What Comes First? A Step-By-Step Guide to Financial Independence: Step 7–Build Wealth Through Wise Investments

Welcome to the final installment of Independent Beginning’s Step-By-Step Guide to Financial Independence inspired by Dave Ramsey’s “Baby Steps”. In the last installment, you learned about Step 6: Pay Off Your Low-Interest Debt. In this installment, you will learn about Step 7: Build Wealth Through Wise Investments.

Step 7: Build Wealth Through Wise Investments

At this point on the road to financial independence, you have an emergency fund completed, all high and low-interest debt paid off, retirement funds set up, and college funds set up. Now, you are ready for the fun part–building wealth! Of course, you have been building wealth for retirement already. In this step, you will set up non-retirement investment accounts that can be used for any purpose.

What type of investments should you use? According to Dave Ramsey, investors should be looking into growth mutual funds at this point. While I agree that mutual funds are a good option, I would personally choose index funds over actively-managed mutual funds. What is an index fund? An index fund is a fund that tracks a particular index, such as the S&P 500. This means that you own a small portion of each company in that index. The advantage to index funds is that the fees are very low and they *usually* outperform the majority of actively-managed mutual funds.

What is diversification? Plain and simply, diversification is just spreading out your money in a variety of different investments in order to lower your overall risk. For example, a diversified account will use several different funds using several different kinds of investments. That way, if one fund loses a lot of its value, you are protected from losing all of your money by the other funds. Diversification is critical to wise investing. Make sure you do not put all of your money in one place. This is another reason why index funds are a good option. Index funds spread your money out between the stocks of many different companies.

What is risk tolerance? Risk tolerance is the amount of risk you are willing to hold. Every investment includes a certain amount of risk. However, some investments are more risky than others. For example, stocks are a more risky investment than bonds. However, risky investments can also bring higher returns. It is important to know what your risk tolerance is. Generally, when you are young, you are able to tolerate a higher risk because any losses have enough time to rebound before you need the money. The older you get, however, the more conservative you should be. Knowing your risk tolerance will help you to decide how much money to put into stocks, bonds, cash, and other investment vehicles.

Building wealth is a fun but sometimes overwhelming task. If you feel too overwhelmed by the task or if you have a large amount of money to invest, you may wish to consider hiring a financial adviser. He or she can help you decide which investment vehicles to use.

With Step 7 underway, you are now finished with the Step-By-Step Guide to Financial Independence! Enjoy your newfound financial freedom, but make sure you share the wealth with others. Dave Ramsey is a huge advocate of giving to others once you have established yourself financially. I hope you have enjoyed this guide and have found it useful!

All articles in the series:

1. Step 1: Set Up an Emergency Fund
2. Step 2: Pay Off Your High Interest Debts
3. Steps 3 & 4: Complete Your Emergency Fund & Set Up a Retirement Fund
4. Step 5: Set Up College Funds
5. Step 6: Pay Off Your Low-Interest Debt
6. Step 7: Build Wealth Through Wise Investments