The process of building wealth can be laborious, but not if you’re intentional, aggressive and start investing as young as possible. Just take entrepreneur, bestselling author and media personality Ramit Sethi as an example. He’s a self-made millionaire and his road to riches isn’t one he keeps cloaked in mystery. Sethi often shares what worked for him — and what can work for you — on his social media channels and in email newsletters.
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In a recent email newsletter, Sethu broke down the six investing fundamentals, rung by rung, to make wealth building easy. Climb this ladder, and you’ll be on your way to financial freedom.
Max Out Your 401(k) Plan Match
If your company provided a 401(k) plan, the most popular type of retirement plan, there’s a good chance they will match a certain amount of what you put in — usually in the ballpark of 4%-6%. You’ve probably heard financial experts telling you that to not take advantage of this is to turn away free money. They aren’t exaggerating. Your company is literally giving you money when you save for retirement. Hop on board to build wealth.
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Pay Off High-Interest Debt
High-interest debt, the kind you get with credit cards, has the potential to ruin your financial life fast. Just one late payment after years of being on time with your payments could drop your credit score. And if you’re only paying the monthly minimum, the amount owed will continue to increase. It’s a vicious cycle that can get so out of control, you might end up in bankruptcy court. The second rung on Sethi’s ladder to building wealth easily is it to pay off all high-interest debt.
Open a Roth IRA and Contribute as Much as Possible
Ideally, you want to build wealth before you retire so that you can enjoy your golden years without having to worry about bringing home a paycheck. You simply can’t save enough for your old age, so go the extra step and open a Roth IRA and put money in there, too.
Contribute Any Leftover Money to Your 401(k) Plan
Not only does Sethi recommend maxing out your 401(k) plan match, he also recommended putting leftover money that’s not needed for anything else into your 401(k) plan. You’ll be so glad you did this when you retire and are living on a fixed income that hinges on your 401(k) plan.
Invest In a Health Savings Account (HSA)
Healthcare expenses can easily break a household. You can help take the edge off qualifying medical expenses by putting your pretax money in a health savings account (HSA). Unlike a flexible savings account (FSA), which you need to empty out every year, HSAs don’t expire, so you can tap into this healthcare money any time, even in retirement.
Invest Any Leftover Money in a Non-Retirement Account
Here’s where you’ll need to go out on your own, in a sense (though ideally you’ll work with a financial advisor), and invest any leftover money you have into a non-retirement account. Sethi said it might make sense to invest in a Target Date Fund.
“I love Target Date Funds because they’re extremely simple, automatically diversified and automatically get more conservative over time,” Sethi said. “That’s a good thing because as you get older, it’s smart to accept slightly lower returns in exchange for more stability.”
If taking the route of investing in a Target Date Fund, you’ll need to know the year you’re planning on retiring. If you plan to retire in 2060, look for a 2060 Target Date Fund. Your investment automatically diversifies over time and benefits from the power of compound interest.
Or, you can choose your own index funds for spread out investing.
“Index funds let you own small pieces of hundreds or thousands of companies, which means you spread your risk and you keep costs low,” Sethi wrote, adding that one of his investing heroes, David Swensen, suggested the following index fund allocation:
- 30% domestic equities
- 15% developed-world international equities (like the UK, Germany and France)
- 5% emerging-market equities (like China, India and Brazil)
- 20% real estate investment trusts (REITs; they invest in mortgages, residential and commercial real estate)
- 15% government bonds (which provide predictable income and balance risk)
- 15% TIPS (Treasury Inflation-Protected Securities)
And there you have it. The secret sauce to building wealth really isn’t so secret at all.
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This article originally appeared on GOBankingRates.com: Ramit Sethi: 6 Investing Fundamentals To Make Building Wealth Easy
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