You have a great job and make a good income. You’ve paid off your student loans and credit card debt. Now you’re ready to save and invest. But you’re not sure how to invest your money. I have good news.
I’m going to introduce you to six basic steps on how to start investing your money. It will be unlike many of the other “how to” articles on investing. Before you think about investing a dime, we need to set the foundation. Without it, it will be difficult, if not impossible, to have a successful investment strategy.
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I’ll list the steps first and then get into some detail to help you navigate each one.
Six steps: How to invest your money
- Work from your budget
- Determine how much you can save
- The best accounts to start – taxable vs. tax-deferred
- Find the best investment options
- Monitor and rebalance
Now let’s get into the details for each to get you started.
Principles to build wealth
Personal finance principles are not complicated. Executing them takes practice and discipline. If you want to build wealth, you will need to do these three things:
- Spend less than you make
- Save and invest the difference
- Reduce or eliminate debt
These are common sense things. Living within our means, being disciplined about saving and investing and minimizing debt will allow us to build wealth over time. There are no get rich quick schemes that work. There are no short cuts. Doing these three things over a long period will give you the best opportunity to build wealth.
Here’s where to start.
1. Investing for beginners – start with a budget
I know, I know. Talking about budgets is about as much fun as having a root canal. But if you don’t know where your money is going it will be difficult to determine how to invest your money. I’m not suggesting you need to be slaves to your budget. Quite the contrary. But you need to know where your money is going every month to know to analyze areas where you might be able to reduce expenses and increase the amount available to save and invest.
Many people use spreadsheets to budget. If you’re not a spreadsheet person, consider some of the budgeting apps available. Mint.com and You Need a Budget (YNAB) are two of the most popular. Both programs allow you to connect your bank accounts to pull expenses into the app. You can then set up categories to better manage where cash is going.
If you’ve been disciplined enough to pay off your debt it’s likely you have some budgeting mechanism set up. If not, these two apps can help you get started.
2. Determine how much you can save
Your budget tells you how much you can save and invest. That’s the foundation that must be in place to assure you can contribute a consistent amount to grow your wealth.
If you want to save and invest more money, increasing your income means you have more to save and invest. If you’re working in a corporate job, look for ways to get promoted. Learn the art of negotiation when asking for raises. Become more valuable by working harder and doing more than what’s asked of you.
Look for ways to gain income outside of work. Find a side hustle or part-time work that has flexible hours and can bring in more money. The more money you make, the more you can save and invest.
If money for an emergency fund is not part of your budget, it needs to be. What’s an emergency fund? It’s money you keep in a liquid (risk-free, penalty free) account that you can access at any time. Use this money to pay cash for unexpected expenses. If your car breaks down, you have an unexpected medical bill or any other expense, don’t pay for these on a credit card. Use cash from the emergency fund.
The emergency fund should have a minimum of three to six months of monthly expenses in it. So, if your monthly expenses are $1,500, you would keep from $4,500 (3 months) to $9,000 (6 months) in the account. If expenses are $2,000, you’d keep $6,000 or $12,000 in it.
Some people keep one or more years of expenses in their emergency fund. Whatever amount you choose, be sure not to compromise that number. Financing unexpected expenses on a credit card will put you right back into the hole you just dug out of.
After the emergency fund is in place, look at what’s left over in your budget. The money to invest will come from money left after bills are paid and your emergency fund is full. If that amount is zero (it shouldn’t be), then it’s time to look at where you can cut some costs. Since you’ve had the discipline to pay off debt, it’s likely you’ll have a good sum of money for investment.
3. Investing for retirement – choose the right type of account
If you’re thinking about how to invest your money, look at retirement accounts first. Remember, this is after you’ve set your budget, created your emergency fund and determined how much you can invest each month.
If you have a career, it’s highly likely that your company offers its employees a retirement plan. These go under different names – 401(k), 403(b), etc. The plans offer a way for employees to contribute money every paycheck to an investment account where the money invested grows tax-free as long as it remains in the plan.
Company match = free money
In most cases, the employer contributes money to your account as well in the form of a matching contribution. They agree to match what you put into your account with their own money up to a certain percentage.
Here’s a common example. They offer to match your contribution up to 50% of the first 6%. For every six dollars that you invest, you’re getting three dollars more from the company. That’s a 50% return on the first 6% you put into the plan. There is no other investment out there that offers a 50% guaranteed return.
Plus the money you contribute is tax-deductible, meaning it reduces your taxable income by that amount. You pay tax on the money at the time you withdraw it at retirement It’s free money and a tax deduction. It’s truly the best investment you can make.
The IRS allows you to contribute up to $19,000 of your own money into employer-sponsored plans. That means you can put a chunk money toward saving for your retirement.
This article originally appeared on Melissa Blevins.
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