Investing is a powerful way to turn a little bit of money into a lot more money in the future. When done right, you may even be able to double your money via compounding—$1,000 can turn into $2,000, then, $2,000 can turn into $4,000, and so on. Here are some tips on how you can apply a snowball effect to your investment:
#1 Contribute To Your 401(k)
Your employer-sponsored retirement plan is a great place to start investing your money. Traditional contributions to accounts such as your 401(k), 403(b), or TSP can get you a tax deduction at your marginal tax rate for your contribution amount. If your employer matches your contribution, that's also extra money that will go toward your account value, effectively boosting its balance.
These factors in tandem can help you instantly double your investment. It's even better if you automate your contribution, in which case such is taken directly from your paycheck—you won't even feel it and yet your money is growing.
#2 The Rule Of 72
The Rule of 72 is a prediction of the amount of time it will take to double your money based on the rate of return you get on it.
To calculate this, take 72 and divide it by your expected rate of return, and the value you get is the number of years it will take for your investment to double. While this isn't the most airtight calculation, it can help give you an idea of timing when it comes to creating an investment plan, as well as how much the money you've already invested could potentially double in that time frame.
#3 Dollar-Cost Averaging
Dollar-cost averaging is an investment strategy that reduces your risk, which is essentially the main benefit. By keeping some of your money out of the market for a certain period of time, you will be less susceptible to the financial effects of a market crash. You would invest the same number of dollars every paycheck—when the market is up, you will buy fewer shares with that money, and when the market is down, you will buy more shares with that money.
#4 Reinvest Your Dividends
Dividend stocks are companies that pay out regular dividends.
Such companies are usually well-established and hold a track record of distributing earnings back to shareholders. Essentially, the benefit of reinvesting your dividends is maximizing the number of doubling cycles throughout your career. Missing out on doubling cycles can be the difference between several hundred thousand dollars upon retirement.
#5 Keep Invested In Stocks
For your long-term money, it's a good idea to stay invested in stocks. They will offer you the potential for better long-term results than bonds do, even if the stock market returns right now are less than their historic long-term average. Surely, there are higher risks in stocks than in bonds, so you shouldn't tie up the money that you plan to spend within the next five years or so in them.
But for the money you don't need immediately, stock investments may be worth considering for their potential higher returns.
