3. Invest in index funds
Stocks are the most powerful wealth-building tool the average person can access. But picking individual winners is challenging, and individual stocks can be intimidating for newer investors. Index funds solve that problem.
When you invest in an index fund, you buy a piece of every company in that index at once. A $100 investment in an S&P 500 index fund, for example, gives you exposure to all 500 companies in that index. Over time, index funds have been excellent wealth-building tools, requiring minimal effort and carrying lower fees than most actively managed alternatives.
Legendary investor Warren Buffett has said that a simple, low-cost S&P 500 index fund is the best investment most people can make. Index funds are available as both ETFs and mutual funds, and both are easily purchased through any brokerage or investment app. For most beginners, ETFs are the simpler starting point.
Once you've built a solid foundation of index funds, you can branch out into other options. But an index fund might be all you'll ever really need.
4. Use fractional shares to buy stocks
If you have the time and interest to research individual companies, picking your own stocks can be a rewarding approach, especially once you already have a foundation of index funds in place.
Getting started is easier than ever. Most brokers no longer charge trading commissions, and many now offer fractional share investing, meaning you tell the broker how many dollars you want to invest rather than how many shares. If a stock trades at $500 and you invest $100, your account will show that you own 0.2 shares. The same fractional approach applies to most ETFs as well.
This makes it possible to own shares of well-known, high-quality companies without needing hundreds or thousands of dollars to buy a full share.
5. Put it in your 401(k)
If you have a 401(k) or other employer-sponsored retirement plan, funding it could be an excellent use of your investment dollars. That's especially true if you haven't maxed out your employer's matching contributions.
There's even more to like about investing in your 401(k): lower taxes. Every dollar you contribute to your 401(k) is considered a pretax contribution, meaning you won't pay income tax on that dollar for the year you contributed it to your account. Better yet, your investments will grow tax-free until you start taking distributions in retirement.
Are you self-employed? You can open a solo 401(k). You won't get the free money from an employer, but you can still take advantage of those pretax contributions and tax-free growth.
