Making your money work for you rather than against you is one of the most powerful ideas in personal finance.
Money doesn’t care if you’re tired, stressed, hanging out with friends or on vacation — it can work on your behalf no matter what.
But the opposite is also true. If you’re not intentional with your money it can lead to slower wealth building (at best) or serious financial hardship (at worst).
Your goal is to get as many dollars as possible going to work for your benefit.
In this article, we’ll cover 10 strategies and tips to make your money work for you.
- Leverage the power of compound interest to grow wealth.
- Boost your savings rate.
- Pay off high-interest debt to stop money from working against you.
- Utilize tax-advantaged accounts to maximize your investment returns.
- Establish a solid emergency fund to avoid financial setbacks.
- Take full advantage of your employer’s 401(k) match.
- Maximize your IRA contributions.
- Maximize contributions to 401(k)s, HSAs, and 529 plans for additional tax benefits.
- Diversify your investment portfolio with taxable accounts and alternative assets.
- Minimize investment fees.
What Does It Mean To Make Your Money Work For You?
Making your money work for you is about transforming your existing funds into a tool for generating additional income. Imagine you have $100 to invest. If that investment earns a 10% return in the first year, you’ll have $110 by the end of that year. Simple enough, right?
But let’s take it a step further.
If you earn another 10% return in the second year, your earnings aren’t just another $10, they’re $11. Why? Because your initial investment, along with the $10 you earned in the first year, is now working for you. This is the power of compound interest and the general idea behind making your money work for you.
10 Ways to Make Your Money Work For You
Here are 10 practical strategies and tips you can implement to harness the power of your money and set it to work for your financial growth.
#1. Utilize the Power of Compound Interest
“He who understands interest earns it. He who doesn’t understand interest pays it.”— An unknown ad copywriter
Compound interest is what gives the average person like you and me a fighting chance to build wealth. It’s the safe road — the closest thing to a guaranteed way to get rich.
But there’s a catch, of course. Actually, there are two.
First, it takes time. One or two years is too short of a timeframe to experience the power of compound interest.
Second, it’s hard. You need to continue to invest, even when everyone else thinks it’s crazy to do so.
But even with those caveats, it’s still the most powerful weapon to build (or destroy) your wealth.
Consider this example:
By making a minimum payment of 4% on a $6,000 credit card balance with an interest rate of 18.9%, it will take you 144 months and $9,758.80 to pay off that balance.
For many people, this decimates their ability to build wealth.
Now consider this example:
|Starts Contributing||Stops Contributing||Annual Contribution||Total Contribution||Annual Return||Total at 65|
The 19-year-old, who only invested for a total of 11 years and invested $48,000 less, grew their account to $360,623. Investor B, who at the age of 30 contributed $2,000 every year until they were 65, ended up with less.
The point is not to beat yourself up because you didn’t start contributing to an IRA at age 19. You are where you are today, and your only option is to make the right decisions. So use these two examples to design a financial plan that’s optimized to leverage compound interest going forward.
#2. Increase Your Savings Rate
Most investors are obsessed with their rate of return. But consider this example:
|Annual Contribution||Years Invested||Yearly Return||Total at 65|
A person who invests $5,000 a year and earns a 7% return will have $219,326 in 20 years. Increase that return by 1%, and this same person will earn $247,115.
Yet, if this same person ended up investing $6,000 a year and “settling” for 7% gains, their total balance would grow to $263,191 in 20 years.
The big takeaway is that, for younger investors, it’s more important to focus on how much you save than on trying to pick perfect investments.
The problem with focusing on returns is that anything above what the market as a whole makes you is not guaranteed. Studies show that 95% of financial professionals don’t beat the market average over the long-term.
So, instead of dedicating time to trying to earn an extra 1% or 2% in returns, it’s much better to:
- Put that focus into making more money.
- Use that increase in earnings to save more money.
At The Ways To Wealth, we call this growing the gap:
#3. Eliminate Debt
Compound interest is either working for you or against you. High-interest debt, like credit card debt (which compounds month after month), is a similarly powerful force.
That’s why you want to pay off this debt as soon as possible.
This approach focuses on paying off debts from smallest to largest balance, regardless of interest rates. The psychological boost of seeing debts disappear can motivate you to maintain your momentum.
