This part is about how we invest our money. I have a goal to be able to retire by 40. It doesn’t mean that I will quit my job and escape to a resort and sip margaritas all day. Far from it! Retirement means that our basic needs (food+shelter+safety+clothing) are met no matter what.
The first thing I have always done is to avoid debt. I know it’s not easy to overcome debt after the fact, but it is possible and easier than you think. Before you think about investing, pay off any loans and credit cards first. Having a credit card balance does not count as long as you pay it off at the end of the month. I also don’t count a mortgage as a loan because a house can be a great investment.
The second thing to be sure you have before investing is a slush fund. Have enough in the slush fund to support you for at least 6 months with no income. You would not want to be in a situation where you have to sell your investments that have temporarily gone down in value (due to market volatility) just to make ends meet. Note how I said temporarily. This is because if you take a look at the long-term value of the markets, you will see that over time, they tend to grow on average 7%. The important thing is that you be in control as to when to sell your shares.
Once you have cash saved up for investment, you have to be also ready to take a certain amount of risk. I tried many investment strategies and here are the ones I liked the best starting with the least risky: Personal Capital, Lending Club, Wealthfront, Motif Investing
Personal Capital / Vanguard / Investment advisors
When you are unsure about what to do with your money or how to invest, it may be beneficial to use an investment firm. Many places offer such a fully managed service, but they do have a fee. I used to have my retirement savings in several places. Some did better than others. I’ve become aware of the hidden fees in many retirement accounts and now I mainly put my 401(k) and other IRAs in the S&P 500 stocks. Other mutual funds have very large fees which eat away at your earning potential. Vanguard seems to have the lowest fees to access a personal adviser.
I’m always looking for a way to let people borrow my spare cash for an interest. I have tried to use Prosper, but it’s not available in my state for some reason. Instead, I now use Lending Club. It’s great because they put your money to work right away and start generating interest based on your investments. That interest is automatically re-invested in other loans. Your investment is split up across many loans in $25 increments (which can be increased if you choose). This minimizes your risk of all your money in a loan that has defaulted.
The only snag with this kind of investing is that your money is tied up for 3-5 years in a loan. You can turn off the auto-reinvest feature which will get your money back as the loans are being repaid. Most people try to repay loans early anyway, so you may end up getting the majority back sooner.
Robo-advisors are a rather new thing, but they’re catching on quick. They watch the markets and automatically reshuffle your investments as the markets change. I like them because it takes the human out of the equation. Humans have emotion, and with investing, you must have the emotional equivalent of a rock. I find Wealthfront and Betterment nearly equal in service. I use Wealthfront because it has lower fees. For the first $10k, you pay $0 in fees. Anything above that is a 0.25% yearly fee. Betterment charges 0.25% annually for any amount.
If you are in to the stock market or want to play around with buying and selling individual stocks, then Motif is for you. The reason why I like it is that you can buy fractions of stocks and it is the cheapest form of per stock investing I’ve found. You can buy up to 30 different stocks in a bundle they call a Motif for only $10 per trade. Before I break it down, let’s look at how the company makes money. Motif buys large amounts of individual stocks from the market like all the other companies (which charge $5-$10 per stock). Then, they will sell you as many shares of up to 30 stocks as you want in your motif for $10.
For example, say Motif buys 100 shares of Alphabet, 100 shares of Amazon, and 100 shares of Apple for $5 per trade (a total of $15). It then splits up those shares among four people buying 25 shares of each of those companies in their Motif. Instead of each person paying $5-$10 per stock trade, they pay $10-$30 total for their Motif (a savings of $5-$20). It is good for the consumer and good for the company.
Of all the investment vehicles I mentioned, Motif is the one where you actively have to manage your account. The others are more “set it and forget it”. More likely, you’ll want to set up a periodic transfer to the account. This will not only help your accounts grow, but will also have the effect of dollar-cost averaging.
Next week we’ll take a look at how you can make passive income.