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5 Basic Investing Rules to Follow for Wealth Creation

Are you investing your money in the stock market? If not, I know the reasons why. You either think investing is too complicated, so you keep putting it off until later, you are scared to invest because of all the conflicting information out there, or you think you need thousands of dollars to invest.

Mutual funds on a computer

The reality is all of these reasons to not invest are just excuses. When you break investing down, it is really simple to be successful. And when you learn just a little bit about investing money, you quickly get over your fear.

And finally, thanks to technology, you can start investing with a lot less money than you think.

The bottom line is, that there is no reason why you should not be investing your money in the stock market. After all, investing money is one of the key tips that will help you to become rich.

So in this post, co-written by Jon Dublin, we are going to lay out the five rules you need to follow. These are the investing basics I follow that have helped me to grow my wealth to close to 7-figures.

If you can follow these simple rules, I am certain you too can grow your wealth investing in the stock market.

Investing Money To Grow Your Wealth

Many people believe that the only way to grow their wealth is to invest money in the stock market. However, there are a number of other options for growing your wealth.

One option is to invest in mutual funds. Mutual funds are pools of money that are managed by investment professionals. They allow you to diversify your investments and reduce your risk.

Another option is to invest in bonds. Bonds are debt instruments that are issued by corporations and governments. They offer a fixed rate of return and can provide stability when the stock market is volatile.

Finally, you can also invest in real estate. Real estate investing can be profitable, but it is important to do your research and be aware of the risks involved.

No matter what strategy you choose, investing is a key part of growing your wealth.

mutual funds on a phone screen

1. Have A Plan For Investing Money

Before you even think about investing in the stock market, you need to have a plan. This plan should detail specifics about investing money for you and include the following:

  • What are your goals? What is the reason for investing your money?
  • How long will you be investing your money? What is your time horizon?
  • What is your risk tolerance? Are you able to handle wild market swings?
  • What types of investments make sense for you?

By going into detail with your investing plan, you will have a reference to look back on when the market gets volatile. And it will.

You will understand why you are investing and what you are investing in. Then you will be able to make smart, well-thought-out decisions as to what to do next, and if any action on your part is even needed.

Here are a few extra tips on each point to help you make the best investment plan for you.

Your Goals

Be sure to get specific as possible. Don’t make your goal “retirement”. Detail what retirement looks like to you. Does it mean you will be volunteering a few days a week? Watching your grandkids?

The more specific you are, the more your goal will resonate and have meaning to you. This will help you when times get tough.

Time Horizon

Investing in the stock market is ideal when your goal is five years away or more. Anything less and your money is best saved in a bank savings account.

Therefore, make sure you understand when you plan to need the money as this will play a big role in your investment decision.

Risk Tolerance

This is a tough one simply because most people allow their emotions to cloud their judgment. If you take an online risk tolerance quiz, make sure you pay attention to the potential losses more than the potential gains.

We tend to focus on the gains, and end up with a portfolio that is too risky for us. Then when the market crashes, we get scared and sell. My favorite risk tolerance quiz is this one from Vanguard.

Types Of Investments

For most investors, investing in mutual funds or exchange-traded funds is the way to go. They allow you to invest a small amount of money and be diversified from the start.

In fact, you can get started investing in these types of investments for as little as $25. And if you would choose to invest with one of the many robo-advisors out there, you can invest for as little as $10!

Try one of the free investment apps for beginners to get started.

actively managed mutual funds to diversify

2. Diversify

In order to be a successful investor, you need to be certain to diversify your investments. What does this mean?

If you open up your closet and look at your clothes, you will get a good idea of what I am talking about. Chances are you have various types of shirts in many colors and patterns.

The same is true for your pants, skirts, shorts, and even shoes. This wide variety of options can be seen as a diversified closet.

If you only had white dress shirts and black pants and shoes, you would not be diversified. Every day you would be wearing the exact same outfit.

Investing is the same. You want to invest in a variety of different companies and assets. When you invest in stocks and bonds, you lessen your risk and still are able to earn a decent return.