However, some people prefer a more targeted approach, focusing on paying off high-interest credit card debt while making minimum payments on lower-interest debts (such as student loans) regardless of their balance. This can be a strategic way to reduce the overall amount of interest you’re paying. (The pros and cons of each method are explained in our article reviewing the baby steps.)
Regardless of the approach you choose short-term, what matters in the long-term is adopting a lifestyle of fiscal responsibility.
This means consistently spending less than you earn, thereby avoiding the accumulation of high-interest debt in the first place. It also means living with a reasonable amount of debt that aligns with your income and financial goals.
Remember, every dollar spent on interest is a dollar that isn’t working for you; it’s actually working against you. By effectively managing and eliminating your high-interest debt, you’re freeing up more of your money to work for you.
#4. Minimize Taxes
You want as much of your invested money in tax-advantaged accounts as possible. Traditional and Roth IRAs, 401(k)s, and even HSAs can help more of your money work for you.
For context, the difference between investing $5,000 in an IRA and a taxable account, over 30 years, comes out to $125,490.
|Taxable Account||Traditional IRA||Roth IRA|
|Current investment balance||$0||$0||$0|
|Number of years to invest||30||30||30|
|Marginal tax bracket||25%||25%||25%|
|Future account value||$346,814||$472,304||$472,304|
|Future account value (after-tax)||$346,814||$391,728||$472,304|
#5. Build a Proper Emergency Fund
A proper emergency fund, which can ideally sustain you for at least two months, helps you avoid losing money.
Put this cash in a high-interest bank account. I recommend keeping it in a separate bank account from your checking account, as it will be a bit harder to access the money.
While we’re finally seeing some higher interest rates, the point isn’t to maximize the returns from your emergency fund. Unexpected events — such as a car repair, home repair or even a job loss — can be stressful and costly. These things are inevitable in life, and an emergency fund helps minimize the damage they cause.
While you may only earn a small return on your money in an emergency fund, you’re preventing yourself from paying high-interest debt if you need to use a credit card when something goes wrong (often at a rate of 18% or higher).
That’s a great return. And over time, it means that more of your money is working for you.
Pro tip: When you do draw from your emergency fund for an unexpected expense, your priority needs to be replenishing it.
#6. Take Advantage of Your Employer-Sponsored Match
The best way to start investing, if available, is by contributing to your employer-sponsored plan — likely a 401(k) — all the way up to your maximum company match.
The company match is part of your compensation. It’s free money.
But even with that free money on the table, 25% of people don’t take advantage of an employer match, thereby missing out on a combined total of $24 billion per year.
Low-cost exchange-traded funds (ETFs) and target retirement funds are great options for beginning investors within their 401(k) because they offer diversification at a low cost.
Diversification means spreading your investment across different asset classes and industries, which helps to mitigate risk and can improve potential returns.
ETFs and target retirement funds allow you to invest in a wide range of stocks, bonds and other securities without having to manually select them, and they typically have lower fees than actively managed funds — which means more of your money goes towards growing your investment rather than paying high expenses.
#7. Contribute to an IRA
Taxes do make a big difference. It’s for this reason that you’ll want to leverage tax-advantaged accounts. After your 401(k) match, that’s likely to be an individual retirement account — more commonly called an IRA.
Your goal for this step is to contribute the maximum amount possible to your IRA.
But why an IRA rather than your 401(k) plan?
Because IRAs give you more control over your investments and fees.
Given this, it’s a good idea to shop around before signing up for an investment account.
Pro tip: You can contribute to an IRA for the previous year up until next year’s tax deadline.
#8. Leverage Other Tax-Advantaged Investments (Maximize Your 401(k), HSAs and College Savings Funds)
To make your money work harder for you, consider maximizing your contributions to tax-advantaged accounts such as 401(k)s, health savings accounts (HSAs), and 529 college savings plans.
These accounts offer unique tax benefits that can significantly enhance your wealth-building efforts.
- 401(k) plans. If your employer offers a 401(k) plan, aim to contribute as much as you can, up to the annual limit. Contributions are made pre-tax, reducing your taxable income for the year, and your investments grow tax-free until retirement.
