Beginner’s Guide: How Do I Invest $x?

Let’s address a common question we regularly see popup in our forums by our listeners of all background – I have $x saved up, what should I do with it? 

At some point or another, anyone with savings ponders this question, so if you don’t know where to begin, don’t worry – you are not alone. We put this together as a guide to help you better understand important financial considerations and investment vehicles. 

Regrettably, there is no generic advice we can give that suits everyone’s circumstances, but hopefully this helps. Let’s dig in. 

While 40% of our working population has a college degree, unfortunately universities and public schools do not do a good job of teaching financial literacy, despite its critical importance to a healthy, happy life. 

Everyone Can Be a Millionaire

To start with some good news – everyone out there who wants to become a millionaire, can be. The math is as simple as this. 

A 21 year old who invests $5,000 a year, and makes an average of 8% annually, has accumulated $1.46 million by the time they are 61. This is compared to it being worth $200,000 in a no-interest savings account.

It’s not about a great education or a fancy job, it just comes down to having a good financial plan early on — Then sticking to it (the harder part!). 

*We don’t know the original source of the illustration above, but if anyone does, we will add in a reference here. 

The above chart helps you visualize how to plan your savings, manage debt, and invest in assets. Remember this is just a guide, and no two people’s circumstances are exact. 

Soo, you have $x saved up, what should you do with it?

#1 Emergency Fund 

You need to build an emergency fund (cash savings) with at least 3-6 months living costs. This is there as insurance for you, not to spend or to put in volatile or illiquid investments.

If your primary income source dries up, we go into a recession, or you have an unexpected life event, you’ll need to be able to rely on this money.

Warren Buffet commonly recommends to people who ask him for investing advice, to “put 90% of your money into an S&P 500 index, and put 10% in cash or US treasuries”. The reason he recommends the cash (or cash equivalents) component is exactly this, to have your emergency funds available so you don’t need to sell your investments to finance your life.

But don’t just put this emergency fund under your mattress, rather open a high interest savings account. We like the only banks such as Marcus and Ally 1.8%, or 6x the national average.

#2 Company Matched 401K 

For some, companies offer free money to invest by way an employee matched 401(k). An example of a good 401(k) matching program may provide 50%, of up to 6% of your salary. 

Assuming the example — if you earn $60,000, then $3,600 (6% of your earnings) of your contributions are eligible for matching. But remember the employer will match 50% of your contributions, so the maximum your employer would contribute each year is $1,800.

Of course, you need to contribute $3,600 yourself for your employer to chip in their $1,800. This is literally free money, so please take advantage of it.

#3 Manage Debt 

Not all debt is necessarily bad — In fact, certain low interest debt, such as mortgages and student loans, that allow you to grow your income or net worth can be argued as good. 

However high-interest debt, as commonly found on credit card debt and payday loans, is toxic to financial goals. While all debt needs to be managed, any high interest debt needs to be immediately addressed and stomped out as quickly as possible. Before you consider any further savings or investing, you need to pay down bad debt and ensure all your debt is manageable. 

#4 Individual Non-Taxable Accounts 

The most common form of these are non-taxable retirement & health savings accounts. In the USA, our favorite ones are ROTH IRAs, and Health Savings Accounts (HSA). 

ROTH IRA -You can contribute $6,000, annually and it grows tax free until you’re age 59, at which time you can pull it out without penalty and spend it as you please. The compounding effect of this tax free growth overtime is astonishing. But the most important thing — time. It is crucial to get started as early as you can. In our article on the power of compounding interest, we explore how dramatic the growth potential is of saving $5,000 a year over 30 – 55 years.

HSA – another account we love is a Health Savings Account. Individuals can save up to $3,500 annually into an HSA. This money also grows tax free and can be used regularly to pay for qualified health costs. Another bonus — any contributions to an HSA can be deducted from your income taxes. 

Depending on your country of citizenship, you will most likely have comparable options for non-taxable savings accounts. We strongly encourage you to prioritize these.

#4 (Alternate) Saving for a Primary House

One large investment that the cheat sheet above doesn’t account for is saving to purchase a home. Owning a home, is usually the largest investment decision a person makes in a lifetime and it is on the mind for most of us. If you are thinking about saving to purchase a home, this is where it belongs for most people. Before saving specifically for a home, you will want to establish an emergency fund, maximize the free money in your company matched 401k, and manage any high interest debt burdens.

#5 Company 401K – if you have additional money available, now is a good time to go back and top off your company 401k. In #2, we only contributed funds to secure the employee matched component. As of 2020, the annual contribution limit was $19,500. As you can deducted 401k contributions from your income, this will help bring down you tax bill. 

#6 Invest – If you have money left over, start investing your taxed money. Many people like to skip straight to this step, but the other steps are crucial to get done in line. Remember, taxes are your biggest expense in life  —  reduce your taxable income by investing through tax-deferred accounts and taking other deductions

Our podcast is an exploration of investing in a variety of asset classes — from Real Estate and Stocks, crypto currencies and precious metals, to forex trading and p2p lending. It can be a complicated world, but it is easy to start. We always recommend keeping it simple and investing in index funds via a robo-advisor such as Wealthfront or Betterment, or doing it yourself with low cost fund providers such as Vanguard.  

We recommend investing index funds (equities) for the longer term, and only adding other asset classes, including alternative investments, once you have educated yourself on them. Here are a few of our favorite episodes to help you understand investing in stocks and index funds. 

ILAB 15 – Meb Faber on Building The All Seasons Portfolio

ILAB 25 – 12 Investment Decisions Guaranteed to Change Your Financial Future

ILAB 86 – Index Fund Allocation Modeling 

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