For many of us, dipping your toes into the wide world of investing can be intimidating, to say the least. We often spend so much time working hard for our money that we forget that if we’re smart about it, our money can actually start working for us, too! No matter what the state of your finances is, anybody can start investing, and they should! Especially for hardworking young business professionals, some smart investing moves can be the difference between just scraping by every month, and sitting back and watching your money grow.
FIRST THINGS FIRST: CLEAN UP YOUR DIRTY FINANCES
Before you start thinking about where you want to invest, there are three things you should make sure you do. Not everybody does these things before they start investing, but it’s the safest and lowest-risk way. When it comes to your money, we believe playing it safe is the best policy.
1.Squirrel away some money for emergencies.
Lots of people suggest having at least $1,000 on hand, and most financial advisors suggest that the ideal amount is enough to live on for six months. Start by setting aside a little bit from each paycheck, you’ll be able to hit this mark easier than you think. Investing can be exciting and fun, but you should have a good chunk of security money that you don’t touch for any reason except when you really need it. It your survival fund. Prioritize it.
2.Lay off the plastic!
Before you start investing, pay off all your credit card debt. I know it doesn’t sound like any fun, but it’s a huge deal. The truth is, the interest rates on most credit cards is so high that you’d have to have a matching or higher return on investments to make up the difference, so you’re actually saving more money paying off your cards quickly than you could make taking that same money investing.
Confused? Let’s say you have an extra $50. If you apply it towards a credit card payment, you’ll be saving yourself the 20% interest that would accrue on that $50- so in essence you’ve turned that $50 into $60. If you were to invest that $50, you would need a 20% return on your investment to make the same amount, and there’s always the chance that you might lose that money in the market, or that it will take a long time to get there. It’s safer and smarter (and quicker!) to use your money to pay off your credit cards ASAP.
3. Manage your student loan debt.
Americans now owe over 4 trillion dollars in student loan debt, and for way too many of us, that means high payments eating away at our monthly budget, with no end in sight. If this is you, make sure you’re maximizing all available resources! There are great options available, including loan consolidation, lowering your interest or monthly payments with the lender, or the federal Income Based Repayment Plan, which lets you make monthly payments based on your income.
Once you’ve got your finances in order, you can start putting your money into the market. Let’s get your money busy making you more money!
An IRA is kind of like a savings account on steroids. Typically, you need at least $1,000 to start one, and you aren’t supposed to withdraw it until you retire. If you do need to withdraw it, you’ll pay penalties and taxes. If you can hold out till you retire, you get the money (plus interest) with no taxes. This is a great option for somebody who has an extra $1,000 that they know they won’t need until they retire. It’s not such a great option for anybody who is living with a variable income or financial insecurity.
High-yield savings accounts
Annual percentage yield is the yearly amount that you make on a savings account, including compounded interest. A high-yield savings account will let your money grow predictability (but slowly!) over time.
A CD (certificate of deposit) is different than a savings account; the money stays in the account for a set amount of time, usually either six months, a year, or five years, maturing at a fixed interest rate. At the end of the time, you can withdraw all your money (plus the interest rate!). A CD is often considered to be a really safe kind of investing; you know exactly how much money you’ll make (and when you can get it) before you even start!
Spare change investing apps
Over the past couple years, wonderful new apps have started popping up that can really help you save some money in a really easy way! Apps like Acorns and RobinHood sync your credit cards with your bank account, and then rounds up your purchases to the nearest dollar, and puts those extra pennies to work by investing them in one of five template investing portfolios. For anybody who is really nervous about the market, or for people who only have a couple bucks to invest, this is a painless way to get started.
The stock market
If you have a little more money and are looking to start getting directly involved in the market, you will need to use an investment broker. This can happen through an online service like Betterment, or you can meet face to face with an investment broker. The fees can be high, so make sure you’re weighing the cost and benefits with how much you’re paying a broker and how much you’re investing.
When you start investing, you will build what is called a “portfolio”, which is the collection of investments, chosen by how risky you want to be. Typically, there is a mix of higher and lower risk investments, which theoretically can balance each other out to create a more stable gaining potential. You often join into a “mutual fund”, which is a group of people who are all investing together, with the level of their buy in dictating the level of their loss and gain. As the stocks increase in value, your investment will improve, and as they decrease in value, your value will decrease. You can buy or sell your stocks at any time.
The stock market is a living entity, constantly growing and changing. it’s affected by everything- politics, economics, social trends- so it’s important to stay up on the current climate of the market. A strategy that worked well ten years ago isn’t necessarily going to be the best bet today.
For the last handful of year, FANG stocks (tech corporations like Amazon and Facebook) have been performing excellently, but in 2017, their growth downgraded slightly. The best performing stocks were technology semiconductors (those microchips in cell phones and other mobile technology), and after a couple years of peril (especially 2016) shares in healthcare industries are also on the rise. Energy markets are also up in 2017, especially companies like Eaton Corporation, which posted a 10% gain so far in 2017, and projected by many experts to keep growing at a similar rate for the next couple years.
Especially if you’re interested in short term investments with high gain potential (versus longer term safer investments) than staying up on the trends on the market are crucial. The Wall Street Journal and other online sites can give great insight into shifting market trends. In investing, just like with life, you have to think smart and constantly adjust your strategy to stay successful.
Investment properties and rentals
One of the more popular (and tried and true) ways to invest is in property. Unlike cars and many other material purchases, property is one of the only physical investments that increases in value with time.
There are two main ways to invest in property with the intention of making money:
Buy low, sell high! With a shrewd eye on up and coming neighborhoods, and a little bit of know-how with home improvement, flipping houses can be a great investment. More than anything, this involves the right neighborhood. Ideally, you would buy a house that is in a neighborhood that has great potential. For a residential property, this means proximity to good public transit, good schools, and a neighborhood where the property value is going up. Also, you want to pick a property that aligns with your budget, and not just the outright price. The whole point of flipping is that you increase the value of the property in order to make money, so you need to have the financial resources to do whatever needs to be done to fix the house. For all but the most ambitious flippers, you will want to look for something that requires mostly cosmetic fixes. A great deal on a house can quickly spin out of control if you need to replace the foundation, or totally demolish the building. Make sure you get a thorough inspection and know what you’re getting into!
Another way to make money off property is to buy a property and rent it out. Much like flipping a house, you want to pay attention to the neighborhood. Keep in mind that if you are near a university, there is a high likelihood that you’ll have to deal with high vacancy rates as students move in and out. Also, you will need to pay property taxes and insurance.
Being a landlord is a complicated job, and you should make sure you’re up for it before you dive in. You will be the person who gets called about leaky faucets and loud tenants, and you’ll also be the person responsible for interviewing potential residents. In many ways, this is an human resources job! Make sure that is a position you want. If not, you can hire a property manager, but that is an additional expense to consider.
Setting the price of your rent is crucial: it has to be enough to cover all expenses, and also turn you a profit! Check out the other rents listed in the area, and make a detailed budget, and make sure you still come out on top!
Obviously, buying and maintaining property requires more startup capital, and it also means you need to be willing to invest more time and energy. But for business people who are cut out for it, owning property can be a fabulous investment with a high return.
With a little knowledge and elbow grease, anybody can use their money wisely to help increase their net worth.