I’ve found that keeping my investing uncomplicated is the key to staying focused and achieving more. Here are three ways I’ve simplified my investing for more success.
Leveraging Tax-Advantaged Accounts
One of the best ways to invest money is under the umbrella of one or more tax-advantaged accounts. You’re probably familiar with retirement accounts at work, such as a 401k or 403b, which come with tax benefits and perhaps free matching funds from your employer.
Not only do retirement accounts reduce taxes, but they automate investing by deducting contributions from your paycheck before you can spend them. Plus, if you leave your company, you can take all your money with you, including your vested matching funds.
If you’re self-employed, you have options too, such as an IRA, SEP-IRA or a Solo 401k. These accounts can also be automated and are powerful vehicles to save and reduce taxes at the same time.
Additionally, there are other types of investment accounts with big tax benefits that help you save for different purposes. One is a 529 college savings plan, which allows earnings to grow tax-free if you use funds to pay for qualified education expenses for you or a family member.
Another terrific account with huge tax breaks that I’ve used for many years is a health savings account or HSA. It allows you to pay certain medical expenses completely tax-free using contributions and investment earnings — if you’re covered by a qualified, high deductible health plan.
The main downside of these special accounts are penalties that range from 10 percent to 20 percent if you spend them early or on non-qualified expenses. But for me, the penalties help me stay focused on the end goal and leave my investments untouched.
Consolidating Investment Accounts
Having fewer financial accounts can greatly simplify your life, so I consolidate them whenever possible. This makes investments easier to monitor, cuts paperwork and reduces the paper trail at tax time.
For instance, you can transfer money from a 401k with a previous employer by doing a tax-free rollover to an IRA or a retirement plan at your new job. Or, you might put all your money in the same investment fund family.
It’s amazing how much more in control of my finances I feel when I’m organized and know exactly where my investments stand.
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Minimize Risk With a Buy-and-Hold Strategy
Don’t get fooled into thinking that you need to take a lot of risks to be an investor. If anyone recommends that I buy this or that individual stock, I smile politely, thank them for the suggestion and never act on the information.
For most investors who don’t want to make a career out of stock picking, buying and selling individual stocks is a bad idea. Instead, I buy diversified funds and hold them for the long term to reduce investment risk without sacrificing return.
Index funds, target-date funds and exchange-traded funds are made up of hundreds or even thousands of underlying investments. So, if the price of one stock in a fund takes a dive, it’s no big deal because the fund has many others holding steady or going up.
While you can easily make investing complex, I don’t recommend it. Using a simple strategy can keep you on a path to lasting financial success.
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