I admit it -- I'm not a big fan of people telling me what to do with my own money. But that doesn't mean I don't listen to what others have to say about the subject. As a former financial advisor and stock market veteran, I'd like to think that I don't need a reminder about how to manage my own money. Sadly, I think we all could use a refresher course now and then.
Later, I'll get to my suggestions for three smart moves you can make to obtain better results. But first, I want to briefly look at three of the worst moves you could possibly make with your money right now.
Worst move No. 1: Sticking your money under the mattress.
This one has always irked me. Some people take this metaphorically and allow large sums of money to sit in their checking accounts earnings 0.01% interest, while others take it to heart and literally stick money under their mattress. Either way, it's one of the worst moves you could make. As long as inflation is higher than 0% (and there's a very good chance of that, as history has shown us), your dollars are becoming less valuable over time by just sitting there.
Worst move No. 2: Overpaying on your taxes.
Even I've been guilty of this one. According to the IRS, more than 109 million taxpayers got refunds last year. That's 109 million taxpayers who overpaid their federal taxes the year before, allowing the U.S. government to borrow that money free of charge.
Nor is this anything new. Just look at the results Bankrate got when it did a survey back in 2010:
More than half of taxpayers were slated to get a refund. And even more disturbing, 71% of the participants said they would not change their filing status to avoid a large refund in the future. The prospect of receiving a check from the government is nice, but being able to invest that same money, which shouldn't have left your hands in the first place, is even nicer.
Worst move No. 3: Buying a CD.
I am fully aware there are staunchly risk-averse people out there, and I understand their compulsion to buy bank CDs. But with most CDs yielding less than 1%, they won't even keep up with inflation, yet they also allow very little flexibility. In short, if you need that money quickly, you can kiss some, or all, of your interest goodbye and may even have to pay an early withdrawal penalty.
Now let's look at three of the best moves you can make with your money...
Best move No. 1: Maximize your IRA contribution.
IRAs are fantastic -- consider them your own personal "neener neener" account that the U.S. government can't touch. Roth IRAs offer the best possible scenario in that every cent put in will grow completely 100% tax-free! For those who qualify for a Roth based on age, income, and marital status, up to $5,000 can be added annually for those under the age of 50, and up to $6,000 for those 50 or older. If you're looking for a way to compound your wealth without any tax implications, this is the smartest move you can make -- period!
Best move No. 2: Buy solid dividend-producing stocks.
I know some of you have been burned by the stock market, perhaps more than once over the past decade, and are now extremely leery about buying individual equities. But the thing to remember is that investing in dividend-paying stocks and reinvesting those dividends is the key to growing that wealth over time. By diversifying your investments across broad sectors and strong brand names, your portfolio should do just fine. Here's a conservative sample portfolio of five diverse companies I'd suggest looking further into, as they provide both dividend income and safety:
Coca-Cola (NYS: KO)
Johnson & Johnson (NYS: JNJ)
Annaly Capital Management (NYS: NLY)
Duke Energy (NYS: DUK)
Microsoft (NAS: MSFT)
Source: Yahoo! Finance.
Coca-Cola has the strongest brand name in the world, according to Interbrand. It's raised its dividend in 49 consecutive years. Johnson & Johnson, arguably the most stable health-care company in existence, matches that 49-year performance of ever-rising payouts.
Meanwhile, Annaly provides that dividend boost that every portfolio needs. As a mortgage REIT that invests in government-backed securities, Annaly has the safety of nearly guaranteed income -- although it's vulnerable to rising rates, if they ever come.
Duke is one of the largest electric utility providers in the U.S. and provides a commodity in electricity that is in demand regardless of economic conditions. Finally, Microsoft brings a growing dividend and a strong cash balance of $50.7 billion to balance out my picks for this portfolio.
Best move No. 3: Invest for the long term.
Neither of the two prior moves will work if you don't implement a strategy that allows ample time for your investments to grow. If you allow your investments to grow untouched over a long period of time, compounding gains should allow you to earn a lot more than if you were voraciously trading. In addition, when this is combined with lower tax rates on long-term holdings (over one year) you should be able to keep more of your money.
Just as I've presented above, setting you up for the long term is precisely what our analysts had in mind with our latest special report, "3 Stocks That Will Help You Retire Rich." It's completely free to you and full of great ideas, so don't miss your chance to see which stocks our analysts feel are retirement gold.
At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He likes to consider his fantasy football league an investment in his future. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Coca-Cola, Johnson & Johnson, Annaly Capital, and Microsoft. Motley Fool newsletter services have recommended buying shares of Coca-Cola, Johnson & Johnson, Annaly Capital, and Microsoft, as well as creating a diagonal call position in Johnson & Johnson and a bull call spread in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that puts its readers first.
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