3. Invest in index funds
Stocks are the most powerful wealth-building tool the average person can buy. However, it can be challenging to pick the winners, and individual stocks can be intimidating for new investors. This is where index funds come in.
When you invest in an index fund, you buy a piece of every company held in that index. In other words, if you invest $100 in the SPDR S&P 500 ETF Trust (SPY -0.50%), you'll own a tiny portion of all 500 companies in the S&P 500 index. Over time, index funds can be excellent wealth-building tools, with minimal effort from you.
You can choose from a wide variety of stock indexes, ranging from popular ones, like the S&P 500 index, to more specialized indexes. Index funds are easily purchased through an investment app or brokerage account, and they are available in both exchange-traded fund (ETF) and mutual fund forms.
There are some differences between ETFs and mutual funds, but as a general rule, ETFs are the easier way to invest. That's especially true for beginners.
Once you've built a solid foundation of the best index-tracking funds, you can branch out and explore other investing options. But an index fund might well be all you'll ever really need to succeed with your investing. In fact, legendary investor Warren Buffett has said that a simple, low-cost S&P 500 index fund is the best investment most people can make.
Interested in an index fund that costs more than $100? The next topic also applies to ETFs.
4. Use fractional shares to buy stocks
Index funds make stock investing easy, but picking your own stocks can also be a great way to invest. If you have the time and desire to do some basic stock research, it's entirely possible to produce excellent long-term returns. And that's especially true if you already have a solid backbone of index funds.
It's easier than ever to start a stock portfolio with $100 or less. Most brokers nowadays no longer charge commissions, and many major brokerages offer fractional share investing.
So, what exactly is fractional share investing? In short, you tell your broker how many dollars you want to invest in a stock. For example, if you invested $100 in a stock that traded for $500, your brokerage account would show that you owned 0.2 shares of that company.
Looking to invest in index funds? Good news! Most brokers that offer fractional investing for stocks will also allow you to buy fractional shares of ETFs.
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.
