You might not be able to wave a magic wand and see your money instantly grow exponentially, but you can use investment strategies that have been proven over time. When used correctly, these three magic strategies can help you achieve your financial goals.
1. Start early and let time work
It may not seem like a “magical” investment strategy, but starting early is the key to unlocking the magic that accumulates. It’s one thing to earn a return on your investments, but the real growth begins when that return begins to generate a return on itself – and that’s what compounding is.
To really see the power of compounding, let’s imagine a scenario where two people make a one-time investment of $10,000 in an index fund that earns 10% per year, with one person withdrawing the profit each year. In 25 years, here is how the investments would accumulate:
|Earnings spent each year?||Total invested||Total Won||Account balance after 25 years|
In this scenario, you can see that the only thing that separated the two investors was that one took profits every year instead of giving them a chance to earn new returns. That alone made a difference of over $73,000. If you really want to grow your money and let it do the heavy lifting for you, you shouldn’t underestimate the power of time.
2. Let dividends guide you
Ideally, start-ups will reinvest their profits back into the business to continue growing. But older, more established companies that are past the point of hypergrowth need a way to entice investors, because their stock prices are unlikely to grow exponentially. Dividends are a way for companies to reward current investors and attract new investors. With the right dividend-paying stocks, dividends can make up a large portion of an investor’s total returns and be a reliable source of retirement income.
Let’s say you made regular investments throughout your career in a dividend-oriented fund with a dividend yield of 2.5% and managed to accumulate $1 million. In this case, you can expect $25,000 per year in dividends alone. This scenario is not far-fetched either. You can accumulate over $1 million by investing $10,000 a year for 30 years with annual returns of 8% – and that doesn’t include potentially reinvested dividends earned during that time.
3. Take advantage of tax-efficient retirement accounts
A magical way to make your money grow is to make sure a lot doesn’t go to taxes. You will rarely make money without Uncle Sam waiting for his cut. Every time you sell an investment in your brokerage account, you have to pay taxes on the profits you made. If you’ve held the stock for less than a year, you’ll pay your ordinary income tax on it; if you’ve held it for a year or more, you’ll pay a special rate on capital gains. Although the capital gains rate is more favorable, it is still money owed. This will not be the case if you are using a Roth IRA.
Because you contribute after-tax dollars to your Roth IRA, you can make tax-free withdrawals in retirement. Like a brokerage account, Roth IRAs allow you to invest in any stock or fund of your choice. So if you’re eligible to contribute, it makes sense to use it up to the contribution limit ($6,000 or $7,000 if you’re 50 or older) because of the tax relief. Most people are in the 15% capital gains rate bracket, so the difference in taxes paid on investments in a brokerage account versus a Roth IRA can easily reach into the five-figure range. over time.