How you should strategize your investments really depends on your financial situation and the amount of risk you can or want to take. I invest virtually all my money after my expenses. If you’re like me, you’re working in your career field, living with your parents, and have low expenses. I would recommend investing almost everything. Perhaps leave a little cash as an emergency fund. Obviously this comes with a LOT of risk, but if you’re in a position where big expenses such as buying a home is still quite a few years down the road, you can manage this risk. If you have a monthly mortgage or have kids, then I would recommend having at least 6 months of expenses to cover for any unexpected events.
It can get tricky when you have a lot of debt. I don’t believe paying off all your debt is absolutely necessary before you start investing. I have debt too, but not all debt is created equal.
For example, credit card debt is very bad. Personally, I think paying off credit card debt should be first priority. Annual Percentage Rates (APR) on credit card debt often times can go north of 20%. You could choose to have a balance transfer, which can give you 0% interest for a limited time. You need to be cautious when doing this. It doesn’t solve your problem. You still have your debt, and if you don’t pay it off in time, then the balance transfer could end up charging you higher interest than you initially had previously.
Personally I do not have credit card debt, but I do have a little student loan debt and car debt. I am currently not accruing any interest on the student loan debt yet, so I don’t see why I need to rush paying it off. Instead, I’m investing it in places like the stock market. Why pay off debt that is not yet accruing any interest when I can be earning interest in places like the stock market or even high yield savings accounts? Yes, I understand that this can be quite a controversial topic, but that’s an article for another day.
Now that we’ve discussed how much you’re comfortable investing, I’ll briefly talk about the most common places to invest. I’ve found that many people don’t know how to invest money, so they just don’t do it. If you don’t know how, props to you for at least reading to learn how. Now, you have to start. Like right now. Stop putting it off. Easiest place to start is the stock market.
It’s not rocket science. Just simply:
- Open a brokerage account
- Deposit money in it
- Invest in stocks, ETFs, REITs, mutual funds, etc.
Robinhood is a great place for beginners. You can buy and sell stocks without being charged any commissions (most brokerages charge a commission for every trade). If you want to start, click here, and you and I will both get a free stock.
You may feel overwhelmed with which stocks to buy and how you could possibly diversify with a limited amount of funds. Later on down the road, I’ll go into more detail about how to decide what companies or funds to invest in. An easy and safe way to get started is buying an index fund or exchange traded fund that mimics the S&P 500 index (500 largest companies by market capitalization). That way, your investment is “diversified” among many companies instead of just a few individual stocks.
Simply put, you are essentially buying shares of stock in a company and becoming a part owner. Ideally, the share price that you bought it at increases over time and you can sell it at a major profit later. An important part about investing in the stock market is riding the volatility and not to panic when the market is in correction. The key is to buy and hold for the long term. So make sure that the money you invest is not money you’re going to need in the short term.
Another place you can invest money is real estate. When you are paying down your home, you are investing in real estate. For some, paying off the home is really important because of the peace of mind that it brings of no longer having a mortgage payment. You could also view a home mortgage as a way that forces you to save. Instead of using your money on discretionary spending, you can make extra payments to the house to gain more equity, or ownership, and paying less in interest. Some decide to rent it out and move to another. Now you have a new stream of revenue coming in. You can also leverage your money and have tenants pay down the principal and provide you with tax benefits like interest and property tax deductions. If you can’t afford real estate, like many Americans, you can invest in Real Estate Investment Trusts (REIT). Essentially, you are investing in a company that manages and operates income producing real estate. An easy way to invest in these is buying them on a stock exchange.
Just to recap, here’s what you need to consider before you decide on how and when to invest:
- Assess your financial situation (Family, house, school, etc.)
- Build an emergency fund that can pay for at least 6 months of expenses
- Decide on how to approach your debt, if applicable
- Determine the amount of investment risk you can take based on age, job security, debt level
- Choose how you want to allocate assets on your investment portfolio (stocks, bonds, real estate, etc.)
- Let your money do the rest