Investing Money 101: A Financial Road Map

Investing Money 101: A Financial Road Map

investing moneyHave you been reading a lot of Investing Money 101 books and asked to yourself: “Okay. This is all great. I’m ready to change my lifestyle and start investing!…But where do I start?” It may seem daunting at first but it’s actually very easy. And for most long term investors, you can set it and forget it. Let the market and time do the work. But before you do, let’s make sure you’re prepped up and primed first.

Investing Money: Things to Prepare First

Just like learning any other skill, not everyone can jump into investing right away. You need to prepare yourself. The very first thing you want to do is check your finances and make sure they’re in order. The following is a check list of things you need to cover before you should start investing. This is also on the front page of my blog. :

Step 1: Emergency Fund

How is your job security? How much do you have saved up in an emergency fund? Before even thinking about investing money, you need to set aside cash. First, you want to do is calculate your monthly expenses. Secondly, put aside enough in a savings account to cover 3 to 6 months worth of expenses.

This isn’t simply about job security.

You have to remember that life happens.

Things may be sunny today but you never know when you’re going to run over that pothole and pop your tire, or you’re playing basketball and suffer an injury. Because of unexpected life events, this is where your emergency savings comes in handy. Remember the saying “Pay yourself first”? This counts. Putting aside a few hundred a month while paying your monthly bills will go a long way. In the end, this is the pillar that’ll enable to keep investing money.

Step 2: Pay Off Debts and Loans

Once you have an emergency fund set up, the next thing to do before you can start investing will be to pay off all of your debts and loans. In his book, “The Total Money Makeover”, Dave Ramsey talks about the “Debt Snowball” system where you start paying off whichever balance has the highest interest rate, first. Because this way, you’ll ensure that you’re not giving away interest payments to companies. These interest payments could be used towards investing money.

Take a look at the example below:

Account Interest Rate Balance
Visa Credit Card 8.98% $1400
Auto Loan 4.20% $14,000
Student Loan 3.62% $10,000

In this table, we note that your credit hard has the highest interest rate at 8.98%. Keeping this balance open will subject yourself to paying interest every month, which is basically throwing away free money. In the investing money world, free money is a must.

Using the snowball effect system, you want to focus on paying off the $1400 balance first on your Visa. Once that’s paid off, the amount of money that would go towards the Visa next month can be applied to the account with the next highest interest rate, in this case your Auto Loan. Once your auto loan is paid off, then you only have one more account where you can focus all of your efforts on.

While you’re paying off loans, in terms of investing, once you fully pay off your Visa, it’s like guaranteeing a 8.98% return every month where you don’t have to pay that bill. And the investing world, a 8.98% ROI is doing extremely well. So in some sense, it’s like you’re already investing money.

Step 3: Begin The Investments

Investing Money Rule: Always max out all your retirement contributions. Now that you have paid off all your liabilities, let’s start working on your assets. First, what you want to do is max out your annual contribution limits as set by the IRS. Many employers these days provide a 401k as part of your retirement plan with employer matching. If you have this then this should be the first account you contribute to.

IRS limits you to $17,500 per year so max that out. You can then start investing your 401k through asset allocations provided by your employers program. If your employer provides matching then by the end of the year, you will have $17,500. Additionally you’ll get free money from whatever your employer matches.

FREE MONEY!

Here’s another major rule in Investing Money: never give up free money! Depending on your tax bracket you will also want to open up either a Traditional IRA or a Roth IRA. My general rule of thumb is if you’re in the 25% tax bracket or below and you plan on working for promotions and making more money, then that means it’s better to contribute your post-tax dollars into your Roth IRA now and then switch to a Traditional IRA when you’re in a higher tax bracket later. The limit for IRA contributions is a combined total of $5,500 for 2014.

To add up, the Total Retirement Contributions: $17,500 + $5,500 = $23,000 per year

4. Investment Portfolio

Once you’ve maxed out everything else, congratulations you’ve succeeded in Investing Money 101. Open an account with a brokerage account and start depositing money into it on a routine basis. I personally use Robinhood and Vanguard as my brokerages of choice. But you can choose whichever has the best services for your needs. For me, Robinhood’s no-commission trades is like having additional free investing money.

Investing Money Complete

In conclusion, once you have your brokerage account set up and everything else is completed, congratulations, you’ve graduated from the first part of investing Money! After all is said and done, remember: devise an investing plan, follow it, be disciplined, and start investing money.

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