Top 5 Investment Strategies for Beginners You Must Know Before Investing

Top investment strategies for beginners. Investing can be one of the best decisions you can make for yourself, but getting started can be tough. You don't have to be worry again because we have put together top 5 investment strategies to consider:

As we come closer to end of 2023, the world of investing is becoming increasingly complex and competitive. For beginners, it can be challenging to navigate the vast array of investment options available. However, there are some tried and tested strategies that can help beginners get started on their investment journey. For beginners, it's important to focus on building a solid foundation for their investment journey. 

A good investment strategy minimizes your risks while optimizing your potential returns. But with any strategy it’s important to remember that you can lose money in the short run if you’re investing in market-based securities such as stocks and bonds. A good investment strategy often takes time to work and should not be considered a “get rich quick” scheme. So it’s important to begin investing with realistic expectations of what you can and can’t achieve. The wonderful thing about investing strategies is that they can be adjusted as needs arise.

First you need to define your investment goals, whether it's saving for retirement, buying a house, or funding your child's education. Having clear goals helps you align your investment strategy and make appropriate investment choices.

It is crucial to educate yourself and seek professional advice. Take the time to educate yourself about different investment options, risk management, and investment strategies. Read books, attend seminars, or consider seeking advice from a financial advisor who can help you make informed investment decisions.

Diversification is a strategy that involves investing in a variety of assets to spread the risk. This can include stocks, bonds, real estate, and commodities. By diversifying your portfolio, you can reduce the impact of any one asset class performing poorly. This strategy is particularly useful for beginners who are just starting out and may not have a lot of experience in investing.

1. Diversify your portfolio: You must be familiar with the proverb "Don't put all your eggs in one basket," right? The line of reasoning is also supported by portfolio diversification. The likelihood of your investment capital declining during a market downturn is higher if you put all of your money into one or a small number of stocks. It is crucial to diversify your portfolio because of this. You could decide to invest in a basket of companies from several sectors and businesses rather than putting all of your money into one or a few stocks. By doing this, you will spread out your risk and lessen the possibility that all of your stocks will perform poorly during a market slump.

Rebalance your portfolio when needed:-You would have used a certain combination of investments when you built your own portfolio. For instance, based on your objectives, you might have built a portfolio with a 40% equities, 50% debt, and 10% fixed income asset allocation. Now that time has passed, the values of your possessions will likewise fluctuate. In the end, this will result in an imbalance in your portfolio, which is not ideal in terms of being able to achieve your goals. This is why it's crucial to frequently check and adjust your portfolio.

2. Bonds: Bonds are debt securities issued by companies or governments to raise capital. They offer a fixed income stream and can provide a relatively stable investment option for those looking for lower-risk investments.

What are some tips for investing in bonds? When investing in bonds, it’s important to:

Know when bonds mature. The maturity date is the date when your investment will be repaid to you. Before you commit your funds, know how long your investment will be tied up in the bond.

Know the bond’s rating. A bond’s rating is an indication of how creditworthy it is. The lower the rating, the more risk there is that the bond will default – and you lose your investment. AAA is the highest rating (using the Standard & Poor’s rating system). Any bond with a rating of C or below is considered a low quality or junk bond and has the highest risk of default.

Investigate the bond issuer’s track record. Knowing the background of a company can be helpful when deciding whether to invest in their bonds.

Understand your tolerance for risk. Bonds with a lower credit rating typically offer a higher yield to compensate for higher levels of risk. Think carefully about your risk tolerance and avoid investing solely based on yield.

Factor in macroeconomic risks. When interest rates rise, bonds lose value. Interest rate risk is the risk that rates will change before the bond reaches its maturity date. However, avoid trying to time the market; it’s difficult to predict how interest rates will move. Instead, focus on your long-term investment objectives. Rising inflation also poses risks for bonds.

Support your broader investment objectives. Bonds should help diversify your portfolio and counterbalance your investment in stocks and other asset classes. To make sure your portfolio is balanced appropriately, you may want to consult an asset allocation calculator based on age.

Read the prospectus carefully. If you’re investing in a bond fund, be sure to study the fees and analyze exactly what types of bonds are in the fund. The name of the fund may only tell part of the story; for example, sometimes government bond funds also include non-government bonds.

Use a broker who specializes in bonds. If you’re purchasing individual bonds, choose a firm that knows the bond market. Use FINRA BrokerCheck to help find trustworthy professionals that can help you open a brokerage account.

Learn about any fees and commissions. Your broker can help break down the fees associated with your investment.

What are the benefits of investing in bonds?

Bonds offer a host of advantages:Capital preservation: Capital preservation means protecting the absolute value of your investment via assets that promise return of principal. Because bonds typically carry less risk than stocks, these assets can be a good choice for investors with less time to recoup losses.

Income generation: Bonds provide a fixed amount of income at regular intervals in the form of coupon payments.

Diversification: Investing in a balance of stocks, bonds and other asset classes can help you build a portfolio that seeks returns but is resilient through all market environments. Stocks and bonds typically have an inverse relationship, meaning that when the stock market is down, bonds become more appealing.

Risk management: Fixed income is broadly understood to carry lower risk than stocks. This is because fixed income assets are generally less sensitive to macroeconomic risks, such as economic downturns and geopolitical events.

Invest in a community: Municipal bonds allow you to give back to a community. While these bonds may not provide the higher yield of a corporate bond, they often are used to help build a hospital or school or that can improve the standard of living for many people.

What are the risks associated with investing in bonds?

As with any investment, buying bonds also entails risks:Interest rate risk: When interest rates rise, bond prices fall, and the bonds that you currently hold can lose value. Interest rate movements are the major cause of price volatility in bond markets.

Inflation risk: Inflation is the rate at which the price of goods and services rises over time. If the rate of inflation outpaces the fixed amount of income a bond provides, the investor loses purchasing power.
Credit risk: Credit risk (also known as business risk or financial risk) is the possibility that an issuer could default on its debt obligation.

Liquidity risk: Liquidity risk is the possibility that an investor might wish to sell a bond but is unable to find a buyer.

Stocks tend to earn more money than bonds. In the period 1928-2010, stocks averaged a return of 11.3%; bonds returned on average 5.28%.

Bonds freeze your investment for a fixed period of time. For example, if you buy a 10-year-bond, you can’t redeem it for 10 years. This creates the potential for your initial investment to lose value. Stocks, on the other hand, can be sold at any time.

You can manage these risks by diversifying your investments within your portfolio.

3. Buy index funds: This strategy is all about finding an attractive stock index and then buying an index fund based on it. Two popular indexes are the Standard & Poor’s 500 and the Nasdaq Composite. Each has many of the market’s top stocks, giving you a well-diversified collection of investments, even if it’s the only investment you own. (This list of best index funds can get you started.) Rather than trying to beat the market, you simply own the market through the fund and get its returns.

Index investing, sometimes referred to as passive investing, is typically done by investing in a mutual fund or exchange-traded fund (ETF) that aims to track a particular index. This type of investing strategy can be appealing if you don't have the time or experience to research which specific stocks, bonds, or other investments you may want to include in your portfolio.

The advantages of indexing.

Index funds provide the benefit of diversification, and they tend to be cost effective and tax efficient. Investing in index mutual funds and index ETFs allows you to own multiple companies without regularly choosing which ones to buy or sell, and offers the following benefits.

Low fees

Expenses erode returns over time. There are fees associated with any investment. But over time, the fees you pay can really add up, which is why low-cost index investing can leave more of your money invested for growth.

The average actively managed mutual fund charges 0.49% in annual fees. The average index fund charges 0.06% in annual fees.¹

Tax efficiency

Index mutual funds and ETFs tend to have low turnover—meaning they buy and sell securities less frequently—potentially generating fewer capital gains.

