5-Step Investing Plan to Build Wealth

 
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Although many people invest money, the most successful investors often have a plan. In order to build wealth and meet your financial goals you need to have to clarify your investment strategy and decisions. Use the 5 steps below to map out an investing plan.

Step 1: Write down what you are investing for. Most people invest money with the hopes to make a profit. While this makes logical sense, you need to get more specific. In order to set up an investment plan you must first clarify why you are seeking to make more money. Are you trying to build wealth and retire early? Is your goal to increase your net worth or pay down your student loans? Do you want to stack money to buy home or finance your kid’s college education? Whether you have one goal or many different ones, the first step to crafting an investing plan is to write down your financial goals. What are the various reasons you plan to invest money?

Step 2: Determine how much money you plan to invest. Now that you have a list of the reasons you are investing, figure out how much money you want to allot to your goals. This should not be the first random number that comes to mind or a goal you plan to achieve some time in the distant future. This should be a concrete and realistic number, something you can start doing with your next paycheck. Take a look at your monthly spending and your monthly income. Pinpoint areas where you can cut back and write down a total amount you can use to invest each month or each year. Once you have the total amount you plan to invest, figure out which portion of that total you want to use for each of your investing goals. Perhaps you have $400 to invest each month and decide to use 75% of it to build wealth and 25% to save for a down payment on your future home. Or, maybe you carve out a special 10% of the total amount to start investing money for your kid’s education? The amount you invest is up to you, but come up with a number.

Step 3: Create a timeline for when you need the money (and the profits). Once you make your investing goals and figure out how much money you can use, the next step is to create a timeline for when you need your money and the profits. How soon you need to use the money affects what types of investments you can make. If you know you will need money to buy a home in a couple years then you will likely make much different investments and take much less risk than if you are investing money for your kids college over the next 10 years or planning to build wealth over the next 20 years. What is the timeline for each of your investing goals?

Step 4: Figure out the investments you want to make. If you know what your investment goals are, how much you can invest, and when you need the money the next step in your investment plan is to figure out what type of investments you want to make. You can choose to invest in bonds, stocks, cryptocurrency, real estate, fine art, startup businesses, etc. The choice is yours. However, it’s wise to remember that different types of investments have different levels of risk and different degrees of profit. For example, buying an individual stock or investing in a startup may have the potential to make a lot of money but those types of investments can also come with a high level of risk since there is a chance you could lose all of your money if the company tanks or the stock goes down in value. Investing in bonds gives you a guaranteed return on your money but that return may be so small that it barely keeps up with inflation and doesn’t allow you to meet your investment goals by your designated timeline. Other people choose to invest in real estate in an effort to increase their cash flow and decrease their taxes but take on a great deal of debt (in the form of a mortgage to do so). Most people who are new to the world of investing purchase index mutual funds (large funds that are full of hundreds, if not thousands of different stocks, from many companies in a variety of industries). They invest in these index mutual funds to increase diversification and minimize risk while still leaving room for a decent profit. The choice of investment is yours.

Step 5: Pick the right investment account. The last step of your investing plan is to invest money through the correct account. Many young professionals like to use apps like Robinhood to invest for simplicity and convenience’s sake. However, there may be other types of accounts that could provide more benefits. For example, if you are building wealth for your future and trying to invest for retirement, then using your employer-sponsored 401K or 403b may be a good option. If you want to open an investment account that is not tied to your employer and still desire the ability to take your contributions out of the account at any time, then opening a Roth IRA may be the right option. The type of account you invest in (whether it’s a 401K, Roth IRA, or taxable brokerage account like the Robinhood app or a traditional brokerage firm like Vanguard) depends heavily on your investment goals, timeline and risk tolerance.

My point? Everyone should have a goal to invest money on a consistent basis. If you haven’t already, use the 5 steps above to craft and investment plan that meets your needs and allows you to reach your goals.