How to Build Wealth (A Beginner’s Guide to Investing)

How to Build Wealth – A Beginner’s Guide to Investing

People are terrified of investing. Like they’d rather be summoned to jury duty for a month than risk “losing” their money in the stock market. 

I blame these fears on the media. Every time you turn on the TV, hop on Facebook, read a newspaper, or listen to the radio, someone is talking about the stock market. It’s crashing one minute. Skyrocketing the next. This person lost everything in the last financial crisis. Wait… another crisis is on its way.  

Being bombarded with stories like these is enough to make anyone want to run farrrrrr away from investing. But it’s not the big, scary monster people make it out to be. Investing is actually one of the most reliable ways to grow your wealth if you know a few basic rules. 

We’re going to dive into how to invest the right way. But before we do, there are a few things you need to take care of first. 

Before You Invest…

1. Create An Emergency Fund

Life has a way of throwing us curveballs when we least expect it. Prepare for the unexpected by building a three to six-month emergency fund. Keep this money in a high-yield savings account where you’ll earn a guaranteed rate of return. 

Your emergency fund should be enough to cover bare-bones living expenses. If you currently spend $4,000 a month but $1,000 of that goes to dining out, shopping, vacations, and subscriptions, then base your emergency fund off $3,000 a month. Chances are you’d cut all those “extras” if you lost your job. 

2. Pay Off All High-Interest Debt

Investing before you pay off high-interest debt is like taking one step forward and two steps back. You’ll never accumulate real wealth because the interest on your debt will always be higher than what you’re earning in the stock market. 

Common types of high-interest debt include credit cards, title loans, payday loans, and personal loans—really anything over 8%. If you have debt that falls in this category, pay it off before you move on to investing.

When You’re Ready To Invest…

Now the real fun begins. Once you’ve built your emergency fund and paid off high-interest debt, follow the steps below to start investing. 

1. Contribute To Your 401(k)

Saving for retirement should be your first investing priority. You earn free money if your employer offers a contribution match and you fund your account with pre-tax dollars. 

If you’re wondering how much you should invest, I recommend contributing enough to earn 100% of your employer’s match. 

For example, if your employer matches 5% of your salary and you make $50,000 a year, then contribute at least $2,500 a year. At the end of the year, you’ll have $5,000 in total because your employer will match your contribution dollar for dollar. 

Of course, you can invest way more than this, which I recommend. The maximum contribution limit for 2020 is $19,500 or $27,000 if you’re at least 50. Contributing to retirement accounts is my preferred way of investing. In addition to being a simple way to invest, the tax-benefits include reducing your taxable income. Contributing the maximum amount allowed is especially important if you are a higher-income earner. This is a great way to reduce your tax bill.

2. Open A Roth IRA

If you don’t have a 401(k) (or are already contributing up to your employer’s match), open a Roth IRA. The benefits of this glorious account aren’t talked about nearly enough. 

You fund your Roth IRA with after-tax dollars, but your money grows tax-free and you’ll make tax-free withdrawals in retirement. 

Even better, you can withdraw the principal at any time without penalty and you can use up to $10,000 for a down payment on your first home. (I told you… jaw-dropping benefits.)

But there are a few downsides to Roth IRAs: 

    1. You must open the account yourself. Your employer doesn’t do it for you. (You can follow the steps in the “Open An Individual Investment Account” to open and fund your Roth IRA.)
    2. The contribution limits are much lower than a 401(k). For 2020, you can invest up to $6,000 a year or $7,000 if you’re at least 50 years old. 
    3. There are income restrictions. If you make more than $124,000 in 2020, your contribution limit may be limited or you may not be able to contribute at all. 

A Final Note On Retirement Accounts

Many investors don’t know this, so listen closely. 

Once you transfer money into your retirement accounts, you can’t stop there. You must actually invest your money into some type of fund. Otherwise, it’s just a glorified savings account and compound interest can’t work its magic. 

So, do me a favor. When you transfer money into your retirement accounts, make sure you invest the funds. There are several ways to do this, but the wisest choice is to invest in low-cost index funds or a target-date fund (more on those below).  