Over time, returns lost to taxes add up. In this hypothetical example, $100,000 invested in an active equity fund would have lost over $9,000 more to taxes over 10 years compared to an index equity fund.

Advantages: Buying an index fund is a simple approach that can yield great results, especially when you pair it with a buy-and-hold mentality. Your return will be the weighted average of the index’s assets. And with a diversified portfolio, you’ll have lower risk than owning just a few stocks. Plus, you won’t have to analyze individual stocks to invest in, so it requires much less work, meaning you have time to spend on other fun things while your money works for you.

Risks: Investing in stocks can be risky but owning a diversified portfolio of stocks is considered a safer way to do it. But if you want to achieve the market’s long-term returns – an average 10 percent annually for the S&P 500 – you’ll need to hold on through the tough times and not sell. Also, because you’re buying a collection of stocks, you’ll get their average return, not the return of the hottest stocks. That said, most investors, even the pros, struggle to beat the indexes over time.

4. Dollar-Cost Averaging: Dollar-cost averaging is a strategy that involves investing a fixed amount of money at regular intervals, regardless of the market's performance. This approach can help beginners avoid the temptation to time the market and can help them build a diversified portfolio over time.

Advantages: By spreading out your buy points, you’re avoiding the risk of “timing the market,” meaning the risk of dumping all your money in at once. Dollar-cost averaging means you’ll get an average purchase price over time, ensuring that you’re not buying too high. Dollar-cost averaging is also good for helping to establish a regular investing discipline. Over time you’re likely to wind up with a larger portfolio, if only because you were disciplined in your approach.

Risks: While the consistent method of dollar-cost averaging helps you avoid going all-in at exactly the wrong time, it also means you won’t go all-in at exactly the right time. So you’re unlikely to end up with the highest possible returns on your investment.

5. Dividend stocks: Dividend stocks are shares in companies that pay out a portion of their profits to shareholders in the form of dividends. These can provide a steady stream of income for investors.

6. Robo-Advisors: Robo-advisors are online investment platforms that use algorithms to create and manage portfolios for investors. They offer a low-cost and hands-off approach to investing, making them an excellent option for beginners who are just starting out.

7. Real Estate Investment Trusts (REITs): REITs are a type of investment that allows investors to invest in real estate without owning physical property. They offer a way to diversify your portfolio and earn passive income through rental payments. This strategy is suitable for beginners who want to invest in real estate but don't have the capital or expertise to invest in physical property.

In conclusion, there are many investment strategies available for beginners. Diversification, index funds, dollar-cost averaging, robo-advisors, and REITs are all excellent options to consider. 

Remember, investing involves risks, and it's important to do thorough research and assess your risk tolerance before making any investment decisions. However, it's essential to do your research and consult with a financial advisor before making any investment decisions. 

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Backdoor Roth IRA: What it is, Benefits, Limits, and how to set it up

"Backdoor Roth IRA" is simply a term to describe a strategy used by high-income earners who can't contribute to a Roth IRA because their income is above certain limits. Rather than contribute directly to a Roth, you contribute to a traditional IRA, and then convert it to a Roth.

A Roth IRA is a popular retirement savings account to which you contribute after-tax dollars, and if you meet certain requirements, you can withdraw both the invested money (principal) and earnings accrued on the money tax-free in the future. You might be a good candidate if you think you'll be in a higher tax bracket when you retire. The benefit of a Roth IRA is that it offers tax-free growth.

Backdoor Roth IRA income limits

If your modified adjusted gross income (MAGI) is above certain income limits, then the amount you can contribute to a Roth IRA is phased out. The phaseout occurs between $138,000 and $153,000 for single filers and $218,000 and $228,000 for joint filers in 2023. The backdoor method allows those with higher incomes who can't contribute in the typical manner to still take advantage of a Roth IRA.

How to set up a backdoor Roth IRA

1. Contribute money to an IRA, and then roll over the money to a Roth IRA. For this strategy to work, you should contribute to a traditional IRA with no balance. If there's a balance in the IRA, there could be a taxable event when you convert. Once you contribute to the account and wait for any required holding period, you'll then convert the account to a Roth IRA. Any money earned due to market performance before the conversion takes place is subject to taxes. The contribution is considered nondeductible once you fill out IRS Form 8606 and complete your tax return. Note that there's no tax benefit for the year you establish a backdoor Roth IRA.

2. If your 401(k) plan allows, you may be able to do a mega backdoor Roth conversion. Some 401(k) plans permit automatic Roth conversions, which means you can make after-tax contributions and have them automatically convert to Roth within their accounts. Check with your plan to see if this option is available to you.

When should you not consider this strategy?

A backdoor Roth IRA doesn’t make sense for everyone. If you're able to make a Roth IRA contribution the standard way, then you don't need to use the backdoor method.

If you have a balance in a rollover IRA and plan to contribute to that account, you may not want to make a backdoor Roth conversion because of the "pro rata" rule. This rule requires all IRA distributions to be taken proportionally from your pre-tax and after-tax contribution sources. This could limit the tax benefits you'd receive from a Roth conversion. For example, if you have a total of $1 million in IRA assets, and $100,000—or 10%—is after-tax money, then 10% of any withdrawal must be taken from after-tax money. For a $10,000 withdrawal, $1,000 would have to be after-tax money.

It's important to keep in mind when you plan to use the money. If you're looking to withdraw the money within 5 years, you may not receive all the Roth tax benefits.* Also, when creating a backdoor Roth IRA, you'll have to work with an accountant to file tax forms to ensure you complete it accurately.

What are the benefits?

The main benefit of a backdoor Roth IRA contribution is the ability to contribute to a Roth IRA even if your income is too high to contribute directly.

Making a backdoor Roth contribution means that the money converted to the Roth IRA will not be subject to required minimum distributions (RMDs) after the account holder turns 73. Having money in a Roth IRA also provides tax diversification for the account holder once they reach retirement. If the five-year rule requirements are met and you are at least 59½, there are no 10% early withdrawal penalties and withdrawals will be tax-free.

With the enactment of the Secure Act that went into effect on January 1, 2020, the rules for inherited IRAs for most non-spousal beneficiaries changed. Prior to this, those inheriting an IRA could stretch it out over their own lifetimes in most cases. While RMDs are required for IRAs inherited prior to these new rules, the ability to stretch the RMD payments out over a longer period has served to minimize the tax hit for many beneficiaries.

The Secure Act changed the rules for what are called “non-eligible designated beneficiaries.” This includes many non-spousal beneficiaries. The new rules require that these beneficiaries must withdraw all of the money within ten years from an IRA inherited beginning in 2020 or later (the 10-year rule).

In the case of an inherited Roth IRA, the 10-year rule still applies. However, the withdrawals will be tax-free as long as the original account holder satisfied the five-year rule on the account prior to their death. This can allow the beneficiaries to keep more of their inheritance.

Who is the backdoor Roth for?

The backdoor Roth technique is mainly for those investors who want to be able to contribute to a Roth IRA, but who earn too much in a given tax year to do so. To benefit from a backdoor Roth IRA, you need to be able to pay any extra taxes that might be triggered by the conversion. This is true of any type of Roth conversion, or for any type of taxable withdrawal from a traditional IRA. If you don’t have the cash on hand to pay taxes on the conversion, it may not be a good strategy.

How to do a backdoor Roth conversion

• Contribute to a traditional IRA. Contributions are typically made on an after-tax basis, though you could make a pre-tax contribution if desired.
• Convert your contribution to a Roth IRA. If you already have a Roth IRA account open that’s great. If you don’t you will need to open a Roth IRA in order to complete the process.
• Pay any applicable taxes as part of your tax return for the year in which the backdoor Roth IRA is done.

