TLDR Summary at End
Okay, so maybe you’ve come back from deployment or been stuck at the house because of COVID and you’ve been able to save a nice chunk of change. It’s sitting in your bank account, (maybe a high yield one like Marcus or Ally). You know that you want to grow it but you don’t know enough about investing to feel comfortable with such a large amount of money. Where do you start?
You start by making sure you have cleared the bar to invest. Generally, once you invest money you don’t want to touch it for at least five years. There are two considerations that will allow you to achieve this:
- Do you have 3-6 months worth of emergency savings? This does not include money you intend to invest. Take an honest look at your expenses over the last few months and see if your savings is 3-6 times that. If you are moving or are going to be deployed, it is safer to be towards six months.
- Do you have any high interest debt? At MoneyGouge we define high interest debt as 5% or greater interest rate. Paying that off early will earn you a 5% (or whatever the interest rate is) guaranteed return on your money. Unlike investing, the return is guaranteed because you will have paid that in interest if you don’t pay it early. Paying off debt will also dramatically increase your income. Eliminating a debt payment is essentially the same as getting a raise for that amount.
If you have achieved these milestones, then you are ready to make that money work for you. There are countless options out there. We’ll walk you through some good ways to invest as well as some not so good ways.
Stock Market Investing
Nowadays, investing in the stock market is more accessible than ever. You can harness the growth of wall street without having to spend all your time studying stocks. Like all investments, there is a right and wrong way to invest in stocks.
The Right Way:
Open a brokerage account. The best companies are Vanguard, Fidelity and Robinhood. If you use this Robinhood link, you will get a free stock when you open your account. These companies are incredibly popular because they are commission free and easy to use. Commission free means they won’t charge you to buy stocks. Other brokerages will charge every time you buy or sell stocks. There is no reason to pay for that when you have a cost free alternative. I have used all three for years and they are great platforms.
We are not financial advisors and this information is for educational purposes only.
After You’ve opened a brokerage account:
Once you have opened an account it’s time to invest. The right way to invest is in index funds. They allow you to own a basket of stocks. The reason index funds are so powerful is because you are not dependent on any single stock for your performance. Overall, the market tends to return about 10% a year. You will be able to capture these gains without being tied to the fortune of one company. For large amounts of money this is how you want to be invested because it is one of the best risk/reward profiles out there. In fact, Warren Buffet even recommends it.
Companies charge you a fee for building baskets that you can invest in. High fee’s can act as a drag on your return because you pay fees regardless of the performance of the index fund. You want to keep fees as low as possible. The fees for all of the listed index funds are extremely low, which is part of the reason they are such great products.
The Best Index Funds For Your Money
S&P 500: The S&P 500 is often used to describe the whole stock market, but it’s actually just the top 500 companies in the US. You are getting the best of the best when you buy the S&P 500. Buying this will allow you to own companies like Apple, Microsoft, Pfizer and Tesla to name a few. This index has returned an average of 11.7% annually over the last five years. Currently, the S&P 500 has a dividend of 1.5%. Dividends will be discussed later in this article.
Two ways to buy the S&P 500 are:
These two are the same thing. They both are ways to buy the S&P 500. The only difference is the company that offers them (Sector Spider and Vanguard) and the expense ratio. They will have the same annual performance because they are the S&P 500. Vanguard’s expense ratio is slightly lower but these two have the lowest expense ratio by far.
Total Stock Market: The advantages of investing in the total stock market are two fold. You get more diversification because you are balanced between the whole stock market and not just the 500 largest companies. In theory, you also get more return because small cap stocks (small up and coming companies) tend to grow faster than the S&P 500 large companies. This is due to their size, it is easier for a $1 Billion company to double then a $1 Trillion company.
A good way to invest in the total stock market is VTI. It has a 5 year return of 13.68%, dividend of 1.42% and fee of .03%.
This is a great core holding in any stock portfolio because it is well diversified and performs well most years.
Dividends: A lot of investors buy dividend stocks. These are stocks generally older, more profitable companies that choose to share their profits with shareholders of the stock. Typically they pay a set amount annually and it is distributed quarterly. The price of the stock divided by the year’s dividend amount determines the dividend yield. This is what I am referring to with the dividend yields mentioned in this article.
Vanguard has built a basket (index) of companies that focus on paying dividends. The Vanguard High Dividend Yield ETF (VYM) has a five year annual return of 10.03%, dividend yield of 3.17% and expense ratio of .06%.
Money Gouge Tip
Most brokerage accounts have the option to reinvest the dividends automatically. That is, the money you receive in dividends will be used to buy you more stock. This is an incredibly powerful way to grow your money because you will be paid dividends every year regardless of the performance of a stock’s price.
If you have built up a large core holding of index funds it is okay to buy individual stocks. The order is very important, building large positions in a single company holds an enormous amount of risk compared to the whole stock market. Even very successful companies have low performing years. Meanwhile, the market continues to march upward without them. This is why you want to have a large amount of your money in index funds first. Once you have a solid foundation, you should absolutely buy some individual stocks.
