Investing means using your money to earn more money. Those designer shoes you buy before your job interview are not an investment. In order for something to count as an investment, you must use capital of some type to purchase an asset that in turn has the ability to earn interest. The shoes may give you confidence and swag to help you secure the job, but the shoes themselves won’t earn you a dime (unless you’re able to somehow sell them for a profit).
There is a debate in the personal finance world about the best time to start investing. The best answer is: when you’re comfortable with it and it’s the best time for you. However, the answer that I give my clients is that if you have any debt on which you’re paying more than 7% interest, using your cash to invest instead of paying off that debt is hustling backwards. Yes, it’s true that the stock market has been performing at a higher rate than 7% lately, but that’s not always the case.
I also recommend that my clients have at least one month of expenses saved into an emergency fund before they start investing at all. This is because regardless of the investment options you try, you should plan to have your money invested for at least one year (otherwise, what you’re doing is called trading and that’s a topic for a different article). If during that time period some sort of financial emergency arises and all of your cash is tied up in investments, you’ll likely be stuck using high-interest debt to pay for that emergency and then you’ll be back to hustling backwards. When it comes to your personal finances, it’s important to operate from a position of power. Having significant high interest debt and little to no cash savings is not a place of power.
While ideally every asset you buy will earn interest or generate income, that is almost never guaranteed. There are myriad ways to invest your money and we are discovering new ways every day. However, the following six investment options are a good place to start your research as you grow your knowledge in this area.
If you work for a company that offers a retirement account, this is where you should start your investment journey. A company-sponsored retirement account is usually referred to as a 401(k), 403(b), 457(b), or some other number-letter combination. You’re able to make tax-deferred contributions into this account – that means you won’t pay taxes until you use the money and you will have less money today that you have to pay taxes on. Once the money is in your account, you’re able to invest in different stocks, bonds, and index funds that contain a mix of both. In some retirement accounts, you’re able to invest in other types of assets as well.
Retirement accounts have a bad reputation as being “too conservative,” but they can actually be a great avenue to build wealth. Not only are you saving money on taxes, but you also have the benefit of automatic monthly savings to help keep you on track towards your wealth building goals. If you’re lucky, your employer may either contribute to this account on your behalf or match at least part of every dollar you contribute. In either of these situations, that means your employer is literally adding free money to an investment account for you.
While I do recommend that everyone take advantage of a retirement account if they’re able to, there are some drawbacks. The most obvious one is that because these accounts are meant to help you build your funds for retirement, there is a penalty if you use the funds before you reach a certain age. At the time of publishing, in order to avoid paying a 10% penalty, you have to leave the funds untouched until you reach age 59.5. That means that it’s important to only invest funds that you can ideally allow to continue growing for several decades. The second potential drawback is that some retirement accounts limit the funds or asset classes that you’re allowed to invest in. That said, if you’re new to investing, you’re likely better off sticking with more traditional index funds or time date funds anyway.
If you’re in the privileged position to earn enough money to meet retirement account contributions or income limits, you are likely not reading this article. However, that is something else to keep in mind. Some people actually have to limit how much money they invest in their retirement accounts because they will hit a maximum threshold.
The final drawback to a company-sponsored retirement fund is that you may be paying an administration fee that is higher than you would pay if you were investing on your own. While the tax savings you earn from this type of account would likely offset any higher fees, it’s important to understand how much you may be paying for this type of investing.
Index Funds / Personal Brokerage Accounts
In order to grow your wealth in the short and midterm, you should be investing outside of your retirement accounts. As I mentioned above, you will have to pay a penalty if you use your retirement funds before you turn 59.5 (in most cases). Therefore, as you save for things like a down payment on your first house, new cars, business capital, or family planning expenses, you will want to use personal brokerage accounts to grow your savings more quickly than you could in a savings account.
A brokerage account is the thing that most people think about when they think of investing. This is an account that you would open with a company like Fidelity, Vanguard, Betterment or Wealthfront. Once you open a brokerage account, you are able to fund the account with money from your regular bank account and then choose individual stocks and bonds, or stock and bond ETFs or Index Funds.
As the header to this topic suggests, I recommend that my clients invest in index funds as they allow my clients to be invested in a highly diversified set of stocks and bonds at a very low cost. They get to take advantage of the changes happening in the stock market without having to spend their time researching companies and making manual changes to their stock portfolios. While it is possible to make smart trades on individual companies for short-term gains, we have yet to see the person who is able to “beat” the market over the long-term. If your goal is to grow your wealth over the long-term (3-30 years), then I highly recommend using index funds to do so.