What are the tax implications?

Typically the contributions to start the backdoor Roth IRA process are made on an after-tax basis to a traditional IRA account.

There may or may not be any taxes when the conversion from the traditional IRA to a Roth IRA are made. This will be governed by the pro-rata rule. This rule says that if you have amounts in a traditional IRA that consists of money contributed on a pre-tax basis, the amount converted is taxed based on the ratio of after-tax contributions to pre-tax contributions and earnings in total across all traditional IRA accounts you may hold. Note that beyond just regular traditional IRA accounts, the calculation would also include amounts in a SEP-IRA or SIMPLE IRA account.

If you do not have any other money in a traditional IRA, your backdoor Roth IRA might be tax free. If you contribute $6,500 after-tax to a traditional IRA and do the conversion right away, the conversion will be tax-free assuming that your contribution to the traditional IRA did not have any earnings in between the time of your contribution and the time when the conversion occurred.

Using the same $6,500 after-tax contribution, if you wait for a period of time and there are earnings inside of the traditional IRA, then the conversion will be taxed based on the ratio of the amount pertaining to the tax-free contributions and the earnings portion of the conversion.

Let’s say that the earnings in the account are $250 by the time you do the conversion. The total amount of the conversion was $6,750. The amount subject to taxes would be 3.7% of the amount converted. This is calculated as $250 divided by $6,750.

Let’s look at a different situation using the same $6,500 after-tax contribution to the traditional IRA. In the case of our hypothetical person, she has $100,000 in total inside of traditional IRA accounts counting the $6,500 contribution. Of this $100,000, $20,000 is the result of after-tax contributions and the rest consists of money contributed on a pre-tax basis plus earnings inside of the accounts. Of any money she converts 80% will be subject to taxes.

Backdoor Roth IRA contribution limits for 2023

The IRA contribution limits for a particular year govern the amount that can be contributed to a traditional IRA to start the backdoor Roth process. The IRA contribution limits for 2023 are $6,500, with an additional $1,000 catch-up contribution for those who are 50 or over.

The other limit that pertains to backdoor Roth IRAs are the income limitations on the ability to contribute directly to a Roth IRA account. This is the main reason that people do a backdoor Roth IRA. For 2023, these following are the income limits on the ability to contribute directly to a Roth IRA.

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What is a Roth IRA and Steps to Open a Roth IRA

A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. Roth IRA rules dictate that as long as you've owned your account for at least 5 years and you're age 59½ or older, you can withdraw your money when you want to and you won't owe any federal taxes.

A Roth IRA is a tax-advantaged account designed specifically for retirement savings. Unlike traditional IRAs, which are typically funded with pretax dollars, a Roth IRA is designed to help you save for retirement with after-tax contributions that offer the potential for tax-free income in retirement.

Which mean at any time for any reason, you can withdraw your contributions tax-free and penalty-free. Additionally, any earnings on your investments can also be withdrawn tax-free and penalty-free, provided  you meet certain requirements.

Roth IRA offers tax-free withdrawals

With a Roth IRA, you get a future bonus: Every penny you withdraw in retirement stays in your pocket. As long as you have earned income (up to limits set by the IRS), you can contribute to a Roth IRA. Not sure how much to contribute? Use the Contribution Calculator offered by fidelity.

What are the benefits of a Roth IRA?

Once you open and fund a Roth IRA, you can invest your assets in a variety of investments, including stocks, bonds, certificates of deposit (CDs), mutual funds, exchange-traded funds (ETFs) and money market funds. These choices give you the opportunity to diversify your savings with an appropriate mix to help meet your retirement objectives.

Roth IRAs have unique benefits that can help you save for your retirement goals. These benefits include:

Access 

Although Roth IRAs are designed for retirement savings, you can access your contributions at any time without taxes or penalty.

Tax-free income 

A Roth IRA generally provides tax-free income in retirement, giving you greater flexibility to manage your taxes in retirement.

No required minimum distributions (RMDs) 

Unlike traditional IRAs, Roth IRAs do not have RMDs, allowing your assets more time to grow tax free.

Tax-free asset for heirs 

A Roth IRA won't create a tax burden for your heirs.

How do Roth IRA contributions work?

Your contributions to a Roth IRA are made with after-tax dollars, since you can't deduct them from your income taxes. In exchange for paying taxes today, your future qualified withdrawals are tax free, giving you greater flexibility to manage your taxes in retirement.

If you’re eligible, you can contribute up to 100% of your taxable compensation or the annual contribution limit, whichever is lower. Contribution limits are set every year by the Internal Revenue Service (IRS) and are tied to cost-of-living adjustments. 

Keep in mind your total contribution can be no more than the limits shown below for all your traditional and Roth IRAs combined:

Roth IRA Contribution Limits

If you’re 49 or younger $6,500 $6,000 and If you’re 50 or older $7,500 $7,000

To be eligible to contribute to a Roth IRA, you must have taxable compensation and your modified adjusted gross income (MAGI) must be below a certain threshold. MAGI limits vary, depending on your tax filing status.

If your MAGI exceeds these limits, you may still be able to contribute to a Roth IRA through a backdoor Roth contribution.

IRA contributions must be made in cash and can be made at any time during the year up to the tax-filing deadline, not including extensions (generally April 15).

In addition to funding your own IRA, you can also fund an IRA on behalf of:

Your spouse. If your spouse has no taxable compensation, you may be able to contribute up to the maximum IRS annual contribution limit for that account, too, as long as you file a joint tax return.

Your child or grandchild. You can fund a Roth IRA on behalf of someone else, including a minor, as long as the owner is eligible to contribute.

While Roth IRA contributions aren’t eligible for a tax deduction, eligible taxpayers can receive the Saver’s Credit for their Roth IRA contributions. The Saver’s Credit is a nonrefundable tax credit of up to $1,000 for single filers ($2,000 for joint filers) that can help lower your tax bill.

What’s a Roth conversion?

A Roth conversion is when you move funds from a traditional IRA to a Roth IRA. With a Roth conversion, you pay taxes now to have access to tax-free distributions in the future, as well as other benefits Roth IRAs offer. But, please be aware that once a traditional IRA is converted to a Roth IRA, you can’t undo this action.

While there are no eligibility requirements for a Roth conversion, there are several factors to consider when determining whether a Roth conversion makes sense for you, including your current tax rate versus your expected tax rate in retirement, your ability to pay taxes on the conversion, when you need to access your funds, your current mix of pretax and after-tax assets, and your desire to leave a tax-free inheritance for your heirs. A financial advisor can help you determine whether a Roth conversion is a good option for you.

How are Roth IRA distributions taxed?

You can distribute the contributions you made at any time without taxes or penalties. If it’s been at least five years since you first funded a Roth IRA and you’re 59½ or older, you can also distribute your earnings tax- and penalty-free.

However, if you don't meet both criteria, a distribution of earnings may be subject to taxes and or a 10% penalty (see next question for possible penalty exceptions).

What are the penalty exceptions for distributions before 59½?

• Per the IRS, the 10% penalty is waived for early IRA distributions if you:Inherited the IRA after the original account owner died.

• Are disabled or terminally ill.

• Take distributions in substantially equal payments over your life expectancy.

• Have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.

• Use the distribution to pay for medical insurance premiums due to unemployment.

• Use the distribution for qualified higher education expenses.

• Use the distribution to build, buy or rebuild a first home (up to $10,000).

• Use the distribution to pay for expenses related to the birth or adoption of a child (up to $5,000 taken within one year following the event).

• Are a reservist called to active duty after Sept. 11, 2001.

• Use the distribution to satisfy an IRS levy.