This is because most times when the market goes down, not everything drops. Only certain sectors or areas of the market drop on any given day. So by having your money invested in various sectors, you hedge your losses.

Your investment in one sector might have lost money while the money you have in another sector made money. When combined, you didn’t lose as much had you only invested in one sector.

The good news is that you can quickly diversify your investments by investing in mutual funds and exchange-traded funds.

These types of investments own stock in hundreds or thousands of companies. So buying one mutual fund gets you diversified from the start.

mutual fund to invest long term

3. Invest Your Money Long Term

The next step in the process is to invest long-term. This doesn’t just mean investing until you reach your goal. It also means staying invested even when the market is dropping as well as investing on a regular basis.

I know to some of you this might sound odd. Why would you stay invested and keep investing when the market is dropping and you are losing money?

The answer is simple. You do not know what is going to happen in the market tomorrow. No one does. So even though the market is dropping today, it could rise tomorrow. Or it could fall more.

By staying invested, you are taking advantage of the market rising. Need more proof? Here is an excellent study that was done by JP Morgan that shows investors’ returns when they try to time the market.

By simply missing a couple of days, you have the potential to miss out on a lot of growth. And no one knows when these days are going to happen. Therefore, you have to stick with your investments for the long haul.

If you still think this might be tough, take a different view of things. When the market declines, think of investments being on sale. With a lower price, you will be able to buy more shares.

Then when the market rebounds, which it will eventually, you will make even more money on those investments you bought at low prices.

This strategy helped me well during the housing collapse in 2008. I kept investing during the market turmoil. By 2011 I had earned all my losses back, and just a few short years later, I had doubled my money.

4. Ignore The Noise

Even with the strategy of viewing investments on sale when the market drops, you can be swayed to act thanks to outside forces. I call these forces “noise,” and it comes from the media and Wall Street.

Let’s tackle the media first. They make money through advertisements or commercials. In order to get advertisers to pay the most money for ad space, the media company has to show that people watch their channels or read their magazines.

The media company gets you to watch by sensationalizing stories. This is why when the stock market drops, you see red colors on the screen, and pictures of people in anguish, and they use powerful words like collapse, wipe out, turmoil, meltdown, plummet, and destroy to get you emotionally hooked.

They also like to tell you how much the average investor lost, just to drive the point home.

When it comes to Wall Street, they make money on trades. So the more people trade, the more money the big companies make.

So they too hype and sensationalize things, and introduce new and better types of investments to get you to react and buy and sell investments.

Now that you know their tricks you can take action. Turn off the television or don’t read the magazine article. Stop checking your account balances every day.

What I found worked best for me early in my investing career was to only check my balances on days the market was up. This helped me to avoid getting scared and selling based on emotion.

The more you can remove yourself from the situation, the better. If you are investing for a goal that is ten years away, some short-term volatility isn’t going to matter to you in the long run.

5. Review And Revise How Your Investing Money

You have your investment plan, you are diversified, you are investing long-term, and you are ignoring the noise. What else is left for you to do?

Even though I told you to ignore what was happening in the stock market, it doesn’t mean you can turn a blind eye and forget about your money completely.

Aim to review your investments and your investment plan annually. Has anything changed with your plan? If so, then you need to look over your investments and make adjustments.

What about your portfolio? Chances are with the market moving throughout the year; your asset allocation is not like it was at the start of the year.

Therefore you need to move some money around to get you back in alignment. This is big because if you let your portfolio get too out of alignment, one of two things is going to happen.

1. You will have too much money in stocks. While you will be earning more money when the market goes up, when it comes down, you are going to lose a lot. So much that you will get emotional and will have to fight the urge to sell everything.

2. You will have too much money in bonds. This means you won’t risk losing very much money. But you won’t be earning enough for you to reach your goal. When it comes time to use the money you were investing, you will see you are short by a lot.

So take the time to review and revise your investments at least annually.

How To Come Up With Money For The Initial Investment

The best way to come up with the money to invest is to cut down on your expenses. When you’re young, it can seem appealing to spend your money on a new car, the latest trends, and the latest technology.