Passive Business Income
Investing in a business can be a great way to create passive(ish) consistent income over time. Ideally, you would then use at least some of this income to continue consistently investing in one of the other options that I mention in this article. The great thing about investing in a business of your own is that you have more control over the outcome. Investing in the stock market has been consistently positive over time, but you don’t have direct control over the outcome.
If you use your money to create a product or service to sell, you can directly impact the outcome through strong business practices. Additionally, through the power of the Internet, it has become easier than ever to start a viable business with almost no money down. Even if you’re still in the high-interest debt, very small emergency fund phase of your journey, this can be a good place to start investing.
Investing in real estate is not for the faint of heart. That said, everyone needs somewhere to live and they’re not making any more land, so real estate can be a powerful asset to own. When my clients ask me about investing in real estate, I make sure that they’re already taking advantage of their retirement accounts, that they have strong savings in place, and that they have paid off all high-interest debt. I then ask them if they’ve ever considered “house hacking.”
If I had it to do all over again, I would “house hack” my first home purchase by purchasing a 2-4 unit building, living in one unit and renting out the others. This is an excellent way to learn about real estate investing because the purchase process is very similar to purchasing a conventional single-family home. It also allows you to have a place to live while paying for part, if not all, of your mortgage with the rental income you’re earning from the other units.
There are several different ways to invest in real estate and each one can have a completely different impact on your wealth. Some techniques like wholesaling can allow you to earn short-term income while not needing to use so much of your own cash up front. Then, there is house flipping, which may require extensive amounts of cash, but offers the potential for much larger returns. Finally, you may be more interested in continuous long-term earnings and therefore choose to be a landlord to long-term renters. Real estate can be an amazing way to grow your wealth, but I don’t recommend that it be your first way.
Cryptocurrency / NFTs
The newest kids on the block, cryptocurrency and NFTs (non-fungible tokens), are the ultimate in volatility. As these assets continue to become established, it’s hard to know what their value will be at any moment – or if they will even still have value in 20 years! To learn more about what cryptocurrency actually is, I highly recommend reading this definitive article. That said, know that cryptocurrency and NFTs are digital items that exist in the blockchain. That means that they’re built on technology that imbues them with a fingerprint and makes them assets that are meant to be impossible to counterfeit.
There is reason to believe that these types of assets will become more ubiquitous over time, but in the meantime I wouldn’t rely on any specific type of cryptocurrency or individual NFT for long-term wealth. Because of the current volatility of these assets, I recommend that my clients have no more than 5% of their portfolio invested in them. However, if you have already established consistent investments in your retirement and shorter-term investment accounts, have emergency savings and little high interest debt, it doesn’t hurt to have a small percentage of your portfolio invested here.
Art and Other Collectibles
On the other side of the spectrum, art, wine and other tangible collectibles are the oldest types of investments available. While there is certainly value in these types of assets, just like cryptocurrency and NFTs, the value is dependent on the collective consciousness of society to determine the value of any particular item at any particular time. Your Nike Mag Back to the Futures may be worth $40,000 today, but that value could plummet to $0 depending on the fashion of the day. While the Mona Lisa will likely retain its value for centuries to come, not all assets are so lucky.
Also, unlike cryptocurrency and NFTs, because these items exist in the real world instead of on the blockchain, it is possible to counterfeit or destroy them. With specific expertise in certain realms, it may be possible to create short-term income with these types of assets, but I wouldn’t recommend relying on them for long-term wealth. And, just like with crypto, because these types of assets can have volatile value, I only recommend that my clients have a maximum of 5% of their portfolio in something like this.
Ideally, as you build your wealth, you will have a portfolio of different types of assets and asset accounts. Extremely wealthy people safeguard their wealth in tax-advantaged accounts, with insurance and by having diversified assets. You will likely have to start with one type of account and use your growing assets to expand out to other types of accounts over time.
However, when it comes to investing in any of the asset classes I mention above, it’s important to understand exactly what you’re building your wealth for and to have a clear idea of your timeline. Understanding how much money you’re trying to generate and when you’ll need it will make it much easier to understand what type of investment plan you should set up. In order to achieve any goal, it’s important to understand your “why” and that goes for building wealth as well. Ultimately, money is just a tool to be used to help you build your best possible life. If you can clarify what that life should look like, the rest of your decisions become that much easier.
Bevin Morgan is a Financial Trainer at The Financial Gym who has paid off over $200K in debt to become debt free. She is a real estate investor and self-proclaimed personal finance nerd. She specializes in helping Black female entrepreneurs and creators gain confidence in their financial futures with a touch of woo woo. She is on a personal mission to help bridge the racial wealth gap in this country. Black families hold less than 10% the average wealth of white families. Instilling financial confidence in Black women is one small step she’s taking to help change that.
Find her at www.bevinmorgan.me or on Instagram, @bevinmorgan.
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