Three questions to ask yourself when investing spare cash
If you have a small sum of spare money lying around, ask yourself these three essential questions before investing it anywhere.
If you have a small sum of spare money lying around, ask yourself these three essential questions before investing it anywhere.
Many people ask me what the best way to use their spare money is. 听What stock should I buy? Should I invest in real estate? 听Well, for those of us that don't have thousands of dollars sitting idle in a bank somewhere foreign, here's my recommendations on how to invest your $100 in the best way possible.
First Question: Do You Have Debt?
If you do, you should put your $100 towards that first. 听The first priority would be credit card bills- these听have听some of the most expensive interest rates, and should be paid off first, followed closely by student loans. 听Debt like this should be paid off before thinking about investing in anything.
Second Question: Do You Have an Emergency Fund?
An "emergency fund" is dependent on your needs, but typically it's a few (3-6 months) worth of expenses that can be used in an emergency, like a medical payment or losing a job. 听This is important to take much of the stress away when you need liquid cash the most.
听Third Question: What Do You Know?
If you've paid off your debt, and you have a good emergency fund, then it's time to think about investing. 听If your company has a 401K, you should be maximizing any matching they may offer- the sooner you start saving, the more your money will be worth when you choose to retire.
If you've done that, you'll want to contribute to your own IRA, which you can contribute $5,500 to per year tax free for retirement. 听In this account, you can choose which stocks you wish to invest in, much like a brokerage account. 听So, what companies do you know and respect? 听For me, I have studied the entertainment industry for a very long time, and have followed the Walt Disney Company through its ups and downs over the last 15-20 years. 听For me, I feel very confident investing in a company that I understand like Disney. 听They, to me, make great products, whether that be theme parks, movies, consumer products, or sports entertainment in the form of ESPN.
For you, this may be different, like a department store or a car manufacturer. 听It's different for everyone. 听But, in essence, I follow Warren Buffet's advice of "buying what you know." 听If you just follow what someone else says, like buzzwords such as "social media" or "biotech" without fully understanding them, you may lose money. 听Not that those industries听won't听make you money necessarily, but it's important to not follow the crowd and form opinions for yourself when you're investing your own money. 听So, in summation, pay off your debts, form an emergency fund, and, if you have some money left over, invest in what you know in a retirement account like an IRA.