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Historically, investing has proved to be one of the most effective ways to grow your money over time. For example, the average annual return for the S&P 500 from 1928 through mid-2024 was 7.9%, according to The Motley Fool.
Over many years and decades, even just investing in a reliable, more conservative S&P 500 index fund could yield you pretty significant returns with consistent contributions. But it can be hard to know where to start with investing — and with building wealth in general.
Nasdaq CEO Adena Friedman said there’s one “foundational element of wealth creation” that young people need to do.
Nasdaq CEO Said To ‘Learn by Doing’
CNBC Make It spoke with Friedman, and she had three important words for those new to investing: learn by doing. This is her most important piece of money advice for all investing newcomers, including her own children.
“Learn by doing — with small amounts of money,” Friedman told CNBC. “As you get more engaged and more educated, you can start to take more risks … and then get more confidence.”
Taking time to get engaged and educated is crucial to long-term financial success. Once you take action, only then can you start to see positive financial results from investing.
Here are some steps you can take to put Friedman’s words into action.
Be Prepared for Any Outcome
Investing always comes with risk. However, being too risk-averse can lead to less financial growth potential. Investments can lead to both gains and losses, so you’ll need to get into a mindset where you’re prepared for any outcome.
Ultimately, assuming financial risk through investing is how you can achieve financial freedom. That said, don’t risk more than you can afford to lose.
Look at Long-Term Investments
Once you get your feet wet with investing, be sure to look into reliable, long-term investments that have a solid track record of consistent growth. That will help you build wealth and set you up for financial success in the future.
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“That’s what’s going to make it so that you can afford your schools, or your children’s schools, afford a home, and afford to travel the world and experience the world,” Friedman told CNBC.
Slow and steady is the name of the game when it comes to investing.
Invest Early and Often
This is the golden rule of investing. The earlier you start investing and the more frequently you’re able to invest, the greater your investment growth potential.
Consistency with your contributions is key. For example, starting to consistently invest in your 20s versus your 30s can potentially mean a difference of hundreds of thousands of dollars once you reach retirement age, thanks to the magic of compounding.
Consider this example from U.S. News & World Report. If one person invested $200 per month from age 25 to age 35 (for a total of $24,000) and then stopped, their investments would total nearly $300,000 by age 65. By contrast, if a second person were to invest $200 per month between ages 35 and 65 (for a total of $72,000), they’d have only $245,000 by age 65.
Take Advantage of a 401(k) and Roth IRA
If you have access to an employer-sponsored 401(k) plan, be sure to take full advantage. This should especially be the case if you’re offered a dollar-for-dollar percentage match on your contributions.
Contributions to a 401(k) are tax-deferred, so you’ll avoid paying taxes on your contributions until you start taking distributions in retirement. It’s also smart to contribute to a Roth IRA if you meet the income requirements. Contributions to a Roth IRA are made with after-tax income, so you won’t pay any income tax on the gains when you withdraw the money in retirement.
These accounts are great ways to invest money for your future retirement. According to T. Rowe Price, target date investments are offered in 98% of retirement plans, which can help simplify the investing process while still providing investment returns.
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