If you’ve been following this blog for the last few posts, you’re probably fired up to start investing. You’re probably saying to yourself “Jesus Christ man enough with this shit, teach me how to invest already.” I WILL! But if we are going to do this, we are going to do it right. Once you invest, you will probably not be touching that money for the next 5-10 years. This isn’t an ATM. Investing is something you need to put a lot of thought and effort into to be successful.
Because of this, you NEED to make sure that your finances are in check before putting any money into a long term investment. Warren Buffet is one of the greatest investors of all time and the investing strategies you will learn here, come from the lessons that he taught me (not like personally…but I read a lot). When it comes to long term investing, Buffet is king. When asked about his investment horizon Buffet said, “Our favorite holding period is forever”. You need to be okay with letting this money sit forever. That means when your ’09 Civic blows a tranny, you better not be in a position where you need to sell an investment to pay for it.
Saving will always beat investing until you really start stacking up cash. Investment returns start to get juicy the more GREEN you can put into them. Please refer to my previous post on saving tips to help you cut out unnecessary expenses which will help get the first part of your finances in order.
This is probably the most important thing to get in order before investing. It’s going to be really annoying, but I’m going to keep beating this into your head. Until you have a boatload of money, saving money will always beat investing money. Look at it this way:
How much should I save?
A lot of experts recommend saving up 3-6 months of expenses. This is a great opportunity to take a deep dive into what your expenses are. If you’re thinking to yourself “fuck me… how am I going to save $15,000 as a cushion” you might be spending too much money. I’m telling you, cutting out stupid purchases and paying yourself first is where you need to start.
This is also great practice for what it takes to be a great investor. When we start investing in businesses, there is going to be a great deal of thought and analysis that goes into it before pulling the trigger. You need to put the same kind of thought into any financial decision you make, even something as small as buying that coffee every morning before work.
The emergency fund that you are going to create is for emergencies ONLY.
What is an emergency?
Let us define what an emergency is NOT – An emergency is not your friends hitting you up for a “once in a lifetime” trip to Cancun that will set you back $1,500. FOMO is a real thing but it’s not an emergency. An emergency is not the new iPhone coming out, and you upgrading even though your iPhone 7 is working perfectly fine because the new one has three fucking cameras. THREE!
An emergency is something that is unexpected, necessary, and urgent.
Please, please, please work on creating an emergency fund before putting any money into an investment of any kind. At the same time, don’t let this stop you from continuing to invest in knowledge. Knowledge is free.
Clear Out Debt
Debt is a baby back bitch. Always has been, always will be. If you’ve already built a solid emergency fund, then I don’t think it’s necessary to eliminate debt entirely before investing, but let’s focus on high-interest debt. In one of my previous posts, I have my weird orgy analogy of how compound interest is the shit. Guess who else knows that compounding interest is dope??? Your credit card company. When you let your credit card debt build-up, you have to start paying interest on that. Then, you gotta pay interest on the interest and this continues on and on until you are living on the street.
If you have unpaid credit cards, then pay that shit off before even thinking about investing. What the hell is the point of getting awesome returns in the stock market if you have the same power of compound interest working against you at the same time?
If you have crippling credit card debt you are by no means in the minority:
Just because you are in the majority doesn’t mean you’re right. A lot of people just see that little minimum payment and think “okay cool I paid it, now it says there’s no payment due”. Uhhh yeah, no shit bro there’s nothing “due”. Banks love this shit. They will keep collecting interest on that new flat-screen TV you bought. Don’t just pay the minimum. Pay the entire statement balance on your card at the end of each billing cycle. If you can’t pay the statement balance, then you are doing something wrong and can’t handle a credit card. If something comes up where you have to put a lot of money on your credit card, then paying that off moves to the top of your list.
Not all debt is bad.
Some debt is just a necessary evil, such as a 4% school loan, which is not as much of a concern. Make your payments, but don’t feel like you need to pay off a $30,000 school loan before you can put any money into the stock market. Debt like this is very easy to factor into your budget.
