- 1). Outline your goals and time horizon. Clearly laying out what you are saving your money for will motivate you to do it. Time horizons for the long-term investor are 10 years or more. Saving for a child's college education can be 18 years or more. Saving for retirement can be 35 years or more. Over those long periods of time, tax consequences are significant. Long-term investors should take advantage of every tax break they can.
- 2). Pay yourself first. Think about periodic savings as a bill. Take a predetermined amount out of your paycheck and save it. Do not think of this as optional. Write a check to your savings account the same way you write a check for your rent. Take it out of your disposable income before you spend any money. If you never think of it as money you have to spend, you won't miss it.
- 3). Take advantage of your employer's 401k plan. This is a tax-sheltered retirement savings plan that deducts money directly from your paycheck. This is the best way to save for retirement. The money is deducted before taxes are paid, and many employers contribute free money to your account as an employee benefit. Save as much as you can in your 401k plan up to the maximum allowed. This is usually 15 percent of your gross income.
- 4). Invest in a Roth IRA or traditional IRA. These individual retirement accounts are the best retirement savings option for people who do not have access to a 401k plan. They are also a good idea for investors who want to save more for retirement than their 401k plan allows. A traditional IRA gives a tax deduction on contributions for certain investors, then defers taxes until distributions are taken in retirement. A Roth IRA offers no tax deduction but allows contributions to grow tax-free, and you pay no taxes upon retirement.
- 5). Open a 529 plan to save for college. The money you save for educational expenses grows tax-free. 529 plans are also flexible. You designate a beneficiary for the funds but can change it to a different relative or even yourself. This is useful if the person you designate decides not to attend college.
- 6). Choose your investments wisely. All these tax-sheltered accounts (401k, IRA, 529) require you to pick how your money is invested. Investors usually pick mutual funds consisting of different combinations of stocks, bonds and money market accounts. In general, the riskier the investment, the greater the potential for rewards in the long run. If you have a long time until you need your investment money, then consider more aggressive investments.
- 7). Diversify your investments. It is always best to spread your money around to a variety of investments. This protects you if one sector goes bust. Even if your long-term investments are primarily growth stocks, choose a variety from areas like technology, emerging markets and financial stocks. As you approach your time horizon, gradually move your money to safer investments like bonds and cash. You do not want a big dip in your stocks right when you need your money.
- 8). rebalance
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