Some people have serious financial problems, but that's not
you. You've got a savings account, have cleaned up your interest-bearing debt,
are contributing to a 401(k), and all-around are in pretty good financial
shape. So where do you go from here? What's the next step for those of us who
know the basics but want to put our cash to better work?
Facebook's
recent IPO got a lot of people excited about investing in companies
(though the subsequent tanking of their stocks post-IPO may have made many of
the same people gun shy). Still, you may be wondering how you can—or if you
should—get in on some of that action. Unfortunately, the depths of the market
are largely off-limits to individuals with a few bucks here or there to invest,
but you can boost your personal portfolio in a number of ways after you've
exhausted the basics of investing. That's what this post is all about.
Don't Jump The Gun:
Make Sure Your Money Isn't Better Spent Elsewhere
Before you jump head-first into riskier financial waters, we
need to make absolutely sure that you're really at the point financially where
you have money to invest. J.D. Roth, editor of Get Rich
Slowly, explained that before you start looking for new ways to
invest your money, make sure you have the basics covered—and we don't just mean
a 401(k), a positive balance in your checking account, and a $0 credit card
balance. Photo by _e.t..
Before you venture beyond the basics, make sure you've hit
all of the areas on this checklist first:
You have a budget. This may sound obvious, but it's
important. Make sure that you have a budget and you're sticking to it, so you
know at all times where your money is going, including this cash you want to
save or invest.
You're saving for retirement. Your 401(k) and Roth IRA are
great, but they're the bare minimum. Before you start thinking about other
things to do with your money, consider how much you'll need in retirement, and
commit to save as much as possible to make those long-term goals.
You've paid off your debt. We're not just talking about
credit cards here. Your money isn't really yours until you've paid off your
other debt. Student loans, car loans, mortgages, even if it's "good
debt," your extra cash is better spent towards getting your net worth in
the black before anything else.
You have an emergency fund. Usually 3-6 months of expenses
saved up and stashed away, just in case. If you don't have one, here's how to
start one.
You know how to save for life events and desired purchases.
This means you know how to budget well enough to save for that new laptop you
want, for your wedding, or for that dream vacation you've always wanted,
without wrecking your budget or plunging into credit card debt to make it
happen.
J.D explained that if you've hit all of the points above,
you're ready to start thinking about intermediate savings, or taking that extra
cash and putting it aside for other things. If you're not out of debt, or don't
have a fully-financed emergency fund, you're better off putting your money
there instead.
Ramit Sethi is a New York Times best-selling author and
creator of one of our favorite personal finance sites, I Will Teach You to Be
Rich. In his… Read…
That can be daunting for a lot of people, because it implies
you're better off paying off your home or your student loans before you start
playing the investment game, or saving for luxury purchases. Of course, we've
discussed how you can pay down your
debt and invest at the same time, so you have options. Just choose
your path wisely.
Option 1: Use
"Targeted Savings" to Save for Specific Goals
If you have the basics covered, it's time to do some
brainstorming. What exactly do you want to do with this excess money in your
budget? Do you want to stash it away so it makes you more money? Perhaps
there's something you've always wanted—a specific model of car, or a vacation
home? Maybe you want to start your own business, or found a charity? Whatever
it is, J.D. calls these goals "targeted savings," which use dedicated savings accounts and automatic deposits to keep you saving
towards specific goals. He explains that this allows you to name and
prioritize what you're saving for, and you can easily monitor your progress at
any time. Photo by Jeff Turner.
Whatever your dream is, J.D. suggests you set up an
interest-yielding savings account for it, and start diverting that
extra money to it on a regular basis. Consider signing up for a service like SmartyPig, which helps you
save for specific goals, to help you. It's not as sexy as investing
or playing the stock market, but it uses skills you already have, puts your
money to work for you, and most importantly, gets you where you want to go.
Just because the banks are having a hard time handling their
money doesn't mean you have to: you just have to pick the bank offering the
best… Read…
If you need a new laptop, or should really start saving for
your wedding or anything else, try SmartyPig. It's a legit online savings
account,… Read…
Option 2: Contact
Your Retirement Fund Provider and Expand Your Portfolio
Talking to your investment firm about what to do with the
extra money in your budget implies you want to put it somewhere it can grow and
make more money for you, as opposed to save it for a specific goal. A good
place to start is with the investment firm that holds your 401(k) or IRA, like Fidelity Investments or Vanguard.
Even if you're in a group retirement plan with your company,
you can contact them about expanding your portfolio to include personal
investments. It's worth noting that depending on the funds you want to invest
in, you may have to front a certain amount of money just to get started, but if
you have it, use it. Give the firm you have your retirement funds with a
ring—they may just suggest you add the extra money to the funds you're already
in, but others will be more than happy to help you open new lines of
investments, and offer you some financial guidance to help you make the smart
choices as well.
Option 3: Hire a
Financial Planner and Sail for Risky Waters
Sometimes you have to spend money to make money, but a good
financial planner can help you make smart decisions about other, more advanced
options. Sure, a financial planner can help you make the smart saving decisions
we've discussed up to this point, but that kind of advice is free—what you
really want a financial planner or accountant's advice with are the tricky
investment options, like these:
Buy/remodel an investment property: Many people buy a condo
or vacation home just for a little rental income, but if you're not sure where
to start, get help before you go shopping. The market is much different now
than when this was more popular, and your mileage will vary depending on where
you live and what you plan to do.
Start a private portfolio: Mutual funds offered by your
401(k) are one thing, but if you want to get into index funds, options, or even
just start buying up stock in well-performing companies that you want to invest
in, you'll need some assistance. By all means, go for it—just don't neglect
your research.
Consider annuities: The folks at The Motley Fool suggest
annuities, despite their cost and limited insurance coverage, are an option
worth considering if you've already started investing elsewhere. They can be
difficult to cash out of, but they can yield decent returns if you find a good
one. The key, of course, is finding a good one, and The Motley
Fool has some tips on how to do that.
Buy an investment vehicle: Depending on your age and the amount of
risk you're willing to take, you can stash your extra money away in government
bonds (low risk, low reward) or stock options and futures (high risk, high
reward.) It's especially important to get a professional's help before wading
into these waters: there are plenty of vehicles that do little more than fleece
unsuspecting customers, so do your research and get help before writing any
checks.
Or, Stop Worrying and Manage Your Current Investments
Instead
There are plenty of options available if you're wondering if
there's a way to make your money work harder for you, as you can see. Even so,
the vast majority of us will have a hard enough time paying down our debt and
putting together an emergency fund. We mentioned it earlier, but you shouldn't
go running into the wilds of investment properties and annuities until you're
in sound financial shape. There's an old adage about gambling that applies
here: "Don't play with money you can't afford to lose." Photo by 401k.
Despite all of these options, you may be better off simply
putting your extra cash into your retirement fund, whether it's a 401(k) or an
extra contribution to your Roth IRA at the end of the year. It's just easier to
dump it into an interest-yielding savings account or a CD offered by your
credit union, forget about it until it matures, and then roll it over or cash
it out. The market rat-race can be alluring, especially when you read about IPOs
that make investors boatloads of cash, or venture capitalists shoveling money
into companies with big ideas and no products. However, J.D. points out that financial independence means different things to different people,
and it's more than just "having a boatload of cash." Find out what it
means for you, and work your way there.
No comments:
Post a Comment