• Are impacted by a qualified disaster and take the distribution within the required timeframe (up to $22,000 lifetime limit).

What’s the difference between a Roth IRA and a traditional IRA?

One of the main differences is the way contributions and withdrawals are taxed. Roth IRA contributions are made with after-tax dollars and future, qualified withdrawals are tax free. Traditional IRA contributions are generally made with pretax dollars, earnings grow tax deferred, and future withdrawals are taxed like income.

Another difference is required withdrawals. If you have a traditional IRA, the IRS requires you to withdraw a minimum amount each year when you reach 73, known as a required minimum distribution (RMD). A Roth IRA has no RMDs.

What’s the difference between a Roth 401(k) and a Roth IRA?

A 401(k) plan through your employer is designed to allow you to contribute a percentage of your salary for retirement savings. Employer plans may offer a traditional 401(k) and a Roth 401(k) for employees. Like an IRA, a traditional 401(k) is funded with pre-tax dollars and distributions are taxed as ordinary income, while a Roth 401(k) is funded with after-tax dollars with the potential for tax free withdrawals in the future.

With a 401(k), your employer makes several decisions on your behalf where your account is held, when you’re eligible to contribute, what investment options and services are available to you, and when you can take distributions from your account, to name a few. 401(k) plans are generally less expensive than IRAs and can offer certain benefits that are unavailable to IRAs, such as employer matches, the ability to borrow against your assets, and the ability to take penalty-free withdrawals beginning at age 55 if you meet certain criteria. Unlike with Roth IRAs, there are no income limits for Roth 401(k) contributions, but you generally can’t access your contributions at any time like you can with a Roth IRA. You also have to take required minimum distribution (RMDs) from a Roth 401(k) when you turn 73, although this requirement will be eliminated in 2024 as a result of the SECURE 2.0 Act.

A Roth IRA is an individual account you contribute to and manage. It offers you more control and choice over where and how your contributions are invested as well as when you can access your funds. These accounts aren’t tied to your employer and are transferable between institutions at any time. If your 401(k) plan does not offer a Roth option, a Roth IRA can help you diversify the tax treatment of your assets, giving you greater flexibility to manage your taxes in retirement.

Additionally, if you want to maximize your retirement savings, you can contribute up to the annual limits for your 401(k) and a Roth IRA as long as you meet the eligibility requirements.

Can I roll over my employer retirement plan to a Roth IRA?

You generally must meet two criteria to be able to roll over your employer retirement plan to an IRA:

• Your plan must allow you to take a distribution.
• The distribution must be eligible to be rolled over. 

Certain distributions, such as required minimum distribution (RMDs) and hardship distributions, aren’t eligible.

Additionally, Roth 401(k) assets may only be rolled over to a Roth IRA. Pretax 401(k) assets can be rolled over to a traditional or a Roth IRA. But, if you roll over pre-tax 401(k) assets to a Roth IRA, it’s considered a Roth conversion, and the amount that’s rolled over will be taxed.

It’s also important to know that there are differences between employer plans and IRAs. Make sure you understand your options before rolling over. A financial advisor can also help you determine whether rolling over makes sense for you.

Can I move my IRA to another provider?

Yes, you can transfer your IRA to another provider at any time without tax consequences or tax reporting as long as the assets move directly from your current IRA provider to your new IRA provider.

To move an existing IRA to another provider, you will need to contact a financial advisor to help you determine the method best suited to your needs.

I hope you find this article helpful.

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Why is it Important to Save Money and How to Start Saving Money Today

Without savings, a financial shock even minor, could set you back, and if it turns into debt, it can potentially have a lasting impact.

The importance of saving money is simple is it allows you to enjoy greater security in your life. Saving gives you the freedom to live life on your own terms. Despite the importance of saving money, many of us aren’t following through on that tip. When it comes to doing the right thing financially, just knowing you should save isn’t enough.

It can be tough to allocate some of your cash to a savings account if you don’t have a set goal for that money. Why save for later when you can spend on what you want today, right? But among the many reasons to save money is that even if you don’t know exactly what you are saving for right now, you’ll likely find something you want to save for in the future. A new car, a new home, a child’s education… the possibilities are endless. Plus, it’s critical to have some cash set aside for emergencies and unexpected expenses as they come up.

1. Eliminate Your Debt

If you’re trying to save money through budgeting but still carrying a large debt burden, start with your debt. Not convinced? Add up how much you spend servicing your debt each month, and you’ll quickly see. Once you’re free from paying interest on your debt, that money can easily be put into savings. A personal line of credit is just one option for consolidating debt so you can better pay it off.

The best way to jumpstart establishing a budget is to realize your spending habits. On the first day of a new month, get a receipt for everything you purchase throughout the month. Stack the receipts into categories like restaurants, groceries, and personal care. At the end of the month you will be able to clearly see where your money is going. Additionally, your bank or credit union may have this as an online-banking feature. Seeing what you spend in total on food, shopping, etc. can be humbling!

If you have trouble with overspending, try the envelope budget system where you use a set amount of cash for most spending. And once the cash is gone, it's gone.

2. Automate your savings with an app

If you often forget to put money into your savings account or struggle to know how much to sock away, consider using an app that does the work for you.

There are plenty of apps that will automate your savings. Qapital and Digit are two options. These automated savings apps are designed to automatically transfer a predetermined amount from your paycheck into your savings.

You won’t earn the highest annual percentage yield (or sometimes any) on your deposits with these apps, so once you’ve saved up a bundle, consider transferring the money into a high-yield savings account.

3. Set Savings Goals

Start saving for your retirement as early as possible. Few people get rich through their wages alone. It's the miracle of compound interest, or earning interest on your interest over many years, that builds wealth. Because time is on their side, the youngest workers are in the best position to save for retirement. Save your windfalls and tax refunds. Every time you receive a windfall, such a work bonus, inheritance, contest winnings, or tax refund, put a portion into your savings account.

If you need motivation, set saving targets along with a timeline to make it easier to save. Want to buy a house in three years with a 20% down payment? Now you have a target and know what you will need to save each month to achieve your goal. Use savings calculators to meet your goal.

Those with a savings plan are twice as likely to save successfully.

4. Earn cash back on your purchases

Avoid purchasing expensive or unnecessary items on impulse with a self-imposed 24-hour rule. For any non-essential item, wait 24 hours before purchasing. It’s perfect for online shopping where your items can simply be added to your cart to purchase later.

Even when times are toughest, you’ll still need to spend money on essentials, so you might as well be rewarded with cash back. There are cash-back credit cards that can help you collect cash back on your purchases. Some don’t even have an annual fee.

Your existing credit card might also have cash-back offers at certain retailers, but you might need to opt in to redeem this reward. These offers may have an expiration date or other terms and conditions, so double check to ensure you’re not caught off guard.

Cash-back apps might also be an option to consider before you start shopping for new credit cards.

5. Refinance your mortgage

Refinancing has a lot of advantages: It can allow you to lower your monthly payment, save money on interest over the life of your loan, pay your mortgage off sooner and draw from your home’s equity if you need cash.

Explore if you have the option to refinance your mortgage to a lower interest rate. On a 15-year $100,000 fixed-rate mortgage, lowering the rate from 7 percent to 6.5 percent can save you more than $5,000 in interest charges over the life of the loan. And, you will accumulate home equity more rapidly, thus increasing your ability to cover those pesky unexpected home repairs.

6. Set up automatic payments for bills if you make a steady salary

We’re busy. It’s all too easy to forget to pay all of our bills on time. One easy way to save money is to pay your bills when they’re due, assuming you can afford to do so.

Companies charge you late fees for overdue balances. While this might amount to just $5 here or $10 there, those fees quickly add up. Credit card late fees can be a lot more expensive.

