After hearing about things like stocks and cryptocurrencies, many have asked themselves, Will investing make you rich?
The truth is that millions of people have become rich through different investment options. Investment assets range from index funds, individual stocks, cryptocurrencies, real estate, and more. With diversification and persistence, you can become very wealthy through your investments.
There is a lot of information and opportunity, but it isn’t always clear which ones are best. Today we’ll walk you through the research around how to use your investments to propel yourself towards financial freedom.
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Can You Get Rich by Investing?
You can get rich by investing. Money invested will work for you via compounding interest, meaning your money makes you money. The more money you have invested, the more money you can see in investment returns.
We associate wealth with business owners or company CEOs most of the time. While this is one way to grow your money, investing your average income over time may prove just as efficient.
So, how can you get rich by investing? We’ll go over the different kinds of investments below, but the general concept is investing in opportunities that pay you.
Investment returns can come in many forms: paid interest, dividends, capital appreciation, and tax advantages.
- Paid interest is when an investment pays a percentage of your invested funds back to you. This can be done monthly or – more commonly – annually. You can find paid interest in CDs, bonds, saving accounts, and some mutual funds.
- Dividends are a distribution of company profits to eligible shareholders generally given monthly, quarterly, or annually. Although most companies do not offer stock dividends, you can think of this as a reward for investing in a company.
- Capital gain is when you sell something for more than you bought it. Whether you’re selling your stocks, crypto, or real estate, any money you make in the process is called capital gain.
- Finally, most wealthy people profit from tax-advantaged accounts and investments. Legal loopholes allow for paying less tax while pocketing more money through things like Roth IRAs, 401(k)s, and holding on to stocks for more than a year.
Can You Become a Millionaire by Investing?
A five-year study following over 200 millionaires in the U.S. found that roughly 1/5 of them had become millionaires simply through investing and saving their income. This translates to 20% of millionaires who got rich by investing alone.
Investments differ from savings because your money is put at risk with the benefit of making you more money. Unless you’re actively trading stocks, usually, the investment requires little to no further effort on your part after the initial deposit.
What Kind of Investments Make You Rich?
Investments that make you rich are those that generate passive income over time. Some are much faster than others, but they may also require a more significant initial investment or higher risk. Popular investments that have been shown to promote and increase wealth include index funds, cryptocurrencies, tax-advantaged retirement accounts, and real estate.
Generally speaking, the more you invest, the faster you can get rich, but that doesn’t mean that the average Joe can’t get rich too – he’ll just have to do it over a more extended period.
Index funds are a portfolio of stocks or bonds that mimic a general market. This means your return is similar to that of the overall market the index fund follows.
Warren Buffet, considered one of the most successful investors of the 20th century, has continuously advised people to invest their money in index funds and let the funds grow their money for them.
This is a great investment opportunity for patient individuals who want to see their money grow over the years.
By far one of the riskiest investment options, cryptocurrencies have recently skyrocketed in popularity and value. Those who purchased just $100 of Bitcoin, one of the largest cryptos on the market, in 2012 would have over $270,000 today.
While the increase in some cryptos’ value has been astronomical, it’s difficult to predict or average a return in this risky market.
To invest in cryptos, we recommend getting very well-acquainted with their origin, systems, goals, and factors that may affect their worth. This may be a great addition to their investment portfolio for the risk-tolerant investor.
Tax-Advantaged Retirement Accounts
Tax-advantaged retirement accounts should be a part of every investor’s portfolio – the younger you start one, the better.
These accounts include Roth IRAs, traditional IRAs, 401(k)s, 403(b), and 457 plans. Some plans are employer-sponsored, while you can open others individually.
Building on compound interest that is either tax-deferred or gained after taxes, these accounts are a great way to build up your assets over time to prepare for a financially free and enjoyable retirement.
Real estate can produce a generous amount of cash by holding and selling, renting out, or flipping properties. Flipping houses refers to buying a distressed home, completing renovations, and selling it for a higher value.
Most people assume that real estate requires a more significant initial investment, at least for the down payment on the property. While having capital helps, there are ways to finagle buying and selling real estate with only a few hundred dollars!
These include seller financing through lease options, trading fixed assets, taking out a home equity line of credit, or utilizing a peer-to-peer lending network.
Investment portfolios should be diverse for the best stability and asset growth. Other investments that can add to your wealth include Certificates of Deposit (CDs), bonds, individual stocks, Exchange-Traded Funds (ETFs), and annuities.
How Much Should I Be Investing?
Most financial professionals suggest investing between 10% and 15% of your annual income. Remember to adjust this if you receive a promotion, bonus, or salary increase. However, the most important thing you can do is just start, even if it’s only $50 per month and work your way up.
If you can go above this recommendation, you’ll see your investments grow even faster. Once you establish an emergency fund – preferably in a high-yield savings account – make the rest of your saved money work for you by investing it.
A good rule of thumb is the 50/15/5 rule. Fifty percent of your pay should go towards essentials, 15% towards investments, 5% towards short-term savings, and the remaining 30% for discretionary expenses.
If you’re saving up for a large purchase like a car, wedding, or home, you may want to place your savings in either a high-yield savings account or a low-risk investment option such as a short-term bond or CD.
Another factor to consider is the power of compound interest. If your accounts accrue compound interest, the more you invest earlier, the more you return later in life.
Summary: Will Investing Make You Rich?
With the proper knowledge of your investment choice, you can accumulate the wealth you want. Millions of millionaires have become so simply by saving and investing their income.
Diversifying your portfolio to include an array of investments is best for accumulating wealth. Investment opportunities include index funds, cryptocurrencies, tax-advantaged retirement accounts, real estate, CDs, ETFs, bonds, and annuities.
If you’re risk-averse, you may want to focus on mutual funds, bonds, and tax-advantaged investment accounts for slow and steady growth. If you’re more risk-tolerant, cryptocurrencies and real estate may be the path for you.
No matter your choice, know that anyone with enough knowledge and perseverance can reach wealth to reach their goals.