Personal Finance

A lot of people seem to peddle get rich quick schemes, and that is just nonsense. It is very unlikely that any scheme that promises to make you a ton of money with low effort and low initial investment will do anything of the sort. If you hear about such a scheme, run away as fast as you can. However, just because get rich schemes are almost always scams doesn’t mean there aren’t reasonable ways to invest money.

Presumably most guys will get jobs, and thus make some reasonable amount of money. I won’t advise on specific careers, but whatever career you get you should be saving money. There are sensible ways that money can be intelligently invested such that you can earn a good return over time.

Your first priority is to build up a reasonable emergency fund. Basically open a bank account (money market savings and checking) and put enough cash in there to be able to live for at least 6 months should you loose your current job for whatever reason. I recommend you look for a high interest option. Your average bank like Wells Fargo has an extremely crappy interest rate. I personally use Ally bank. I have a money market account at .85% interest and an interest checking account for .15% interest. There are other options though, so look around.  You can see some high interest banks here. You might also consider getting a high yield checking account, but keep in mind that there are more restrictions on these sometimes such as a minimum balance and a minimum number of debit card uses per month.

Your second priority is paying off any debt that you have. Forget about get rich quick schemes, doing any investing, etc until all your debt is paid off. Becoming debt free will be the best bet for your finances in the long run. Paying this off earlier is guaranteed less money you will have to pay out overall, while there is absolutely no guarantee you won’t lose money on whatever investments you choose. Guaranteed savings are better than non-guaranteed capital gains and/or dividends.

Once you have all of your debt paid off, you should start looking at retirement savings. This is the best for investing given the tax breaks that you will currently or eventually receive. If your company offers any sort of match for 401k you invest at minimum enough to get the maximum they will match. That is free money, you need to get it. Whether to invest more in the 401k after getting the match or in some other type of retirement account is dependent on you tax situation. 401k is most advantageous to people with a high salary. By deferring to a 401k you get to defer paying taxes for your income in the highest bracket and thus pay less each year. You will have to pay taxes on the retirement when you pull it out, but in theory it should have increased in value significantly since you put it in. In other words, you get to make money off of what you owe in taxes until you start taking disbursements from your retirement account. If you plan on purchasing a first home, you can also pull up to 10,000 out of your 401k without penalty when you make that purchase. So, that money is still relatively easily available to you for that purpose. However, generally speaking, many of the funds offered in employer 401ks aren’t the best deal because they have high expense ratios.  This is because you are basically locked into only a few choices by the arrangement made between the employer and the investment broker, which allows the broker to push up the costs relative to what you could get if it wasn’t through your employer.  It is a good idea to pick the low-cost whole market indexes usually available in these funds. Besides the lower cost, whole market indexes actually tend to outperform specialized actively managed funds over time.  In fact, in 2011 84% of actively managed funds under-performed the market.

If you are in a lower income bracket and/or very young, then you really need to consider investing in a Roth IRA. If you are in a low tax bracket already, then you get less benefit from deferring taxes by using a 401k. In a roth, instead of deferring tax until later, you pay the taxes on your income now and don’t have to pay any taxes later when you pull it out for retirement. This is quite a good deal. If you are young then the money you put in today could very well increase several fold over the next 40 years and you will never have to pay any taxes on it. This advantage should not be overlooked. In addition, if for some reason you find yourself in an emergency or you need to make a big purchase you can pull out money up to the amount you have contributed (any capital gains or dividends have to stay in the roth until retirement).  I personally use vanguard because it is cheaper in general than most other funds offering Roth accounts.

Once you have a arranged for your retirement savings, you should still have a net savings rate. With this money you can make some investments in the stock market. It is not really a good idea to leave huge amounts of money (more than 2x your minimum emergency fund) in a bank account earning a relatively low return. Even the relatively high interest accounts I mentioned earlier. Your money is still loosing value at that rate because the interest is less than inflation. The main use of the savings account is to lower the effective inflation rate of your money. The vast majority of your investments should be in relatively sound vehicles. When you get to this stage, please get and read “The intelligent investor” by Benjamin Graham for very solid advice.

Lastly, you can if you want set aside a very small portion of your portfolio for speculation. Basically, taking wild gambles on the stock market that are high risk, but might offer a very high return. This fund should be completely separate from the rest of your investments, and shouldn’t include more the 1% of your total worth. You go in being fully prepared to loose it all, or you don’t do this.

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