Everyone dreams of one day becoming financially independent, for themselves and for their family and loved ones. It’s more than just buying that gorgeous real estate property or exotic car, these are considered impulse buys and are usually made to boost ego and be used as a status symbol. While these material purchases are nice, and obtainable, the reality of the situation is they aren’t items that you need. When speaking of wealth, most investors have one common goal which is simple. Their future. This means focusing on creating a nest egg for yourself and loved ones when retirement is approaching. Too many hard-working people earn money their whole lives, only to put that hard-earned money into a bank account that yields little to no interest. It leaves many with only a very small amount to live off of when they are no longer able to work. Some are forced to continue working to support themselves risking their health, and those unable to work are poverty stricken and cast into the social systems that assist the elderly, leaving their family with unimaginable debt once they pass on. The problem is real, worldwide, and not getting any better. In this article I aim to help you become more financially independent so you are not just another point on the 20-year statistic sheet that uncaring politicians and business owners review every year.
Investing seems complicated to most, and brokerage firms in recent years have made it easier than ever to invest, save, and even earn income from passively investing small amounts over a long period of time. I will go over some of these options later in the article but first, in order to invest money, you have to have money to spare. Most people living check to check don’t, and I know I didn’t when I wanted to invest. It seemed like I would never see a six-figure retirement account or trading portfolio when actually it’s not even difficult to obtain in under a decade.
How well do you know your banks account policies? A lot of people never even bother to see if their savings account even yields interest at all. That by itself is a major problem. First, start by looking into what yours is, and then look around at other national and local banks for a higher return on your savings or checking account. Usually it isn’t much but anything helps as you start slowly putting money away. If you have to switch banks, do it. Your pockets will thank you later. You also have to take in to account that if you want to save, you have to stop doing certain things. Eat a lot of fast-food? Stop it. It’s a total waste of money (not healthy for your body) and you will save A LOT of money if you don’t go out to eat, drink, or party.
I know it sucks if this is the lifestyle you are used to. I had to make a lot of changes in my life to save money, but if you are determined to call yourself a millionaire (which most of us are) you’ll do it. Instead of eating in restaurants, getting fast food, and going out to bars to drink, I eat in. And I don’t mean ordering delivery, which is also a waste of money when you can just drive down the street to go get it anyway. As soon as I stopped going out two nights a week, I saved over $400 a month alone. For some it may be more, or less (depending on where you live), but normally “entertainment” is a pretty large allocation in most people’s budgets. Still want to go out? Yeah, I did too, and I do, but only once a month and I limit it to $100. I only purchase alcohol and food at the grocery store, it’s cheaper, and somehow lasts me way longer, not to mention I get those reward points, which is another way to save. Take advantage of those fuel-rewards cards you can get when purchasing food at the grocery store to save money on gas. I know it sounds silly but when you save even 10 cents a gallon on gas every fill up that’s another 20 or 40 dollars a month.
Some other easy ways are you can be “that guy” that uses coupons. Are you an extravagant tipper? I never go above %15 now. There are a million ways to save those pennies in your life, you just have to look at what you’re spending your money on and think, “is it cheaper somewhere else?”. A big one is people calling a repairman for everything that breaks. You don’t have to be a plumber to fix your toilet-bowl pump or leaky shower head. If anything in your house is using excess electricity or water those are the first things you should do a little reading to fix. They add up a lot of money on the utility bill and are normally as easy as fixing a leaky faucet or turning off the lights and heat when you leave your house. These are just example and I won’t go into further detail but you should get the point. If you are going to do something that you would normally think of as “being cheap”, then you need to do it.
So, as I mentioned before, finding a better bank is a great start for this, but try to focus on a bank that also offers brokerage services so that as your savings account grows you can open one up and start really investing it. Before you do this though, make sure that you already have or have allocated enough money into that standard savings account to live off of for 6 months. This is an average recommended amount of money so that if you incur a large unexpected cost such as a car breakdown or dead a/c unit you can cover it and not have to dip into the nest egg. Remember you’re trying to save money for yourself AND your future, not just one or the other.
One way that I found it easy to save money into a separate savings and investment account was splitting up my direct deposit from work. Most jobs will let you do this, and if you can’t you can always set-up auto transfers once it hits your primary checking account. Depending on how much you make, or if you work full or part time, this is going to be different for everyone. Visual learner? Draw a pie chart. We all love pie, and somehow saving money is easier to understand when you split it up by percentages. I personally don’t do it this way but it may help you better if you have a lot of accounts or expenses to juggle. I personally allocate a set amount of money for saving and split it in half between my personal savings account at my bank and half into my brokerage account. I started with $50 a week. Sounds like a miniscule amount, right? Well it is, but you have to start somewhere. I already had money saved separately for emergency expenses, and after doing this, the next thing I knew I had $1500 in a brokerage account. I started working more hours, stopped going out, did all the things I mentioned above and more, and double-downed to $400 a month. At the end of the year I managed to have that account up to $5k.