People with irregular income may want to hold off automating bill payments and instead consider trying a service like Steady, which connects you to side gigs and other earning opportunities near your payday and bill due dates.

7. Create an Interest-Bearing Account

For most of us, keeping your savings separate from your checking account helps reduce the tendency to borrow from savings from time to time. If your goals are more long-term, consider products with higher yield rates like a CD or money market account for even better savings.

Open a short-term certificate of deposit (CD): A one-year CD could help you earn more interest than a savings account. Plus, a CD’s yield is usually fixed; as long as you keep the money in the CD through the duration of the term, you’re guaranteed to earn the opening APY.

One important caveat: Avoid CDs if you think you might need the cash before the CD term ends, so you won’t have to pay early withdrawal penalties.

8. Make your saving automatic

Saving automatically is one of the easiest ways to make your savings consistent so you start to see it build over time. One common way to do this is to set up recurring transfers through your bank or credit union so money is moved automatically from your checking account to your savings account. You get to decide how much and how often, but once you have it set up, you’ll be making consistent contributions to your savings.

Saving automatically will help you build the good financial habit of saving regularly, but without putting in a lot of effort. And since the money never hits your checking account, you’ll never miss it which potentially reduce the temptation to spend what you should be saving.

9. Annualize Your Spending

Do you pay $20 a week for snacks at the vending machine at your office? That’s $1,000 you’re removing from your budget for soda and snacks each year. Suddenly, that habit adds up to a substantial sum.

As you implement these tips into your financial life, remember that where you save your money is important too. Regularly move the money you save out of your checking account into your savings account, where you’ll be less likely to touch it before you reach your goals.

How do I build it?

There are different strategies to get your savings started. These strategies cover a range of situations, including if you have a limited ability to save or if your pay tends to fluctuate. It may be that you could use all of these strategies, but if you have a limited ability to save, managing your cash flow or putting away a portion of your tax refund are the easiest ways to get started.

Building a savings of any size is easier when you’re able to consistently put money away. It’s one of the fastest ways to see it grow. If you’re not in a regular practice of saving, there are a few key principles to creating and sticking to a savings habit:

Set a goal. Having a specific goal for your savings can help you stay motivated. Establishing your emergency fund may be that achievable goal that helps you stay on track, especially when you’re initially getting started. Use our savings planning tool to calculate how long it’ll take you to reach your goal, based on how much and how often you’re able to put money away.

Create a system for making consistent contributions. There are a number of different ways to save, and as you’ll read below, setting up automatic recurring transfers is often one of the easiest. It may also be that you put a specific amount of cash aside each day, week, or payday period. Aim to make it a specific amount, and if you can occasionally afford to do more, you’ll watch your savings grow even faster.

Regularly monitor your progress. Find a way to regularly check your savings. Whether it’s an automatic notification of your account balance or writing down a running total of your contributions, finding a way to watch your progress can offer gratification and encouragement to keep going.

Celebrate your successes. If you’re sticking with your savings habit, don’t miss the opportunity to recognize what you’ve accomplished. Find a few ways that you can treat yourself, and if you’ve reached your goal, set your next one.

It’s important to remember to keep your retirement savings and emergency fund separate. There are better ideas than using your retirement savings for unexpected expenses. Instead, you can put your retirement savings into a long-term investment account like a 401(k). Just be sure to contribute enough to get your employer to match if they offer one. An emergency fund can be kept in a high-yield savings account, which earns interest and is readily available.

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What Are the 5 Areas of Personal Finance You Need To Improve On?

One of the major reasons we fail to secure a financially stable life is because we are unaware of the things that we need to put in place to make it right. Having the basic personal financial skills is one of the most important things we can do to live a healthy and happy life. It is also important to know what the key areas of our personal finance is so that we can keep focus on while creating a road map for our financial well being.

In this article we will look at different aspects of personal finance to give an idea about how your complete financial picture should look like. The height at which you understand these basic will greatly impact your life. This article covers all you need to know about personal finance and all that relates to the subject.

Before deep delving into the topic, it is important to note that there are 5 areas of personal finance.  There are saving, investing, financial protection, tax planning and retirement planning, but in no particular order. 

What are the 5 areas of personal finance? The areas of personal finances are 5. 

• Savings: You need to keep money aside as savings to cover any sudden financial need. 

• Investing: Investing is important to grow money so that you can achieve what you aspire.

• Financial protection: Now, financial protection through insurance ensures you and your family are able to sail through during the hard times.

• Tax planning: With proper tax planning, i.e. making adequate expenditure/investment, you can bring down your taxable income, eventually saving a lot of money every year.

• Retirement planning: Finally, retirement planning is crucial to ensure that you have a big bank balance meant solely for your needs during the twilight years.

These are the important aspects of a complete financial picture and we will discuss each of the 5 areas in full further detail: 

1. Savings: 

The need for sudden money can come at anytime. That is why saving money is important for a number of reasons. Firstly, it helps you to manage your expenses and avoid overspending. By setting aside a certain amount of money each month, you can ensure that you have enough money to cover your basic needs, such as food, rent, and bills.

Secondly, personal savings can provide a safety net in case of emergencies. It is essential to have some money saved up for unexpected expenses, such as medical bills or car repairs. By having a savings account, you can avoid going into debt or relying on credit cards to cover such expenses. It also provides peace of mind and reduces financial stress.

Thirdly, savings can help you to achieve your long-term financial goals, such as buying a house, starting a business, or retiring comfortably. When you set aside money regularly, you can accumulate a significant amount over time and use it to achieve your goals. 

However, such emergency events can be dealt with if we have enough savings to cover the need. As a thumb rule, the fund for your emergency needs should be three to six month of your expenses. 

2. Investing: 

The majority of people consider investment and savings to be synonymous. The point is they are different. Savings as we have earlier stated are excesses from your income after all expenses. While investment involves purchasing assets such as mutual funds, real estate, stocks, bonds, etc. with your money with the expectation to generate a rate of return. Investment comes with a lot of risks. This is because not all assets actually end up yielding ROI. 

Now talking in terms of investment, mutual funds are an excellent investment option if it is done right. However, while investing in mutual funds it is essential to be mindful about choosing the right fund for your investment, otherwise it might turn counterproductive.

Now what funds should one pick as per their financial goals?

Short term goals: The goals that need to be achieved within three years are short term goals. From saving for a trip to saving for a phone, there are multiple things for which one needs to arrange funds within this timeframe.

Mid-term goals: If you have set a goal for yourself that needs to be achieved within three to five years, for example downpayment for a house, it can be termed as mid term goals.

Long term goals: Milestone events like retirement, children education, their marriage, i.e. the goals for which the timeframe is minimum of 5 years are termed as long term goals.

3. Financial protection: We might have different dreams in life and create investment plans to turn those dreams into reality. But unless we protect them with a safety net, the same can turn into a liability. That safety net is insurance.  This is a wide array of products that you can use to guide against unforeseen occurrences. In the case of finances this is generally purchasing some type of insurance. Insurance is a means of protection from financial loss. It is a form of risk management, and it can be used to prevent the risk of a contingent or uncertain loss. There are 4 kinds of insurance we all need which I will discuss  below.

 

The Consumer Financial Protection Bureau was created to provide some financial education assistance and financial tools to consumers that desire to have the facts about financial matters. For more information visit, www.cfpb.gov.

1. Term insurance

It is a kind of life insurance that ensures that your family or dependents do not have to go through financial hardship if you die early. As compared to other health insurance products, the sum assured for term insurance is higher as against the premium amount. Now if you calculate it correctly, then you can account for day-to-day expenses of your family, a retirement corpus for your spouse, cover for your liabilities like – home loan, and children’s education in the sum assured.