Do: Buy reputable companies you know, love or at least understand. Buy them in an amount that is still a minority of your portfolio.
- Invest in a hot stock you do not understand or only know of because you read it somewhere. This is speculating (gambling) and not investing. There is no real end goal here and even if you make money it’s not repeatable. Speaking from experience, this type of activity ultimately wastes whatever money you put in.
- Time the market. This is a classic beginners mistake. Nobody knows what the market will do today or tomorrow. Instead use dollar cost averaging.
Dollar Cost Averaging: Take the amount you want to invest and divide it into monthly amounts over the course of 3-6 months. Pick a day of the month or twice a month and invest it on that date. This will allow you to get an average price over that period as whatever you are buying moves up and down in price. It mitigates the chance of buying at a point where the price is high. This is the go to strategy for how professional money managers invest money. If you use Robinhood their buy over time feature will automate this entire process for you.
Real Estate Investing
Real Estate is a phenomenal investment if done right. It will allow you to have monthly cash flow, monthly increase in equity and lower taxes if done right. If you have low or no debt, 3-6 months of savings and a decent amount of money to be deployed. Real estate might make sense. Many people are hesitant to get started with real estate because it is a big endeavor. Fortunately, there are now ways to greatly reduce the workload and risk to you.
If you want to have an investment property that is already rented (or guaranteed to be rented in the first month) use RoofStock. They also do all the heavy lifting and inspect the house/ get all the paperwork ready for you. They really are professionals and have established a reputation for their services. You will even be able to get a highly rated property manager through them. RoofStock is so good that you will be able to buy an investment property online. Because it is professionally vetted, the property will likely perform better than one you attempt to find on your own. Also, a lot less of your time goes into the home buying process.
Money Gouge Tip
We recommend putting at least 20% down on a given real estate property. This allows you to have cash flow and equity and not be overleveraged with a large mortgage. 20% down strikes a good balance between risk and reward. You will get a good return on your money without relying too heavily on leverage.
If you don’t want to put a ton of money into a rental property but still seek cash flow from real estate there are a few options!
A more passive way to invest in real estate for income is through Fundrise. Think of Fundrise as an index fund of real estate instead of companies. You can invest as little as $1,000 into the various funds that Fundrise has and receive dividend income that is generated by the rent on those properties. These properties are professionally bought and well vetted. The values of your shares may also rise over time as the value of the properties increases. If you choose to sell your shares you can do so once a quarter at the current value. This is a lot easier than trying to sell a house.
Similar to fundrise, you can buy the Vanguard Real Estate Index Fund ETF. This is an index of REIT’s. These are companies that own and operate real estate. An REIT is required by law to pay 90% of it’s taxable income as a dividend. VNQ has a five year return of 5.64% a dividend of 3.35% and expense ratio of .12%.
Bonus: The Best Certificate of Deposit
If you are a Navy Federal Member and receive direct deposits with them, you can get their Special EasyStart Certificate of deposit. This is a good way to earned a guaranteed 3% interest on money you will need earlier than in five years. Currently the certificate offers 3% for 12 months on up to $3000. The best part is that you can restart another one when the first ends.
Make sure you open a Special Easy Start certificate. There is a similarly named Easy Start that only offers .5% interest.
How Not To Invest
Avoid the latest fads and things you do not understand. Robinhood allows you to invest in crypto as well. I think of crypto as a risky individual stock. The same rules apply. If you really need to scratch the itch, put a few hundred bucks in and make your large investments elsewhere. There is no place for large amounts of money in hot stocks or crypto currency. This is your hard earned money and the risk of losing it outweighs the gain you may get from these things.
CrowdFunding: A few years ago, I thought Crowdfunding might be a fun way to augment my portfolio.Crowdfunding is essentially investing in private companies that are not on a stock exchange. It ended up being a complete waste of time and money. I used WeFunder to invest in a few promising breweries. Some tanked before COVID and they all have tanked now. Regardless of industry you are basically just losing this money. The chance of any company succeeding is overwhelmingly low.
Even when they do succeed it doesn’t mean you will make money. The shares that you own are essentially useless until the company gets listed on a public stock exchange. Very few companies make it far enough to do this. I learned the hard way that crowdfunding really has no place in any portfolio.
You can only invest $2200 annually unless you are a qualified investor. A qualified investor has a seven figure liquid net worth. All the other investments on this page will help you get there. Crowdfunding won’t, take that $2200 and use it for something more reliable.
- First, ensure you have proper savings (3-6 months) and have paid off high interest debt (especially credit card).
- To invest in the stock market open one of our recommended brokerage accounts to avoid unnecessary fees. Keep it simple and invest in index funds.
- If you want to use the money to buy a rental property, use RoofStock. They do all the heavy lifting to mitigate the risk for you.
- Other way to invest in real estate without buying a property are fundrise and VNQ.
- If you are a Navy Federal Member, consider opening a SpecialEasyStart certificate. This will give you a guaranteed 3% return on up to $3000 over 12 months.
- Avoid things you don’t understand, cryptocurrency and crowdfunding.