Study after study tells us that, on average, Americans aren’t saving enough to cover their retirement. In fact, an estimated 15% of Americans have no retirement savings at all, and around 45% of people think they will run out of money in retirement.
The statistics are worrying, especially if you aren’t sure how to start saving for the future. After all, if you’re a total beginner, how are you supposed to come up with a solid investment plan that meets your needs?
The truth is, whether you’re saving for the next few years or you need a long-term retirement investment plan, it’s easy to create an intelligent strategy that gets the job done.
Here’s what you need to know to shift from financial contraction into financial abundance.
1. Leverage the Power of Compounding
Investing isn’t something to put off until later. The best time to create an investment plan is now, because of the science of compounding.
Compound earnings happen when your investment returns start producing returns as well. This causes your initial investment to grow at an accelerated rate over time.
Compounding is the tool of wealth used by all of the greats.
Albert Einstein explained compound interest as “the most powerful force in the universe.”
Warren Buffett, whose net worth is estimated at an astounding $105 billion said, “My wealth has come from a combination of living in America, some lucky genes, and compound interest.”
Benjamin Franklin described compounding as, “Money makes money. And the money that money makes, makes money.”
Often called the 8th wonder of the world, compounding is a extremely powerful force that you can use to your advantage—without needing any unique skills or expertise.
2. Crush One Asset Class First
Personally, I’d suggest that you learn one financial asset class first and learn it well.
For example, start your investing journey by diving deep into one topic, such as rental real estate or cryptocurrencies or stocks or precious metal investing—or any other asset class you enjoy.
This will position you to start deploying your money, with confidence, into one specific type of investment.
Overtime, if you wish, you can diversify into other asset classes. But, if you’re crushing your financial goals by focusing on your first niche, it just might make sense to stay focused.
Personally, my first investment vehicle has remained by favorite investment vehicle: income-producing real estate.
However, over time I have diversified into new types of income-producing real estate based on market trends and my ever expanding knowledge.
3. Get a Financial Mentor (or Role Model)
In my opinion, the most effective approach for rapidly multiplying your wealth is to get a financial mentor.
If you don’t know how to do this, read this article to learn how to approach someone for mentorship, because it is an art form to secure the time and attention of someone who has achieved noteworthy success.
Ideally, this should be someone whose net worth is well beyond yours, so they can teach you the path and help you shift your limiting money beliefs.
Believe me, if you’re not where you want to be financially, then your money mindset is part of the problem. Thankfully, this means that shifting your money mindset can be a part of the solution. If you need help in this area, I’d recommend that you grab the book Secrets of the Millionaire Mind by Harv Eker.
If you can’t secure a financial mentor, then pursue a financial role model instead.
A financial role model is someone you can watch and model, without being directly mentored. Observe them, watch or read everything they put out, and aim to replicate their behavior and actions as closely as you can.
4. Financial Education Drives Financial Gains
Before you dive too deep into creating an investment plan of your own, do some research to understand the basic types of investments available, as well as their pros and cons.
For in-depth learning, consider exploring the finance section of this blog or checking out free courses from major online education platforms. Udemy offers some compelling courses on the subject for under $20.
You can also call the Customer Service line of your brokerage firm: representatives there can’t give you financial advice, but they can answer questions and direct you toward relevant learning tools.
We live in the Information Age, so this step should be easy. As Robert Kiyosaki, author of the best-selling book Rich Dad Poor Dad says, “Having no money should not be an excuse not to learn.”
5. Don’t Buy Into Financial Bullsh*t
In terms of how to prioritize your financial contributions, there are many schools of thought.
Most people will tell you to give up control of your money and forget it about it for entire decades of your life by contributing to 401k, IRA, or similar retirement account.
If you observe carefully, you’ll notice that quite often the people giving you this advice don’t have a particularly high net worth. If they do, it usually took them decades of their life, often until retirement age, to achieve it.