When taking on debt, always ask yourself if what you are purchasing with that debt will decrease in value. For example, let’s look at a car loan. A new car loses it’s value as soon as you drive it off the lot, then continues to lose value at about 15% a year.
You will still be paying for the full price of the car plus interest even though the car is now worth half of what you paid for it. Taking on debt to cover the cost of liability is never a good idea. On the contrary, a college diploma will still have value for the rest of your life. Yes, college is expensive and the debt is probably killing you, but hopefully, that degree increased your value as an employee.
The same thing goes for mortgage payments. You will be paying off the purchase price of your home for 30 years, however, more often than not, the price of your home will appreciate in value. You are paying for something that is actually increasing in value the more time passes.
Debt for assets = Good ι Debt for liabilities = Bad
Do you know what else is a baby back bitch? Taxes. Luckily, Uncle Sam created a few loopholes to help us finesse the system. Basically, you get taxes taken directly out of each paycheck, which sucks ass, but it is what it is. If you were then to invest that pre-taxed money into the stock market with a traditional brokerage account, you would eventually have to pay additional taxes on any money that you gain once you sell the asset. This is called the capital gains tax.
The US government never wants you to make money without them getting a little piece of the pie. We’ll discuss how to limit your tax liability in a later posts but a Roth IRA is probably the most important weapon in fighting the war against taxes.
The cool thing is… A ROTH IRA IS INVESTING! Finally, we can hop into the markets in the easiest and smartest way possible.
A Roth IRA retirement account allows you to invest money without ever paying federal taxes. You can put money in every single year while you wait for the freedom of retirement and when you take the money out, YOU GET TO KEEP ALL OF IT. All of those sweet and delicious capital gains are all yours. Obviously, the government doesn’t want you to get too carried away with this loophole, so they limit contributions to $5,500 per year.
How much can I make with a Roth IRA?
Let’s take a look at the benefit of the Roth IRA account. If we break down the max contribution into monthly investments, it comes out to $458 per month. This may not be possible for everyone, but this is your goal. The average return for a Roth IRA account is 7-10%. The chart below shows how your money will compound over time if you maxed out your Roth IRA account from age 25 to 65 (assuming 7% return).
After 40 years, your $458 monthly investments come out to 1.2 MILLION DOLLARS, all yours. Nothing to the government. If you simply put that into a savings account every year, you wouldn’t even get a quarter of that.
I personally use Vanguard, but there are tons of different options out there for opening your very own Roth IRA account. So do your research and pick which one is best for you. I really think it’s bananas to open up a personal trading account before having your Roth IRA locked down. So get that done. Even if you can’t hit the maximum, please just open the account and start contributing what you can.
This one should be common sense, but I feel like a ton of people focus too much on the “get rich quick” aspect without properly educating themselves. As I said before, knowledge is free and it’s also what will pay off the most long term. It’s important that you know what you are doing before you make an investment.
I’ll be honest, I didn’t follow this advice when I first started and it bit me right in the dick. I had an account when I was in college and just watched The Wolf of Wall Street. I found some hot stock pick from a guy on Reddit, I believe it was a company called Amtrust Financial. I tossed a ton of money into it without knowing anything about the company…legit nothing. I sorta forgot about it for a while and checked my account and was down $6,000. Because I didn’t know anything about the company or investing, I had no idea why this had happened. Should I sell? Should I buy more? Should I just keep holding? I didn’t know the answer. So as any panicked newbie would do, I sold and took the loss.
The more knowledge you have, the more confident you become. Now, it’s easy for me to look for buying opportunities and I know the difference between a solid company and a sketchy one.
Remember when you were in chemistry class in high school thinking why the fuck am I learning this? I’m never going to use this in real life. Well, whenever you are learning about investing it’s the complete opposite. I mean what better way to spend your time than learning skills that will actually make you money, right? You already found yourself at Invest for the Rest so you are on the right path!