We all want to get the most out of our money, whether our end goal is a home down payment, retirement, or increased freedom and security. Your investments are, undoubtedly, critical building blocks for increasing your net worth and reducing any financial stress. This article will provide five under-utilized steps you can take today to help ensure your money will grow to its highest potential.
1. Set dividends to reinvest
Every brokerage house will allow you to set dividend payments to either "cash" or "reinvest." If you have this setting in "cash" mode, every time your investment pays a dividend, you'll receive it as ready, spendable cash in your settlement account. This is a sensible choice if you rely on your investment account for passive income and see long-term gains as a secondary priority.
However, if you're investing in a retirement account for the purpose of covering retirement costs in 30 or 40 years, you'll be far better off setting dividend payments to "reinvest." When each of your investments pays a dividend, the payment will be automatically reinvested back into the same stock, bond, or fund from which it came. If the market value of the investment has fallen, your dividend will purchase more shares upon reinvestment. This causes a powerful compounding effect that requires no ongoing intervention on the part of the account owner.
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2. Get your employer match
Most employers offer a company match for contributing to a 401(k) or 403(b) plan, and this is one of the easiest opportunities to immediately double your money. If an employer offers a 4% match (match range is typically 3% to 6%), this means that for every dollar up to 4% of your compensation that you contribute to your employer's plan, your company will contribute an equivalent amount. This works out to a 100% return -- precisely the definition of doubling your money.
Some employers also offer other incentives, like an Employee Stock Ownership Plan ("ESOP"), that allow you to take advantage of discounted stock purchases or additional matching opportunities. This is why it's absolutely necessary to read your company's 401(k) plan document and really know the details -- often, there is free money to be had by simply following the rules of the plan.
3. Use a discount broker
Whether you're trading stocks, bonds, exchange-traded funds ("ETFs"), or mutual funds, you should not be paying expensive trading fees for the privilege. Commissions have fallen to zero or near-zero -- there is simply no reason to pay a fee to buy shares of stock in 2020. Fidelity, Vanguard, and Schwab, among other brokers, offer zero-cost trading in most instruments, and do not require in-person assistance.
The fact is, costs matter -- a lot. A 1% annual fee on your investments, also known as a "wrap fee," will eventually eat up quite a significant share of your after-tax return. High commissions, often ranging from hundreds to even thousands of dollars per trade, are, in my estimation, an archaic and predatory fee method used to take advantage of investors. Use a discount broker and you'll be well on your way to doubling your money by simply avoiding high fees.
4. Leave your investments alone
The literature on market timing is clear: The more you try to trade in and out of the market in search of short-term gains, the more you're putting your long-term goals in peril. If you hear someone say that it "feels like the market is a bit overvalued," this statement is nothing more than a veiled attempt to time the market. The best option, at least for those investing for the long term, is to set your investments according to a written asset allocation. Then, don't change them unless it's to contribute more money or periodically rebalance. Repeated contributions at regular intervals over long periods of time will cause your money to multiply at a rapid pace -- regardless of where the market happens to be trading today.
5. Change your mindset
When it comes to personal finance, it's useful to look at your own income statement as if you're running a business. On the income side, are you in a career that brings in enough revenue, and if not, are there any certifications or professional designations that might advance your salary? On the expense side, do you feel you're getting proper value out of your expenditures, or are there places to cut spending? Simply looking at your finances from this standpoint can sometimes help free up excess money that can be used for continuous investment. The more money you have invested, as early on in your life as possible, will lead to it doubling sooner.
Take stock and act
Doubling your money in the stock market comes down to getting a few simple steps right. Assuming you are careful to control your costs, ensure the settings on your accounts are accurate, and operate with a business mindset, you'll be on the right track to achieving investment success.
