Once you have freed up all that extra money from paying off your debt, you can put your money to work through savings and investments. What you save for will depend on your age, lifestyle, and goals.
In addition to an emergency fund, you will also need retirement accounts. You should also consider whether you need:
- Education savings, for yourself or your children
- Travel savings
- A down payment fund for a house
- Savings to start a business
- A car fund, for repairs or a new vehicle
- Extracurricular fund for dependents
- Long-term care savings, for yourself or dependents
By creating designated savings funds, you can track your progress toward specific goals. You can also put those savings in a high-interest account, money market account or CD (certificate of deposit) in order to earn interest on your money.
Remember, when you pay interest, you are losing money. But when you earn interest, your money is making more money all by itself.
If you won’t need your savings for several years or decades, one of the best ways to make your money work for you is to invest.
When you put your money into investments, it grows all on its own through interest or the increased value of the thing you invested in. Some investments also pay dividends, which you can either take as extra income or reinvest to help your portfolio grow.
Investing is a long-term strategy for building wealth. The most successful investors invest early, then allow their money to grow for years or decades before using it as income. Constantly buying and selling investments is likely to make less money than a buy-and-hold strategy in the long run.
As you start investing, it is important to diversify your portfolio. Having all your money in just one type of investment increases your risk. If that single investment fails, all your money could be gone. Instead, spread that risk out by investing in a mix of:
- Exchange-traded funds (ETFs)
- Government bonds
- Mutual funds
- Real estate
- Business (your own or someone else’s)4
Many mutual funds or brokerage firms have a minimum amount for first-time investors. You may need to save up that minimum amount before you start investing. In the meantime, you can start small with investing apps that allow you to purchase fractional shares by investing amounts as small as $1 at a time.
No matter how you are saving or investing, have a specific set of goals. Know what you are working towards, like paying for your child’s education, purchasing a home, or early retirement. This will help focus your spending and give you motivation, as well as helping you decide what types of investment are the best for you.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.