In addition, paying off a credit card with a 20% interest rate will be like locking in a 20% investment return for several years.
The paying off or paying down debt isn’t all about preparing for the worst either. It’s equally a matter of preparing for the best.
If you want to make any of the investments in this article, increase your retirement savings, or launch a side business, the less money you owe the easier each of those ventures will be.
Much like building up cash reserves, getting out of debt is a way of increasing your preparedness. That will work to your advantage whether you’re preparing for an oncoming storm or jumping into a new venture that will improve your future.
- Launch or Accelerate Your Retirement Savings Plan
Technically speaking, a retirement plan isn’t an investment – at least not in-and-of itself. It would be better to say that it’s a platform to do your investing in.
You should take full advantage of that. Not only are contributions generally tax-deductible, but the investment income you earn in your account is tax-deferred. That can mean the difference between getting a 7% return on your investments – after tax – and 10%, tax-deferred.
The compounding difference between the two over 20 or 30 years is staggering.
For example, let’s say you can invest in stocks and REITs and earn an average annual return of 10%. If your combined federal and state income tax rate is 30%, the net return on your investments in a taxable account will be 7%.
If you invest $10,000 in a taxable account for 20 years, with an average annual after-tax rate of return of 7%, the account will grow to about $38,700.
But if the same $10,000 is invested in a tax-sheltered retirement plan, you’ll get the benefit of the full 10% average annual rate of return on your investments. After 20 years, your initial investment will grow to about $67,300. That means you’ll be nearly $30,000 richer just for housing your investments in the right account.
That’s what investing through a tax-sheltered retirement plan can do for your investments. And we haven’t even calculated the benefit of employer matching contributions on 401(k) and 403(b) plans.
Given that advantage, you should have all the motivation you need to either start a retirement plan or increase your contributions to the one you have in the coming year.
If you’re participating in an employer-sponsored retirement plan, you can contribute up to 100% of your earned income, up to $19,500 per year, or $26,000 if you’re 50 or older.
Make a commitment to get as close to the maximum contribution as you can in 2021. And if you haven’t started a retirement plan so far, make it happen in the coming year.
- Make 2021 the Year You Begin Investing in Yourself
This is one of my favorite “investments”, even though most people probably don’t think of it that way. But investing in yourself is often the best long-term move you can make. It offers an opportunity to increase your earning power, which will have a major, positive impact on any other investment activity you participate in.
That may be more important to do in 2021 than it has been in decades. 2020 proved to be a difficult year for people in at least a dozen different occupations. Investing in yourself may be a way to add an important skill that will enable you to either keep the job you have or transition into another field.
“In my mind, the best investment is in yourself,” advises Tom Diem, CFP and ChFC at Diem Wealth Management. “2020 has been a struggle for many just to keep employed. Overcoming unemployment doesn’t have to involve entering into an extensive educational program. It’s better to think a little differently. Sure, the food and beverage, tourism, fitness, and health and beauty sectors have taken a hard hit this year. But despite lockdowns, the home improvement industry has shown gains in 2020. According to Macrotrends, Lowe’s Corporation has a year-to-date increase in sales of over 1% and a third quarter sales increase of over 28%. It may be a matter of shifting out of the occupations that are in decline and into those that are on the rise.”
Investing in yourself doesn’t necessarily have to be limited to improving your career prospects. You can also invest in other areas of your life, like improving your health, or learning how to be a better investor. Either will have the potential to improve your long-term financial situation, as well as the quality of your life.
“Most people go from month to month, year to year, only seeing “what happens” or “how things go” or “how the market performs” – but never invest the time, effort and financial resources to improve themselves,” suggests Frank Lopes, author of The 7-Minute Setup: How to Achieve your Business and Personal Goals Faster and Easier. “Some examples of this could be investing in a personal trainer to get themselves into shape. Or the investment of a nutritionist to set up meal plans, shopping lists, and menus to follow so someone can invest in their nutrition and better health. You can also hire a personal coach to set up a process for achieving other financial, spiritual, time management, relationship, and other short- and long-term goals.”
- Invest in a Side Business
Much like investing in yourself, a side business isn’t typically thought of as an investment. But it is very much an investment, even though time and effort may be your actual investment, rather than money. And in a very real way, investing in a side business is the ultimate form of investing in yourself.
I’m personally a big fan of side hustles. That’s mostly because my current income portfolio includes a number of side hustles that have become regular contributors to my bottom line. Because of my experience, I’m keenly aware there are literally dozens of ways an ordinary person can make money for a side hustle.
It’s not as complicated as you may think, either. Most side businesses start with either a hobby or by converting what you do on your primary job to a second income source.
- If you’re a teacher, you can provide specialized tutoring on the side.
- If you’re bilingual, you can teach English as a second language.
- As an accountant by day, you can build a side business providing income tax preparation to individuals, or bookkeeping services to small businesses.
- If you have a strong social media presence, you may be able to parlay that into becoming a social media manager for multiple small businesses.
- If there’s a topic you’re particularly strong in – like investing, auto mechanics, or traveling on a budget – you can create an e-book and sell it on the web.
These are just five examples of the types of side businesses you can start from right where you are now.
“I have a lifestyle business in which I travel the world and generate revenue in several ways,” reports Tina Dahmen, online course coach at Entrepreneur.com and owner of her own online course creation blog, TinaDahmen.com. “One of the ways is online courses. What I found with online courses, and selling them in particular, is that blogging helps to build authority in the space and it’s a necessity to be seen as an expert if you sell online courses. Online courses are a digital asset which anyone can create.”
I can’t say enough about the benefits of a side business. The most obvious is the ability to earn additional money that can be used to either pay off debt, or increase savings and investments. But a longer-term possibility – and one that happens more than you might think – is that your side business may one day turn into your primary occupation. If it’s work you truly enjoy, it’ll be a double win.
If you take the plunge into a side business, you’ll have plenty of company. According to the IRS, there are at least 41 million self-employed people in the US, most of whom run their businesses as side hustles. You can be one of them.
As we enter 2021, it should be obvious to everyone that change is a normal part of life. And though it doesn’t always, it sometimes affects your financial well-being. That can include your job, your business, and your investment portfolio.
Since panicking solves absolutely nothing, the best strategy is to have a plan of attack. That may not mean doing anything radical. But just implementing strategies that will increase your investment returns, decrease your losses, improve your ability to earn a living (or stay employed), and get better control over your cash flow, can lead to major improvements in your life going forward.
So, forget about those New Year’s resolutions, and zero-in on New Year’s commitments – making the kinds of investments that will improve both your finances and the quality of your life.