- HSAs. If you have a high-deductible health plan, you’re eligible to contribute to an HSA. Contributions are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are also tax-free. After age 65, you can withdraw funds for any reason, making HSAs a versatile tool for both healthcare costs and retirement savings.
- 529 college savings plans. If you’re planning for future education expenses for your children, consider a 529 plan. Contributions may be state tax-deductible, and the money grows tax-free if used for eligible education expenses.
HSAs and 529 plans offer a rare “triple tax advantage”: tax deductions on contributions, tax-free growth, and tax-free withdrawals for qualified expenses. By maximizing your contributions to these accounts, you’re leveraging tax laws to make your money work more efficiently for you.
#9. Invest in Taxable Accounts and Other Alternative Assets
Once you’ve established a solid financial foundation — paying off high-interest debt, building an emergency fund, and maximizing contributions to tax-advantaged accounts — you’re in a position to explore additional investment opportunities.
Diversifying your portfolio with alternative assets can potentially enhance returns and reduce risk. It’s also a good way to prepare for a recession, ensuring your investments can withstand market downturns.
This is where taxable accounts and alternative assets come into play.
- Taxable accounts. Unlike tax-advantaged retirement accounts, taxable investment accounts don’t have contribution limits or restrictions on when you can withdraw your money. This makes them a flexible option for additional investing beyond your retirement accounts. While you’ll owe taxes on dividends, interest and capital gains, strategic tax planning can help minimize these costs.
- Alternative assets. Beyond traditional stocks and bonds, there’s a world of alternative investments to consider. Real estate, for example, offers potential for both income and appreciation. Diversifying your portfolio with alternative assets can potentially enhance returns and reduce risk.
#10. Keep Investment Expenses Low
“Where returns are concerned, time is your friend. But where costs are concerned, time is your enemy.”— John Bogle, founder of Vanguard
There are very few things you get to control with your investments. Taxes are one of them. Investment fees are another.
The difference between investing $5,000 while paying 0.20% and 1% amounts to $60,345 over 30 years.
|0.2% Fee||0.5% Fee||1.0% Fee|
|Current investment balance||$0||$0||$0|
|Number of years to invest||30||30||30|
The answer to this question depends on many factors, including your age, your financial know-how, your risk tolerance and your goals. But with all of that said: the overwhelming majority of investors will get the best returns by continuously contributing a passive investment plan such as index funds or ETFs.
Picking stocks is very difficult, and you’re unlikely to beat the market. With that said, it’s never a bad idea to speak with a financial advisor who can look over your specific situation and help you develop a customized investment strategy.
Here’s an article I wrote explaining how to find cheap or free financial planning help.
For most people who want to save money, the first step is figuring out how to make money and increase their income stream. If you’re interested in starting your own business, I’m a big proponent of launching a blog — after all, it’s worked well for me! If you’re just looking for a way to increase your cash flow, these side hustles and online jobs can be a great option. And if none of those options work, you can focus on these easy ways to cut your living expenses.
It’s impossible to double your money without taking on some level of risk. While it may be tempting to seek out high-risk, high-reward investment opportunities in an effort to quickly grow your wealth, it’s important to understand that those types of investments often come with significant potential for loss.
To make money with a small amount of money (without starting a business), you should practice dollar cost averaging.
Dollar cost averaging is a financial habit that involves investing a fixed amount of money at regular intervals, regardless of the price of the investment — e.g., investing $50 into a mutual fund on the 1st of every month, whether the market is up or down.
The goal is to start small and increase the amount of your investments over time.
Micro-investing apps are a great way to get started. These apps often have low minimum investment requirements and allow you to build a diverse investment portfolio with minimal upfront capital.
How to Make Your Money Work for You: Closing Thoughts
This article was written from the perspective of trying to maximize every dollar you have.
In a perfect world, you’ll work your way diligently through each step, never having to start over or move backward. And in a few decades, you’ll have built up a compound interest machine that’s churning out passive income for you every month.
But the chance of living a life that avoids financial setbacks is slim to none. We all hit rough patches in life. When you do, it’s your job to not only be prepared, but to work your way out of the weeds as quickly as possible.
That’s why proper money management practices, like having an emergency fund in place and minimizing your debt, are so important; they allow for more days for your money to go to work for you, rather than going backward.
Read next: How to build generational wealth.