While it’s perfectly reasonable to save some money for personal indulgences, it’s vital that you learn how to restrict and budget. 

If you’re throwing money away every month on excess items, you need to reconsider your priorities.

People who are building wealth do not buy an excessive amount of items, they live frugally because they understand that the majority of their income should either be invested or saved. They’re playing the long game, and you need to start getting into that mindset. 

So, what do I mean when I say you need to cut down on your living expenses? The best way to control expenses is to create a budget.

Create A Budget

First, you’re going to want to examine your bank statements. Calculate how much money you are spending on items each week, and each month.

This could be anything from bills, clothing, technology, dinners, and subscriptions.  

Next, create different categories for your budget. The first category will be necessities, such as your electric bill, phone bill, and food.

The second will be personal items, such as clothing and technology. The third one will be entertainment, such as dinners, theater, and so forth. 

Finally, you’ll have the savings category.

Now, you’re going to want to make sure that your income exceeds your expenses, by a healthy margin (15-20%).

You may need to cut down on some of your monthly expenses in order to reach this level. You can do this by using different services and apps, such as Checkout 51Rakuten, and Fetch Rewards.

Make Sure You Have Affordable Housing

This is one of the biggest expenses that people have, so it’s something that needs to be seriously considered when you begin building wealth.

It doesn’t matter if your salary is $50k or $250k, unless you’re able to cover your rent or mortgage, you’ll continue to struggle financially.

Housing is the biggest expense that most people have. If you want to save money on this, then there are a variety of things that you can do.

First, look for an apartment that costs less than you can afford. Second, you can also try and reduce the amount of money that you’re spending on rent by finding a roommate.

This could be a good friend, someone who works with you, or even an acquaintance. What matters is that your respective incomes combine to cover the costs of your rent or mortgage.

If you’re really ambitious, you might want to try living rent-free.

Save Money On Personal Items And Entertainment

When it comes to personal items and entertainment, you’re going to want to aim to reduce the amount spent in each category per month, by half if possible. If you can reduce the amount, even more, that’s great, but everyone is different.

If that seems daunting, you could reduce personal expenses by twenty percent, and entertainment by half, if that makes it easier, or vice versa. 

Top Tip:

You might find that due to your low budget, you do not spend much money on entertainment, or personal indulgences each month. In fact, you might find that you cannot reduce them further. Do not fret, below we will look at other ways you can cut down on your expenses. 

Necessities 

Now, necessities are a little harder to cut down on, because it depends on personal circumstances. Here are some things to consider, and reflect on: 

  • Can I get my gas, energy, or electric at a cheaper rate, from a different company? Is there any switch over fees, that could make it not worth it? How much money could I save a year on energy bills by doing this? 
  • Can I get a cheaper phone contract? Do I need this amount of data or my next upgrade? Can I stick with this phone, and when the contract expires, get a cheaper data contract? 
  • Can I carpool to, or from, work? Could I, instead, get the bus? Would either of those be cheaper, or even worth my time? 
  • Can I get my Wi-Fi at a cheaper rate? How much money would I save if I switched companies? 

Part of living frugally is knowing how to get the best deal, at the best rate. One reason people do not analyze this data is because it takes time, and effort.

If all you manage to save per year is an extra hundred dollars, that is still an extra hundred dollars. If you put that money in investment accounts, you could end up with double, or triple that amount.

Now, if you keep that mindset throughout your life, you will keep accumulating money, and you will keep either saving or investing it. This is how you generate and build wealth, do not overlook such basic, but important steps. 

The money that you save here is vital. It can either be saved, added to an emergency fund, or invested. Either way, you are giving yourself a strong financial foundation and beginning to build wealth. 

Pay Off Your Debt

When it comes to making money, the best way is by getting out of debt. If you have any credit card or student debt and they’re not being paid on time then these can snowball into much worse problems over time as interest rates will start adding up quickly! 

The average rate for an unsecured line of credit currently stands at over 14% but some cards may charge 20% or more. Ouch!!

It’s not always easy to handle your debt if you’re on a low income. But that doesn’t mean there isn’t anything you can do! Your first step should be making the minimum payments and putting any extra money toward the principal. 

