Learning how to invest your money is one of the most important lessons in life. You don’t need to be college educated to start investing, in fact, you don’t even need to be a high school graduate. You just need to have a basic understanding of business and the confidence to make a plan: Consider it a business plan for your life. You can do it!
WHY INVESTING CAN BE SCARY
For many of us, money and investments weren’t discussed at home. These subjects may even be taboo within certain households (as is often the case within households that don’t have much money saved or invested).
If your parents or loved-ones aren’t financially independent, they probably can’t give you good financial advice (despite their best intentions). And even if your family is well-off, there’s no guarantee that their financial advice makes sense for you. Plenty of parents encouraged their kids to buy a house during the peak of the housing bubble, because in their lifetimes, housing only went up.
Having said this, the first investment that you make will probably be the hardest.
THE GOAL OF INVESTING
Everyone has different financial goals. The more you learn, the more confident you’ll be in determining your own path.
Notice the first part of this goal is about hard work. If you’re hoping to take a little bit of money and gamble it into a fortune in the stock market (or forbid, cryptocurrencies), you can stop reading now, this article isn’t written for you. But, if you want to retire after a few decades of work, you’ll need to spend less than you make and invest the difference.
Notice that this goal doesn’t recommend selling your investments. Rich people don’t sell-off their assets for spending money; if they did, they wouldn’t be rich for long. The rich stay rich because their assets provide enough cash flow to support their lifestyle. These cash-producing assets can be passed down from generation to generation through careful estate planning.
All investors should aspire to live off of their investment income and have something left over for their loved ones (or charity). It may not be possible for everyone, but it’s the right attitude.
WHAT SHOULD I INVEST IN?
The most common investments are stocks and bonds, which most financial advisers agree should be held in some proportion based upon your personal circumstances. Stocks represent partial ownership of a company and bonds are a form of “I owe you.” Mutual funds can own stocks or bonds (or a mix of both) both on your behalf.
There are other ways to invest: for instance, real estate investment trusts (REITs). These types of investments have their place, but you needn’t focus on them if you are just starting out. Sticking to stocks, bonds and the funds that hold them is fine for beginners (and pretty much everyone else).
SHOULD I INVEST OR PAY DOWN DEBT?
It should go without saying that if you can’t make the minimum payments on your debts, you should not be investing at all. But if you have extra money left over from each paycheck, you have a few choices that can each have a positive impact on your finances:
1.) USE ALL OF YOUR EXTRA MONEY TO PAY DOWN DEBTS (MORTGAGE, CREDIT CARD, STUDENT LOANS).
If you have interest payments that are higher than 10%, you are almost certainly better off paying down debt than investing. The stock market has returned about 11% per year in the long-term (far less if you consider taxes and fees), but there are no guarantees in stock investing. Your debt, however, is guaranteed (sometimes, even after bankruptcy).
2.) USE ALL OF YOUR EXTRA MONEY TO BUY INVESTMENTS (STOCKS, BONDS, FUNDS).
If your debts are costing less than 5% interest, you may be better served (in the long-term) by investing your extra money in carefully chosen stocks or stock funds. Think carefully before buying bonds. It makes no sense to buy a bond or bond fund that yields 2% if your mortgage is costing you 5%; you’d be wiser to pay off your home. Even if a bond pays you a higher interest rate than what you owe, that doesn’t mean that it’s a good investment.
3.) USE SOME OF YOUR EXTRA MONEY TO BUY INVESTMENTS AND SOME TO PAY DOWN DEBTS.
Benjamin Graham, Warren Buffett’s teacher, once suggested that investors should hold no more than 75% of their investment money in a single asset class (he was referring to stocks vs. bonds). You can apply this same logic when deciding how much of your extra money should be used to make investments.
Think of your low-interest debt like a bond. That means that, at minimum, you’d use 25% of your extra income to pay this debt off; the remaining 75% could be invested in stocks. If stocks or stock funds became too expensive (remember, the higher the stock market climbs relative to corporate earnings, the more expensive it becomes), then 75% of your extra income would be used to retire debt. The remaining 25% of your extra income could be invested in stocks, despite their high price.
It makes sense to pay down debts with the highest-interest rates first. For more complicated situations, it may be best to speak with a fee-only financial adviser who is familiar with your personal situation. A financial planner is only as good as the information that he or she is provided with, so if you consult an adviser, be honest. Mention all of your debts as well as your investments, investment ideas and goals.
KNOW THE DIFFERENCE BETWEEN SAVING AND INVESTING
Your investments and your savings are very different things. What if the stock market crashes and you lose your job? If you don’t have a cash savings account, you’ll probably have to sell your investments at the worst possible time. Don’t fall into this trap.
Being employed, having essential insurance coverage, having your personal debts under control and having an emergency savings account in case you lose your job are all things to do before you start investing.