App developers have valuable skills. We're well paid compared to may other professions. Give that, how can we become rich? Or if we can't get rich, how do we build wealth or prosperity?
One key is to start investing!
Note: I'm not your financial advisor, and this isn't personalized financial advice. This guide is US-centric, so while the specifics differ, the general principals work in any nation. Also keep in mind that tax law is complicated. I highly suggest discussing your situation with your accountant or other tax professional. If you don't have an accountant, I suggest hiring one.
If you work at a company that offers a 401k, sign up immediately. Most large corporations offer a 401k, and they're a fantastic way to save for retirement because you don't have to pay taxes on money going into the account. In other words, a portion of your paycheck can go into your 410k without paying taxes on that portion.
Once you sign up for your employer's 401k, you can choose how much of each paycheck you'd like to invest into your 401k. Typical 401k accounts offer a menu of funds to invest that money in.
Note: removing money from a 401k before retirement age usually results in a tax penalty.
If you don't have a 401k, or if you'd like to invest more than the 401k limits (which is $19,000 per year for 2019 in you are under 50), you might look into the following kinds of tax-advantaged accounts:
Finally, the last place to invest money is an ordinary taxable individual investment account. This kind of account is taxed:
Research shows that high fees rarely pay for themselves. In fact, many of the most expensive funds perform worse than the cheaper funds. Usually investors who pay lower fees have better returns on their investments.
In general, I suggest paying less than 0.20% of any investment per year in fees. Ideally you'll pay even less than that. It is possible to find funds that charge 0.04% per year in fees.
To minimize fees, high quality index funds are your best bet. Index funds are funds that track the performance of an index (e.g. the S&P 500, which is tracked by SWPPX and VFINX, among others).
When comparing funds, the annual fees are indicated by the expense ratio. This can usually be found in the summary of the fund. For instance, the expense ratio of SCHB is currently 0.03%.
Don't bet on predictions. Some folks believe that Indian stocks will do very well in the future. Some folks just buy lots of Amazon stock. Others think that the US market will always have the best returns for the risk. Still others think that biotech stocks in particular will have the best returns in the future. Most predictions are wrong!
Instead of betting on predictions of the future, invest broadly. Buy investments across different industries, asset types, company sizes, and geographies. Hold on to those investments for the long term. Index funds are a great way to easily build a very diverse portfolio.
I buy a US stock index fund, an international stock index fund, an emerging market index fund, a small cap index fund, a bond index fund, and a natural resource index fund (among others). I try to invest in everything.
Do you feel like the value of X will go down? Do you feel like the value of Y will go up? Buying or selling investments based on the belief that the timing is right is called market timing.
The vast majority of people time the market poorly, even experts. Investors who sell an investment thinking “this will go down” are often wrong. On top of that, you can’t earn dividends on an investment you’ve sold. Dividends can represent a significant percentage of the returns of an investment.
Trying to buy at the bottom and sell at the top also can have big tax implications (except in retirement accounts).
I recommend investing for the long term: I rarely sell any investment. Except for a few rare cases, I prefer to let my investment grow over decades.
This is emotional advice rather than investment advice. It's better to consistently invest over a long period of time than to invest one big lump sum. I have several reasons for this:
An accountant can help you legally reduce your tax bill. Talk to them about your situation and how you plan to invest. Besides taking advantage of retirement accounts, there are other easy wins like keeping REIT investments in an retirement account.
It's easier to invest automatically than to invest by will power. Automatic investment makes 401ks magical: a portion of each paycheck lands in an investment without ever touching a checking account. Many brokerages can configure automatic investments for other account types as well.
The largest factor in investing is time. The more time you have your money invested, the more time you'll have for your investments to grow. Getting started is easy; most brokerages have staff who are quite eager to help you invest money!
There are many different brokerages to choose from. I've personally used and enjoyed the following companies:
I suggest picking a brokerage who has the funds you want commission free. For instance, Vanguard doesn't charge you to trade Vanguard ETFs and Mutual funds. The same goes for Schwab and Fidelity. In addition, may brokerages have a unique list of third party funds they allow you to trade commission free.
There are also "roboadvisor" companies which can automatically pick, allocate and manage your investments for you. These are convenient tools for investing, but their fees are usually much higher than (and also on top of) the underlying investments.
For instance, at the time of writing Wealthfront charges 0.25% of your investment per year. The funds Wealthfront invests in charge an additional 0.07% to 0.16%. In other words, Wealthfront more than doubles the fees of the investments. Some roboadvisors claim to have advantages in their investment services which make up for the added expense. You'll have to judge for yourself.
The easiest place to start investing are Target Retirement Date Funds. These funds typically hold a diverse portfolio of low-cost index funds, and automatically adjust the portfolio to a less risky mix of funds as your target retirement date approaches. All you have to do is pick the fund matching your retirement date. Here are some examples:
If you'd prefer to get more sophisticated, you can design your own portfolio of funds, or talk to a financial advisor.
If you hire a financial advisor, the most important thing to know is if they are your fiduciary. In other words, if they are accountable for the advice they give you.
It is also important to establish exactly how they make money. Are they compensated in any way by the funds they pick? If so that's a conflict of interest (and you likely could get cheaper funds).
Finally, it's important to ensure they aren't charging you a percent of your investments annually. That would be another fee dragging down the performance of your portfolio.
It's fine to pay an advisor for their time and advice, but a percent fee makes no sense unless you're investing in something exotic. Designing a portfolio for $1,000,000 is no harder than designing a portfolio of investments for $1,000. Actually, it's probably more difficult to design a portfolio for $1,000!