If you’ve been a fan of The Motley Fool for any length of time, you know we love investing. It’s the best way to grow your wealth over the long term, but it’s not magic. You still have to take the right steps to set yourself up for success. If you don’t make the following essential moves, you’re not going to be very happy with your results.
1. Actually investing
Investing is intimidating for many, because there is a risk of loss. But what most people don’t realize is there’s also a risk to not investing. There’s no savings account on earth that can match the stock market’s average annual return. And since the inflation rate often exceeds a typical savings account’s annual percentage yield, you could actually lose money by being too conservative with your finances and locking your money up in one of these low-yield accounts.
If you take the right steps, including diversifying your money and choosing the right asset allocation, you can grow your wealth through investing while reducing your risk of catastrophic loss. That’s not to say you’ll never lose money — ups and downs are a natural part of investing. But as long as you plan to hold your investments for at least five years, the stock market’s daily fluctuations shouldn’t bother you too much.
It’s worth noting that just putting your money into an investment account doesn’t mean you’re actually investing it. You need to use your funds to purchase stocks, bonds, mutual funds, exchange-traded funds (ETFs), or other securities. Otherwise, you just have a pile of cash sitting in an investment account where it’s not going to earn any interest.
2. Taking care of high-interest debt first
High-interest credit card or payday-loan debt often costs more than people typically earn on their investments. Some credit cards have annual percentage rates (APRs) exceeding 30%, while payday loans can have APRs of 100% or greater. That means your payday loan debt could double in a single year.
The stock market, on the other hand, has only earned a 30% return in five of the last 30 years, and sometimes, it has experienced losses. On average, you can expect about a 10% annual return, and that’s if you invest all of your money in stocks. If you have some bonds mixed in there, you’re probably looking at a slightly lower return. Unless you’re lucky enough to invest in a company whose stock skyrockets overnight, you’re probably not going to earn enough on your investments in a year to make up for what you’re losing in interest on credit card or payday-loan debt.