2. Health insurance and Critical Illness insurance

Having health insurance ensures that you do not have to pay from your pocket in case you or any of your family members have taken ill. Health insurance covers all costs for treatment of the insured like hospitalisation, medication, pre and post hospitalisation expenses etc. Meanwhile you can opt for critical insurance along with your basic health policy. In case you are diagnosed with one of the critical illnesses mentioned in your policy, the insurance company will pay you the sum assured.

3. Mortgage Protection insurance

Mortgage protection insurance pays off your mortgage if you die during the term of the mortgage. It ensures the loan or mortgage for home, car, property etc. does not become a liability for your family, in case you die early.

4. Personal Accidental insurance

In case you meet with an accident and get seriously injured, or become partially or fully injured, the insurance company will pay the sum assured to cover the expenses for treatment and also loss of income. Meanwhile, if you die during the accident, the lumpsum amount will be paid to your family. The payable amount, however, is dependent on the fatality of the accident.

Having financial goals is very important to provide you and your family with financial freedom and security. The earlier you start having a financial plan, the better.

5. Retirement planning

Retirement is one of the most crucial stages our life, and it can be as blissful or as miserable depending upon how we have planned for it. It holds true for financial planning too. 

There are two aspect to consider when planning for retirement. First, is saving for retirement and second is, generating income from your assets during retirement. And, here are the two steps:–

1. Building a retirement corpus: Saving for retirement is crucial for two reasons majorly – loss of income and increased life expectancy. Let’s assume that you retire at 60 and live up to 85. How do you plan to fund your expenses for 25 years after retirement, at a time when you do not have any steady income? 

Plus, considering inflation, i.e. the rise in prices of goods and services for regular use, your expenses will be much higher after retirement than it is today. For example, if your monthly expenses are Rs 35,000 right now, it would be Rs 80,000 per month in 20 years, considering you would want to maintain similar living standards.

Now, building a fund as large as a retirement corpus is a lifelong process. So, the earlier you start saving, the better it is.

2. Generating income during retirement: As much as it is important to ensure that you are saving enough for your retirement while you are working, it is equally important that you channel that corpus correctly after retirement. Making the right investments will ensure that you have a steady income as long as you live.

Investment options for generating income during retirement: STP withdrawal/transfer from Mutual Funds, life insurance annuity, and rental income. 

Saving money is an important part of personal finance and can provide financial stability and independence. According to a rule of thumb, don’t spend more than you earn. The instant this starts happening, debt is imminent. Although going into debt can be very helpful. But this is when you borrow to secure an asset with the expectation of a return. 

The process by which you manages your personal finances is usually summarized in your financial plan or a budget. Having all the aspects of a complete financial picture in one frame ensures that your financial future is just picture-perfect.

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How to Get Out of Debt Faster in 6 Months Strategies that Work

The road to debt freedom can be tough. But remember, your future is worth the work you put in today. There are a lot of things you can do to get out of debt fast. But without the right plan, it’s hard to make progress and even harder to keep yourself from going back into debt later.

One of the quickest way to be debt-free is committing to filing bankruptcy, but you need to understand your options and the consequences that come with having a bankruptcy on your credit report. Read to the end to find out everything you need to know about bankruptcy.

Learn Budgeting

Your first step to be debt free is to build a budget to pay off  existing debts. It’s easy to lose control of debt when you’re not tracking your spending. Budgeting is a big part of staying out of debt, but it can also help you pay off debt faster.

You need to create a budget that gives you a clear idea of how you spend and save your money. If you have excess credit card debt, budgeting can give you valuable insight into where your income goes each month. Use a budgeting spreadsheet can also help track your spending habit for a month and to see where you can allocate more income toward repaying debt.

• You can try to also incorporate a 50/30/20 budget: Meaning, you split your income into three categories: 50% goes toward your needs, 30% goes toward “wants” and 20% goes toward savings and debt repayment.

• Zero-based budget: At the end of each month, your income minus your expenses should equal zero. This helps you account for every dollar earned, including debt repayment and savings.

• Envelope budget: Categorize your spending into virtual “envelopes,” such as food, utilities and housing. Allocate your budget at the beginning of the month to cut down on superfluous spending.

• Minimalist lifestyle: Cut regular but unnecessary expenses, such as eating out or gratuitous shopping trips, to maximize savings. Dedicate any remaining income to debt repayment.

You can also utilize an online debt payoff calculator to determine how much you should allocate toward your debt in order to pay it off within a certain time. This gives you a clearer image of how much you’ll pay every month and how much you’ll pay in interest in the long run. You can customize your strategy to pay off debt based on how much you can put aside each month.

You may able to reduce the cost of your borrowing, this will make repaying your debts cheaper and free up more money to pay off what you already owe.

Credit cards

You could also look at your credit card statement to see what you’re being charged in interest. Reducing the interest rate and amount owing on your credit cards will also help reduce your debt.

Improving your credit score can also help you get out of debt quick. When you have a low score, you almost always pay higher interest rates on everything from credit cards to personal loans.

If your credit score is high enough, you can make significant savings by transferring your debt onto a balance transfer card with a 0% credit period. This will enable you to focus on repaying your debt without interest charges boosting it further. You may have to pay a fee, but the savings normally outweigh this cost.

If you’ve previously missed credit card payments or have a lower credit score, you may not be eligible for a 0% balance transfer card. However, you may still be able to find a card with a lower rate than your current one.

With any balance transfer card, it’s important to remember that its purpose is debt repayment - that means you need to be disciplined and not purchase anything with the new card.

You should also look at how long your interest-free or discount period lasts and ensure you repay your debt before it runs out. Otherwise, you’ll start paying interest again, and simply paying the card’s minimum repayment is unlikely to be enough to clear your debt.

Loans

If you have a fixed rate secured or unsecured loan, you’ll probably have to pay to move to a cheaper option. However, it’s always worth checking.

Work out whether you could save money by moving your loan and then ask your lender how many monthly payments you have left and the outstanding balance. You should also check whether there are any penalties if you repay the loan early.

Increase your debt repayments

One of the easiest way to take control of your finances is to know exactly how much you owe, how much money you have coming in and, with luck, your outgoings are lower.

That means you should be ready to start focusing on your debts and using the money you have freed up to repay them.  

Pay off as much as you can each month. Not only will this speed up your debt repayment, but it will also save you money in interest too. Setting up debt repayments by direct debit can make sticking to your plan easier.

Stop taking on new debt

If you borrow money from one source to pay another, you’re shuffling debt around instead of paying it off. Sometimes this can be beneficial, like opening a new balance transfer credit card to take advantage of a 0% APR introductory period or consolidating your debt into a personal loan with a lower interest rate. 

When you are trying to pay down debt, you must stop taking on new loan. Don’t open new credit cards or apply for loans unless you have strategic reasons, and freeze all unnecessary spending.

Mortgages

A mortgage is likely to be your most considerable monthly expense, so if you can save money on your mortgage, it could make a big difference to the amount of money you have to tackle other debts.

If you’re currently on a standard variable rate mortgage, you could be paying more than you need, and remortgaging could be a simple way to reduce your monthly bills.

Remortgaging with your existing lender can be a good option because you don’t have all the costs of switching to another bank or building society.

An independent mortgage adviser will be able to explain your options and help you work out the exact cost of moving your mortgage. Remember, remortgaging is only worthwhile if it saves you money.

In all likelihood, you won’t be able to save money by remortgaging if you are on a fixed deal. This is because the penalty fees are likely to outweigh the benefits of a better rate.

However, you should still make a note in your diary so that you’re ready when your rate does run out. Then you can switch straight away and start making savings.

