How To Begin Investing To Build Wealth

Building wealth can be a daunting task for someone young or unfamiliar with the financial industry. To get involved without a good idea what you want can be dangerous for your financial future. However, to not get involved can be far more dangerous for that same future. So here is what you do.

1. Educate yourself

Find out what kind of investing would be the most profitable for you. The most profitable form of investing is always the same for everyone. It's whatever interests you the most. Don't try building wealth based on subjects you find boring. If you seem to find all subjects boring then find a good investment adviser and let him manage your money.

Here are some ideas for investing:
real estate
stock market
bonds
business

When you decide on a subject or multiple subjects then begin educating yourself. Go to the library, rent books, download podcasts, buy books, read everything you can, prepare yourself for any possible situation so you can take advantage of any situation, even situations that seem like problems.

2. Find a good investment adviser

In my opinion this is the most important part of investing. An educated, clever, and honest adviser will prevent you from making even the small mistakes that can cost you hundreds to millions of dollars.

You should make a list of local advisers in your area of interest and set up dates to interview them to advise you and help you manage your assets.

To know you have a good adviser you need to at least know the basics of investing. Don't expect the advisers you meet with to have your best interest in mind. Non-fiduciary advisers don't have the clients best interest at heart. They have a legal contract to put their broker service's interest first, then they will humanly put their interests second, and finally you come in a sad third. A fiduciary is a special, higher, certification that the adviser has the client's best interest at heart. These fiduciaries are the people you want helping you manage your money.

Get ALL of the fees and expenses associated with the adviser. Make sure you understand everything the adviser suggests.

3. Implement The Plan

Set goals that you want. The type of goals you have will dictate what you should invest in and how it should be managed.

Here are some ideas for goals:
growth
income
stability
safety
time span

4. Stick with the plan

Rarely will investing yield you astronomical gains. However, over time it can create HUGE wealth using compounding interest. Compounding interest is nothing to be ignored. To exemplify this I will show you some simple numbers.

$1,000 invested at a very reasonable rate of 8% over 50 years, yields $46,901.61

But.

$1,000 invested at 8% over 100 years, yields $2,199,761.26

You need to put the money in a tax shielded vehicle to capture the full effect of compounding interest. If the money is not in a tax shield vehicle then the interest gains will be reduced by taxes and the gains will take much longer to realize.

The fact is this. If you see these numbers and they don't impress you then move along. But if you do, then you have realized a huge asset. You are the type that can take information and run with it.

Here is a compounding interest calculator so you can do some of your own calculations.

The Power Of Compounding Interest

Did you know that if you inherited a $100,000 IRA when you were one year old that IRA would pay out more than $8,000,000 over your lifetime?

Compounding interest is an amazingly powerful tool for building wealth. Almost all wealthy people have used compounding interest to work for them in one way or another. Whether it be stocks, bonds, CDs, or mutual funds, you should get your money working for you as early as possible.

Often when I mention the folly of not investing extra money into some sort of compounding investment early in life I get mixed responses. Some don't comprehend the magnitude of an opportunity like that. Some think numbers that enormous can only be a scam. Some are apathetic and just don't care. But then there are some that see the opportunity and take advantage of it. I hope you are one of those people.

Compounding interest is the best way to build wealth because it is easy. There is no effort involved in making the principal accrue interest and build itself. Granted, you have to work hard to earn that principal but look at it this way. Say you are 21 and you have $40,000 in savings. You want to buy a new lifted truck because you hear paying cash is a great way to save money not paying interest. This scenario is to illustrate the power and importance of compounding interest. Here are two options and the results they will give:

Option 1: Buy the truck outright with the cash. Let's imagine you would have had to pay 9% on that loan. Over a period of 5 years you would have paid $9820.05 in interest.

Woohoo! That's great. Let's see what you would have made if you would have invested the $40,000 in a retirement account and taken out a car loan.

Option 2: Invest the $40,000 at 9% in a ROTH IRA and take out a car loan at 9%. You might think they would just cancel out, but you would be wrong. Here are the numbers:
You spend 5 years paying off your new truck and pay out $9820.05 in interest. While you paid off your loan your IRA was busy making money babies. Over 5 years that invested $40,000 has made you a fat $61,544.96 . That is a profit of $11,724.91 (with the interest subtracted). But since that money is staying with you it continues on making money far past the loan maturity date.

To summarize that scenario, over 20 years, when you are 41, you would have a comforting $224,176.43.

I do not suggest trying to retire on only $224,176. I do suggest using this principal of compounding interest while you are young so that you don't have to work so hard as you get older.

Here is your very own calculator so you can figure out what your savings could do for you.

Financial Calculator

What have your experiences been with saving and investing? Sound off!