In contrast, everyone I know who has achieved financial freedom at a young age (myself included) has gone a different route.
By financial freedom I mean that working is optional instead of required, because you can pay your bills with passive income.
People who achieve financial freedom at a young age nearly always invest in cash flow producing assets, because this re-occurring income allows them to pay their living expenses.
They also keep an close eye on their money and maintain control of it, instead of delegating out this responsibility to other people who may not have their best interest in mind and who charge hefty fees for managing it with no performance guarantee at all.
6. Acquire Cash Flow Producing Assets
This leads us perfectly in tip number six, which is to acquire cash flow producing assets.
Generally speaking, investments can pay you one of three ways. The first is through price appreciation (aka, going up in value). The second is through cash flow. The third is through tax advantages.
While most “average” investors tend to invest in investment vehicles (like stocks and bonds) where price appreciation is the primary goal, the problem with this approach is two-fold.
First and most importantly, these investments will not help you pay your bills during the most expense decades of your life—the middle of it when you’re paying down student loans, having kids, and paying for their college expenses.
Second, relying on price appreciation can be precarious, because most investment vehicles go through periodic market cycles. This means they can experience large swings in price and sometimes “crash”.
For example, the stock market collapsed in 2002 after the dotcom crash. This happened again only nine years later when the housing bubble popped in 2009.
In contrast, when you invest in cash-flow producing assets, it doesn’t matter if the asset itself varies in value, because you get paid each month either way. This lets you ride out market cycles so that you can sell during the “up” periods after an asset has surged in value.
Examples of cash flow producing assets include:
- rental real estate
- real estate funds and syndications
- high-yield dividend stocks (owned outside of a retirement account so you can live off the dividends)
- corporate or municipal bonds
- peer-to-peer lending
- hard money lending
- mortgage tax lien investing
7. Know Your Reasons (Your “Why”)
The best investment plans happen when you have an end goal in mind.
Why are you investing? Are you trying to save up for retirement or do you want to set up a shorter 10-year investment plan? Are you building up money to leave as a legacy, or do you want to establish a unique college investing plan?
Knowing your purpose for investing can help you set up a sound strategy to reach your goals. It also affects factors like your risk tolerance and where you put your money, so it’s critical to think about it in advance.
If you’ll need your investment money to buy a home in five years, you’ll need a different strategy from someone who’s saving for retirement.
In general, short-term needs will mean opting for less risky investments, while long-term plans can tolerate larger market fluctuations and added risk.
8. It’s Not the Investment, but the Investor Who Is Risky
As the billionaire Warren Buffett once said, “Diversification is a protection against ignorance.” Meaning, when you understand an investment vehicle well, you can go all in.
Or as Robert Kiyosaki, author of the best-selling personal finance book Rich Dad Poor Dad says, “It’s not an investment that is risky, but the investor who makes it risky.”
What he means by this is that more you know about an investment and the more control you have over it, the less risky it is. This is why he always teaches that you want to become an investing “insider.”
You want to understand what you’re investing in, pay close attention to it, and get better and better at managing your investment plan over time.
9. Aim for a 10% Return (or Greater)
With inflation averaging 3.22% per year and financial management fees often eating away another 1-3% per year, most investors don’t make a profit until they achieve at least a 5% rate of return each year.
Even then, they will only keep the spread beyond what inflation and fees eat up.
Meaning, someone who thinks they are earning 7-10% per year in the stock market is more likely making real-world gains in the range of only 2-5% per year.
For this reason, most wealthy people try to invest in assets that pay a minimum of 10% per year—and, of course, the more the better.
Aiming for this rate of return will also help your investment to multiply in value at a much faster rate.
Implement Your Investment Plan
Even if you haven’t put much thought into your investment strategy in the past, creating an investment plan as soon as possible can help you get on track for the future.
It will take some time to set your financial goals, but once you’ve established a reliable plan, all you’ll need to do is follow it—until your annual check-in, of course!