Make a grocery shopping list.

One of the easiest ways to save money at the grocery store  is to make a list. Whether you like to write down your grocery needs on a piece of paper or you prefer using a grocery list app. 

But here’s the thing about making a list: You have to stick to it. Especially if you're shopping with kids.

Once you’re debt-free: Learn how to stay out of debt

Becoming debt-free is a difficult task, so it’s important to build better habits going forward so you don’t find yourself in the same situation again. Stay out of debt by monitoring your budget, building your savings and working on increasing your income. 

It’s important that you don’t sacrifice your emergency savings for debt repayment. You should always be saving at least some money in an emergency fund. That way, when you’re hit with a big, unexpected expense, you don’t need to resort to taking out debt again.

Many professionals advise that you have between three and six months’ worth of expenses saved up in case of emergency. If that seems like a lot, start small; create your emergency fund by saving up one week’s worth of expenses, then one month, and build from there. Here are a few traps to avoid as you step your way to debt freedom:

1. Debt Consolidation

You’ve probably heard of it. And maybe you’ve even fallen prey to it. But hear us out: Debt consolidation is a bad idea.

With consolidation, combining your debts for a lower interest rate will make you feel like you’ve done something to help your situation. In reality, though, it’s only going to keep you in debt longer—because debt consolidation often means a longer repayment term.

The only form of debt consolidation we can get behind is for student loans. And that’s only if you consolidate your student loans the right way.

2. Credit Card Balance Transfers

Just like debt consolidation, credit card balance transfers will only offer you a temporary solution. Sure, it might give you a little extra breathing room in your paycheck, but it’ll keep you in debt for longer.

Why? Because you’ll be tempted to spend those “extra” dollars on something other than your debt. Remember, the only way to get out of debt fast is by throwing everything you have at it—until it’s gone.

3. Filing for Bankruptcy

When you don’t have enough money to pay the light bill or buy food, it’s beyond terrifying. But bankruptcy is rarely the answer. If you feel like bankruptcy is your only option, it’s time to slow down, take a deep breath, and remember there’s hope.

Bankruptcy is the last thing you should consider. Before you go there, do everything you can to avoid it. If you’re feeling like you have no other choice, please talk with a Ramsey Preferred Coach first. They can offer hope by walking you through other options.

Conclusion 

If you  are a low income earner, getting out of debt doesn’t have to be far-fetched. Follow these strategies will help in your journey of become a debt-free by eliminating those pesky balances. You could consider a debt consolidation loan if you have several debts with high interest rates to help you get out of debt faster. 

Taking action sooner than later will help you improve your credit score and get one step closer to attaining financial freedom.

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10 Basic Principles of Financial Management You Need to Know

Whether you do all the work yourself, there are some basic money principles to be adhered to. It is also necessary to have answers to the following questions. What do you know about money? Do you understand money? Do you have a philosophy about how you use your money?

Experts say many people have little understanding about money; consequently, their finance are never in order regardless of how much money they have. Below are simple money rules that you need to know.

Differentiate between needs and want: Many people end up spending their fortunes on things they do not need. According to experts, everything that people really need revolves around foods, shelter and clothing. They stress that a key aspect of financial planning is the ability to differentiate between needs and wants. 

Unfortunately, they say many people fail to do so. While it is true that in today’s world many items, besides basic needs, are necessary, the decision to have your house fitted with classic painting by great artists at great expense definitely falls under wants. And they are many more examples like that. 

Even when people go for their needs, their decision is often informed by their want. For instance, while you need a bed to sleep in, you do not need one that has gold engravings or fitting all over. Many people spend money that way, on the things they want, believing that they are getting things they need and this can be a costly mistake because it amounts to money going to waste. To spend money wisely, always distinguish between wants and needs then go for the needs and ignore the wants.

Do not spending all your earnings: While this is self-explanation, many people find it impossible to spend less than they earn. But for you to keep your finances in order and to avoid getting into debt or running out of cash before the next pay day, if you do not spend all that you earn each month, you will have some cash to either pay off your debts or save. Now, the benefits of having some form of saving are numerous. Saving can allow you to invest, resolve emergencies and ease the financial pressure you feel when you run out of cash before the next earnings. Of course, the economic situation in the country has left some people with barley enough to feed, but many people have risen above such a challenge by adopting drastic saving tips.

More money may not be enough: For many people, the solution to their financial challenge is more money. While some of these people may genuinely need more money, experts say some others have enough nut mismanage it because they are financial illiterate. They do not differentiate between their wants and needs; they adopt a lifestyle that results in spending more than they earn, etc. Take time out to determine which category of money user you belong to, and if you believe that more money is what you need, then you need to know that there will be a time when you will realise that you did not need all those gadgets, cars or personal houses. When that time come, more money will hold no appeal.

Plan for the unexpected: Despite your best efforts, you’ll face some unforeseen emergencies along the way. Morris urges, “Save enough money and stock up on insurance to be able to weather extended unemployment, accidents, catastrophic medical care, large car or house repairs, and natural disasters.” Increasing the amount of money you save when times are good can help you manage the cost impact of bumps in the road, making sure unexpected financial exposure does not derail your long-term goals and your family’s financial security.

Money decisions have costs: It is important to note that every money decision you make, there is a cost attached. This means that by deciding to purchase one item, you are giving up another. By bearing this in mind and weighing both options critically, you are more likely to avoid making a mistake. For example, if you have N1m and you are to choose between the car, you need to know that the car did not just cost you N1m, it also cost you a plot of land.

Organize your finances: Organizing your finances is the first step to creating wealth. Credit cards, bank accounts, personal loans, brokerage accounts, mortgages, car loans, and retirement accounts — track everything. Budgeting software can provide complete solutions to track all such accounts, make on-time payments, and more. Jeff Morris, a certified public accountant in Bethesda, Maryland, points out: “Once you enter your accounts and balances into budgeting software, you will be able to spend less time getting organized and more time making sense of your situation.”

Budgeting: This is another simple but highly important principle; however, it’s one that a lot of people underestimate its importance. Budgeting provides a pathway to the first tip mentioned of spending less than your earnings. With budgeting, you also have control of your day-to-day finances, prioritise expenses, plan better for your basic needs and even unexpected needs and also act as a check to spending unnecessarily. Never underestimate the power of budgeting.

Keeping records: This is another money principle that’s highly important, but the lazy man sees this as stressful and unnecessary. Keeping records of your financial transactions gives you better knowledge of your financial life, and that in itself is a financial victory.

Keeping records of your financial transactions would enable you know how effective or ineffective your budgeting is and how to correct the loopholes. It would also give you a clue on what’s actually consuming a gulp of your money and how to minimise it. Basically, you understand your financial position better when you keep records, and it’s even dire that some business people don’t see the need for record keeping.

Develop yourself: For you to get the most out of your money, experts say it is important that you spend some to develop yourself, you need to spend money to improve knowledge and to acquire self-management and communication or networking skills, which will not only help you to grow but enable you to manage yourself, your health and finances better.

Don’t try to impress others: When you try to impress other people, you are likely to cause financial problems for yourself. Because not only is such a move capable of making you to live above your means, it is also likely to make you invest in items you do not need. For example, there are people who have gone out of their way to purchase cars, only to find out that they cannot maintain them. Some of them are forced to sell the cars at a loss. The advice is that you live beneath your means, and develop a saving habit and in the future, perhaps when you are in your late 30s, you might be better off financially.

Also, avoid borrowing money. Of course it is easier said than done, but by debt-free, you stand a better chance to taking control of your finances and planning for the future. According to experts, if you can just live within your means for some years, you will be able to achieve a high level of stability.

