Best investment strategies, ranked

Paying off high interest debt

Before considering any investments, it's essential to prioritize paying off high-interest debt, such as credit card debt or personal loans. The interest rates on these types of debts can be significantly higher than the returns you can expect from investments, so paying them off should be a top priority.

For example, an credit card debt can have APR as much as 28.99% or even higher. Historically, it is very unlikely for you to find investment strategies that can guarantee ROI higher than that, which is why it is always better to pay off your high interest debts.

401k contribution

After paying off high-interest debt, investing in a 401k remains a top investment strategy. A 401k is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their salary into an investment account. There are two different types of 401k plans that employers offer:

1. Traditional 401k: This is the most common type of 401(k) plan offered by employers. Employees contribute a portion of their pre-tax income into the 401k account, reducing their taxable income for the year. Employers may also match a percentage of the employee's contributions, up to a certain limit. The contributions and any investment gains are not taxed until withdrawal during retirement.
2. Roth 401k: Another 401k plan that employers might offer is Roth 401k. With a Roth 401(k), employees contribute after-tax income into the account. While the contributions are not tax-deductible, the withdrawals in retirement are tax-free, including any investment gains. This can be beneficial for individuals who expect to be in a higher tax bracket during retirement. You can mix Roth 401k and Traditiional 401k, but the total contribution has a annual contribution limit. In 2023, the contribution limit was $22,500.

You can read more about the differences between the plans here.

But that is not all. If you want to, you can also consider these additional after-tax contributions.

1. Backdoor Roth 401k: A backdoor Roth 401k is a strategy for individuals who want to contribute to a Roth 401k but have income exceeding the limits set by the IRS. In this case, the employee first contributes to a traditional 401k and then converts those contributions to a Roth 401k within the same plan. This method allows individuals to take advantage of the Roth benefits even if they are above the income limits for direct Roth contributions.
2. Mega Backdoor Roth 401k: The mega backdoor Roth 401k is an advanced strategy that allows individuals to make additional after-tax contributions beyond the normal contribution limits of a 401k plan. These after-tax contributions can be converted to a Roth 401k or rolled over into a Roth IRA, enabling tax-free growth. The advantage of the mega backdoor Roth 401k is that it allows individuals to contribute significantly more to their retirement savings than the traditional contribution limits.

However the availability and rules of these backdoor strategies rely on your employer and 401k plan. It is advisable to consult with a financial advisor first if you're not sure.

You can read more about them here.

Health Savings Account (HSA)

If you have a high-deductible health plan (HDHP) and have already paid off high-interest debt, contributing to an HSA can be a wise investment strategy. HSAs offer tax advantages, and funds in the account can be invested in mutual funds or other investment vehicles.

A HSA has what is called, a triple tax advantage, which means contributions, earnings, and qualified withdrawals are all tax-free. This is a great way to save for medical expenses when you retire. You can use it for non-medial expense post-retirement, but it will be subjected to income tax.

Read more about it here.

Real Estate

Investing in real estate can be an excellent way to generate passive income and build long-term wealth. However, it's important to make sure that any rental income covers the costs of the investment property and any associated debt payments. Another downside is the requirement to have access to a large amount of capital to either as down payment to secure a loan or to purchase the property.

Read more about ways to invest in real estate here

Stocks

Investing in individual stocks can be a high-risk, high-reward strategy that can potentially generate significant returns over the long term. However, it's important to remember that stocks can be volatile, and there is always the risk of losing money.

Before you start investing in stocks, I recommend you to start off by reading about some basic investment strategies first.

Bonds

Bonds are a low-risk investment option that can provide steady income and help diversify your portfolio. However, the returns on bonds are typically lower than stocks, and they may not be sufficient to cover high-interest debts.

Certificates of Deposit (CDs)

Certificates of Deposit (CDs) are a low-risk investment option that offers a fixed rate of return for a set period of time. However, the returns on CDs may not be sufficient to cover high-interest debts, and they may not keep up with inflation over the long term.

High Yield Savings Account (HYSA)

Sometimes you might need quicker access to your cash, such as for a down payment on a house. In this case, we can consider a high yield savings account. A high yield savings account has a high APR interest that gets paid out to you. The downside is that the rate of return is usually lower than CDs and usually has a monthly withdrawl and deposit limit.