Wisely save and invest money requires a handful of behaviors working together to build wealth. Having sufficient wealth will lead you to financial independence. That is when you do not need a job, your passive income will pay your living expenses. Yet, to achieve that, you need to wisely save and invest your money, and here are the ways to do it.
Know Your Investment
The first basic rule in investing is to never purchase or hold any investment that you don’t understand. So, make sure you understand the assets you currently own.
Know the possible risks and possible profit they have. Besides, you also have to plan risk management for each of your assets, so you will not get excessive losses once the market goes against you.
Proactively Manage the Risks
In managing your money and investment, you need to always reduce the possible risks. The failure to do it will cost you all capitals you have collected in your entire investing life.
There are various forms of risks, including liquidity risk, market risk, inflation risk, counterparty risk, and fraud risk. Managing risk is equally important as getting the right trading strategy.
For the majority of investors, the best way to manage risk is through a diversified portfolio, long term investment, and dollar-cost averaging.
Dollar-cost averaging allows you to spread the purchase of a particular asset over a span of time. That offsets any price fluctuation. Meanwhile, a diversified portfolio means you own various types of assets. They can be stocks, bonds, mutual funds, real estate, and commodities.
After that, you need to hold that investment long term. That way you can avoid short-term losses and get long term gains, instead.
Get the Advantage of Compound Interest
Wise investment requires you to maximally utilize the power of compound interest. Compound interest gradually increases your interest and your principal at the same time.
It makes your money grow exponentially over time. To build big compound interest, you need to start as young as possible.
Minimize Taxes
Minimizing your taxes will result in higher compound interest. There are ways to minimize your tax liability. One of the ways is by deferring it through managing your portfolio in order to control when the tax increases and when it is paid.
Minimize Expenses
The last thing that can affect your investment is expenses and fees. It is best to keep them low. For high net-worth people, investment advisors that cost them a 2% fee can worth the profit.
Yet, for the majority of small to medium investors, cost matters. You can reduce these expenses by choosing low cost managed index fund or brokerage.