Understand risk: The key to understanding return on investments is that the more you risk, the better the return should be. This is called a risk-return trade-off.

Investments like stocks and bonds that have a higher rate of return often have a higher risk of losing the principal that you invested. Investments like certificates of deposit or money market accounts with a lower rate of return have a lower risk of losing principal. Since no one knows the future, you cannot be 100 percent sure any investment will do well. Morris explains, “If you diversify your investments, one can go sour without severe impact to your overall portfolio.”

Diversification is not just for investments: Find creative ways to diversify your income. Everyone has a talent or special skill. “Turn your talents into a money-making opportunity. Investigate ways to make money from home and launch a home-based business,” Morris says. The extra income can supplement your full-time income or even result in an exciting career change. Good financial management software can show you how even a slight improvement in income can positively change your financial profile.

With these money principles, you would be sure to have a better guide to making better financial decisions and living a healthier financial life.

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How To Build Wealth: 5 Simple Ways To Build Your Fortune

Wealth-building is a process that generally takes time. Although the idea of becoming an overnight millionaire is appealing for many, the only real way to get rich overnight is via speculation, an inheritance or a lottery win.

Ironically, the best way to build wealth “fast” is to chart out a prudent path toward long-term gains. The quicker you can save and invest, the faster your money will compound, which is the true magic behind building wealth. Here are 10 ways you can grow your net worth as rapidly as possible without taking on undue risk.

Successful people invest time, energy, and money in improving themselves. A man told me once, "The best way you can help people in need is to not be someone in need." Help yourself out so you are in a position to help someone else out. This means investing in yourself to become great at something.

I invested in sales training when I was 23. That made my income-producing ability skyrocket. Investing in yourself is the best investment you can make.

1. Find a job in the right vehicle: The rich are able to get in with the right company where there is opportunity for growth. My VP of sales Jarrod Glandt started working for me over seven years ago for $2,500 a month. He wasn't making anything but he was in the right vehicle. He grew his skill set and was able to multiply his monthly income many times over because he knew I was looking to expand.

Too many people just look for a job. You need a job, but you need the right vehicle. All companies live from this thing called revenue. Get commissions rather than just a salary and you will finally be in control of how much you earn.

2. Get great at what you do: Commit to being great, not just average. Any industry can be a painful profession for average and bottom performers, but massively rewarding for those that are great. Those that live, breathe, and eat their profession, those that are obsessed, become great.

I have never met a great who wasn't all in and completely consumed by their trade. Have you? The fact is, if you aren't great, you are average. The rich get great.

3. Get multiple, connected income streams flowing: You won't get rich without multiple flows of income. That starts with the income you currently have. Increase that income and start adding multiple flows.

You want what are called symbiotic flows. Do not just add disconnected flows. Instead, find other ways you can add income to the job you already have. My video guy does advertising for me — and after proving himself, he started making advertisements for those connected to me. He didn't start a doughnut shop.

Too many people go from one flow to a second flow, resulting in two flows that do nothing. Your flows should always be connected.

4. Hit $100K, then invest the rest: First, try to save $100,000. Why? You need to prove to yourself that you can go out and get money. If you have only $10,000 saved, your only priority should be increasing your income so that you can save more.

Saving $100,000 shows that you have an ability to make money and then to keep it. Most people can't do either of those things.

5. Buy a Rental Property

One of the key ways to build wealth fast — and over the long term — is to earn passive income. And one of the best ways to generate passive income is to own one (or several) rental properties. With a well-managed rental property, you’ll receive a steady stream of income every month, with little additional effort required on your part. 

While you’ll have to find tenants to move in and will have to deal with occasional maintenance issues, your income will essentially be on auto pilot. Unlike your mortgage payment, your rents will continue to rise over time, meaning your tenants will be paying some or all of your mortgage while you watch your properties appreciate in value.

Run Side Hustles

Even if you have a job, you don’t have to only rely on your paycheck. You can run a successful side hustle to increase your income. You can turn your talent or hobby into monetary value during your free time.

There are many lucrative side hustles you can run online as long as you have internet access. These include:

• Working as a virtual assistant
• Freelance writing and editing
• Copywriting
• Online tutor, coach, consultant
• Web design, app development, coding, etc.

Other side hustles that don’t need internet access include:

• Part-time professor at a local college
• Part-time gym instructor
• Freelance bookkeeping, tax preparation, tutoring
• Becoming a shopper
• Part-time driver for a ride-sharing or delivery service

Once you can earn and save, then you can start building wealth. I'd recommend multi-family real estate if you are conservative like me. I never looked to get rich quick, but I did look to get rich.

6. Create a budget

Creating a budget and sticking to it is crucial if you want to know how to build wealth from nothing. 

Using that regular income source we just spoke of, now you need to create a budget to take control of how you are spending your money, usually set on a monthly basis.

A budget is a financial plan for a defined period that contains estimated income and expenditures for that period.

Every household and/or individual needs to create at least a monthly budget to identify your expected income and estimated expenditure. Living without a proper budget is like sailing without a compass, and you can guarantee that you’ll get lost in the seas of financial missteps. 

A popular budgeting technique is the 50:30:20 rule. In this technique, you can formulate a budget where 50% of income goes to essential expenses (rent, mortgage, food, healthcare), 30% to non-essentials like shopping, vacation, entertainment, and 20% to savings and investments.

Why is budgeting important? 

One main reason is that by understanding how you spend your money, it’s easier to identify the things that can be cut: the lower your expenses, the more you can add to your savings and investments. 

By identifying and cutting unnecessary and avoidable costs, you can build wealth faster. It’s that simple.

7. Build an emergency fund

Now that you have learned how to save a significant part of your income, the next course of action to build wealth from nothing is to create an emergency fund. 

An emergency fund is like self-funded insurance. It’s money you set aside for unexpected expenses like car repairs and unforeseen circumstances like job loss or pandemic-induced lockdowns.  

When unexpected expenses and unforeseen circumstances arise, there are ways to make matters worse: incur debt and/or sell your investment(s). 

You pay interest on debt, and when you sell your investment(s), you lose both the amount you sold and the interest from the market exposure it could have earned if you didn’t sell.  

Therefore, to avoid those two scenarios, we recommend you learn how to start an emergency fund right away. An emergency fund should hold between three to six months of your monthly expenses. Also, ensure those funds are in a savings account where you can easily access them when the need arises. 

Like insurance, an emergency fund won’t make you wealthy, but it will prevent you from selling your investments or incurring debt during emergencies. 

Live Within Your Means

You’ll never generate any wealth at all if you spend more than you earn. To set yourself up for a lifetime of prosperity, it’s important to create a strict budget and stick to it. Make sure that in addition to all of your unavoidable expenses, you’ve got a significant line item for saving and investments. Every month that you can come in under budget, you’re adding to your pool of lifetime wealth.

Don’t Be Too Conservative

Although being too speculative is a sure-fire way to risk all the savings you’ve worked for, being too conservative can be equally damaging in terms of limiting your wealth. Taking some risks in your financial life — from investing a bit more aggressively to starting your own business — is a necessary component if you want to generate outsized levels of wealth. 

If you put all of your money into Treasury bills, for example, you’ll actually generate a negative real return after taking taxes and inflation into account. Owning some stocks, real estate, your own business or even some cryptocurrency are ways to gain exposure to higher potential returns on your investments. Just understand that while speculation has a role in generating wealth, it also brings additional risk to the table.

Building wealth is not a rocket science process. With dedication and discipline, you can grow your wealth fast. Before starting on this journey, it’s important to equip yourself with financial education. That alone should catapult you through the other steps seamlessly and eventually build wealth.

Many people overlook retirement accounts when it comes to building wealth. You’ll not only save for retirement but also grow your wealth over time.

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