A note on this, don’t make your life un-livable. Everyone still has to have fun once in a while. You have to plan for your budget and expenses. Don’t save more than you can afford or live off of ramen noodles for a year. Don’t let it affect your health or well-being, and NEVER ignore debts and obligations. In fact, you should pay off any outstanding debt using a method like this so you don’t have to break your savings plan down the road. Family first.
Before reading further, and this goes for newer traders/investors. You have to do your own research, a lot of the verbiage used from here on out way be foreign to you, look up the words. If you do not know what something is, I urge you to do your own research on all of these topics both following and preceding this section.
Before we get into the actual investing there are some basic fundamentals you need to be familiar with. I am not going to explain all of them here because this would turn into a book rather than an article, however please read-up on the following topics before investing.
– Risk management
– Portfolio Management
– Basic Technical & Fundamental Analysis
– Differences in Investment Techniques
If you would like one on one education privately to help you with these topics and more you can reach out to me as I do provide these services. Please contact me either on Twitter or Discord. Information is listed at the end of the article.
This is a topic all on its own so I’ll try to just briefly list and give a few details about the benefits of each option. And remember diversification is very important to a portfolio, but don’t go crazy and spread yourself to thin, this is a mistake a lot of new investors make. They get attracted to everything bright and shiny and think that more will yield more returns, when investing it’s quite the opposite as I have found. If you have 10K and you split it up with only 2 in each investment option one will outperform the other and it will be a waste of allocated funds.
Generally speaking since you are aiming to create a nest-egg you will not be focusing too much on stocks, options or futures, and more on ETF’s, Mutual Funds, and IRAs. If you happen to find a CD account with an ungodly amount of interest then go for it, but they are old-news and investors have moved on from these in the last 10 years.
– Stocks, Options, Futures
For intermittent income this is not a bad idea. If you employ the same method of automatically purchasing a set amount of stock every week or month, you end up lowering your dollar cost average over time. Options and futures are more short term and meant for seasoned traders with knowledge of how they work, not to mention there is a considerable amount of risk involved with day-trading and options trading. For longer term purposes it would be a better idea to look up who the running “Dividend Aristocrats” are. These are publicly listed stocks available that pay very solid and reliable dividends. These dividends can be reinvested into your portfolio making it grow even more as I do not advise taking them as income since you want to save, not spend.
– IRAs, & Mutual Funds
These are definitely meant for long term investing. In fact, with most IRAs you can’t touch any of the money at all for a 5-year period. Please research the difference in benefits and drawbacks between both traditional and Roth IRAs before deciding as they are important and will affect which product you choose. The main difference is a traditional IRAs will lower your taxable income in the contribution year, however if you are under 59 and a half, you will pay a 10% penalty (in addition to brokerage fees) for early withdrawal. With a Roth IRA however, you can withdraw contributions (but not earnings) penalty free before that age, and tax free (since you contribute funds after tax) at any time.
I personally like Roth IRAs better because you can invest them in anything you want, it could be an index funds, an individual stock or many other alternative investments. They are flexible, safe, and yield high returns. Remember those “Dividend Aristocrats” I mentioned … yeah, you can re-invest all those dividends into that Roth IRA if the account is invested in one of them, hint hint.
Mutual funds are a different investment strategy entirely, and as a long-term extra source of income can work well too. These are managed accounts and could be invested in one or many strategies by the managing firm. The advantages are simple, diversification, transparency, and variety. But the drawbacks are mainly the fees involved of someone else earning you money. You also usually need quite a sizable portfolio to invest as the management companies have minimums. In terms of taxes though, you can get them tax-deferred if holding the mutual account in a 401K or IRA like we discussed before.
There are many options with these forms of investments so make sure you dive in, do your research, and read all the fine print of the types of accounts your choosing, and who they’re from. It’s your money, and you don’t want someone careless managing it, or have your money stuck in a low yield account for years.
While these investments are all long term (5–20 years), you have to make sure you monitor them on a fairly regular basis. I like to do it bi-weekly when funds are being cleared so I can check up on things. While your habits have already changed and settled by now, the markets may have changed direction. This is where diversification can come in handy if you want to shift investment strategies for a portion of your portfolio to prevent slowed returns or even loss.
If you have chosen to invest in bonds but the fed is decreasing the interest rate you might want to consider moving those bonds into another investment option to prevent those slower gains. You could cash them out for their return early, pay a smaller penalty now and then roll over those funds into your IRA for something more reliable. If your mutual fund in under-performing after the first year due to the lack of management confidence, choose a different one. You always have other options, it’s your money.
In closing, you have to make your money work for you. I mean, shouldn’t you after you worked so hard for it? There are tons of options out there for investing and these are only a few of them. I didn’t even discuss ETF’s or go into detail about how bonds work or anything like that. Like I mentioned in the research step, that is a MAJOR factor in this process and you should dive into it while you start the process of saving money or getting out of debt. As long as you get the information you need from reliable sources (not #cryptotwitter) you should be well on your way to understanding your options and how different forms of investments work. This will help you better choose which suits your current needs, and be prepared for the future if those needs change.
Remember, good things don’t come to those who wait around, they come to those who take action!