If you have good credit and are employed, refinancing your student loans may be an option for getting a better interest rate.

Don’t Buy A New Car

It’s easy to get caught up in the excitement of buying your dream car, but it might be worth considering what you’re really giving up when financing an expensive purchase with borrowed money.

I know, I know–we all need to drive, and new cars are fun to drive. But if you really want one, save your money for it! Most new cars will lose close to 20% of their value in the first year alone.

It’s not just about the cost you’re paying now–you’re also laying the groundwork for a high monthly payment if you’re financing this purchase over five years or longer.

Start An Emergency Fund

An emergency fund is often overlooked because it’s not as exciting as investing. 

Putting away money, specifically for unexpected expenses, does not feel as wealth-building as investing does. This is not a mentality you should have.

You also need to save money, and you need a fund for emergencies.

Your emergency savings account is your lifeboat. It’s what you can rely on if the worst happens, and you end up ill, you have an accident, or you are fired from your job.

It saves you from going into credit card debt, having to borrow money, or taking money out of your general savings account. Likewise, it means even when the worst happens, you’re still going to be OK. 

Generally speaking, you should have three to six months’ worth of living expenses saved in your bank account.

With that said, even if you only manage to save up one month’s worth of expenses, this is a good step and is vital when it comes to building wealth. 

This is financial literacy, this is what it means to be smart with money, and it takes this attitude and forward-thinking to build wealth. 

Maximize Your Earning Potential

If you want to build wealth, then you are going to need to start maximizing your earning potential. 

This means you are going to need to reflect on aspects of your life and make progressive changes. It’s all about making good career choices or working out how to make good career choices, that will lead to more money in your pocket.

Career Path

First, you should reflect on your chosen field. Are you happy with your choice? What are your projected salary outlooks? What is the average salary in your aspirational field? Is it low, or high? 

If your projections are low, then you may want to reconsider whether your chosen field is right for you.

Is there another job, perhaps similar, that would lead to a better salary, and better opportunities? Do you need to change careers completely? Will you be happy in this role? There is a lot to consider, but no matter your age, you should be continuously looking for growth, and assessing what future growth opportunities look like.

If they are underwhelming, change the course of your career. 

Ask For A Raise 

With that said, are you deserving of a raise?

Do you have experience and skills that are not being utilized, or are you being underpaid for your job? Try to negotiate a raise with your boss, or explain that you are looking for career advancement because you are passionate about growing your career within this field, and company. 

The worst that can happen is they decline. As long as you are confident and polite, they will remember that you have drive, which is an incredibly important trait.

This means you could be considered for future opportunities. 

Set Financial Goals

Setting goals is one of the most important things you can do to make sure that your wealth management plan works. The more specific your goals are, the easier it will be for you to reach them.

You should set financial goals based on what you want to achieve in life and how much money it will take. Make sure that they’re realistic and that they’re specific enough to help you plan out your life.

It’s important that you set long-term and short-term goals, as well as a monthly budget to help you accomplish them. If you’re really struggling with this process here are some examples of good financial goals:

Change Your Mindset About Money

One of the biggest differences between those who accumulate wealth and those who don’t is that wealthy people always think about how they can make money.

The more you begin to think like a rich person, the easier it will be for you to build wealth.

Educate Yourself About Money

You may start earning a steady income in your 20s, but don’t forget that this is just the beginning of your wealth-building journey. 

You can’t accumulate wealth if you have no idea what’s going on with your finances. There are plenty of programs out there that can help teach you about money management after you enter the workforce.

The more educated you are, the more likely it is that you’ll make smart financial decisions moving forward. There are plenty of resources out there to get you started:

Wrapping Up

The five rules of investing basics we’ve outlined are a great starting point for those looking to build their wealth. However, it is important to remember that these guidelines are not set in stone and should be tailored to fit your specific financial situation.

Speak with an advisor if you have any questions or would like more personalized advice. Are you ready to get started on building your wealth? Are you going to purchase mutual funds to gain financial security?

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