3. Open An Individual Investment Account

Once your retirement accounts are growing steady, take it to the next level by opening an individual investment account. 

First, look for a low-cost, online brokerage like Vanguard, Schwab, or Fidelity. (Hint: you can also open your Roth IRA with these firms.)

Once you’ve established your account, it’s time to put your dollars to work. But you’re not just going to invest in stocks and call it a day. (This is a surefire way to lose your money and become one of those sob stories talked about in the news. No, no.)

Instead, you’ll use the same approach you used with your Roth IRA and either invest in a few low-cost index funds or a target-date fund—depending on how hands-off you want to be.

Let’s break down both of these options below.   

Index funds are a collection of securities that mimic the movements of a major index, like the S&P 500. Instead of trying to beat the stock market, these funds aim to match its return. 

Index funds are what we invest our money in, and they’re recommended by most of the mega-wealthy—including Warren Buffet. They’re extremely low cost and easy to manage, making them the perfect choice for hands-off investors. 

As far as maintenance goes, the only thing you’ll need to do with index funds is rebalance your portfolio once a year to make sure it’s still aligned with your risk tolerance. (Easy, peasy.)

If you don’t even want to worry with rebalancing your portfolio once a year, then a target-date fund is for you. It’s truly as hands-off as it gets in the investing world. All you do is pick a target-date fund that aligns with your retirement year, and it’ll rebalance your portfolio and change your risk tolerance as you move closer to retirement. 

Wealth Building Tips

4. Automate, Automate, Automate

Let’s be honest. No one likes spending hours on end managing their finances. Once you add investing to the mix, things get even more complicated. But you can save yourself time and headache by automating everything. 

Your 401(k) already gets taken out of your paycheck every month, but you’ll need to automate your Roth IRA and investment account contributions. You can do this by logging into your brokerage account and setting up automatic transfers for once or twice a month, depending on your pay periods. 

After you automate everything, your work is done. Then, you can sit back and relax as your money begins to make you even more money. 

The Bottom Line

There are a lot of misconceptions about investing. It’s risky. It’s a form of gambling. It’s only for rich people. It’s only for wealthy people… and the list goes on. But investing isn’t just for the rich. You don’t have to have millions or even hundreds to begin investing. Check out this article about wealth-building basics. 

Take a moment and clear your mind. Set aside preconceived notions that investing is a guaranteed way to lose your money.  Whether you’re interested in retiring in the next 10 years or 30 years, buy and hold investing can have you on your way to reaching financial independence.  You’ll be on your way to reaching financial independence in no time. 


Tell me about your investing experience in the comments below. What’s your investing strategy? What types of securities do you hold? Are you more of a passive investor or an active one?

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  1. Maria @ Handful of Thoughts | 11th Dec 19

    So many things to think about. Thanks for breaking it down into easy to follow steps. I’m a total passive investor. I contribute to my retirement accounts, invest in low cost index funds and then just let them do their thing. Set it and forget it.

  2. Rachel @ Money Hacking Mama | 1st Jan 20

    I think the hardest part is just getting started. I love how you make the steps for starting off super simple and easy to follow.

  3. Michelle @ The Better Grind | 27th Jan 20

    As a new investor this is a clear, straightforward and actionable guide too investing. I love the quote “investing isn’t just for the rich”. I always thought that investing was something I would do ‘when I was older’ and it’s so liberating to realise that it can be simple and effective. Great post!

    • Mrs Miller | 28th Jan 20

      Congratulations on starting your investing journey! Some people never start. Investing has changed in the last 10 years and today it’s easier than ever. It’s unfortunate that so many people are scared off because investing is presented as such a complicated thing. It doesn’t have to be.

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  5. FYF 40: Building Generational Wealth with Mrs. Miller from Millers On Fire » TwentyFree | 12th Nov 20

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  6. Rebecca Gardner | 1st Apr 21

    Thanks for listing the different types of high-interest debt we should focus on paying off, such as credit cards. My brother wants to start learning about trading strategies so he can make money by investing. I’ll share this info to give him some guidance on where to get started!

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