There are a couple different pahses of investing. Let’s take a look at each one.
You Can’t Invest If You Are Broke!
Simple concept right? You have to be living far enough below your means in the first place to save up some money to invest. You can’t start investing if you are living pay check to pay check. If you are, read through the first 5 foundations and come back to this one.
I have money, now where do I invest it?
You are following the first 5 foundations and your savings acount balance is starting to have some zero’s on the end of it. You have an emergency fund of 6 months and you have money left over that you are now ready to invest with the hopes of seeing better returns than 5% in a high yield savings account.
There are thousands of different investment options out there. My goal here is to break it down and make this really simple: put the money in a broad market index fund or a growth stock mutual fund with a long track record of success.
I have two spots where i put my investment money: growth stock mutual funds and index funds. Let’s start with the mutual funds. Since my older sister Rachel works at Lord Abbett Investments , I don’t pay any sales charges or commissions to Lord Abbett. This is a huge advantage and the primary reason I have most of my portfolio with them.
If Rachel were not at Lord Abbett, I would have the money invested with an index fund at Vanguard. Since Crystal and i are not married yet, her 2006 Roth IRA could not be opened at Lord Abbett without paying a sales charge. We decided instead to open a Vanguard account and put the money in the S&P 500 Index Fund. Opening the account was easy and with a 12.2% return since 1976 and a .18% expense ratio this is a great investment option!
I have the money invested now what?
Leave it alone! Let the magic of compounding take over. This is one of my favorite calculators to play with:
http://www.moneychimp.com/calculator/compound_interest_calculator.htm
Take a look at this quick math:Â If you invest just $10k a year for 30 years at a conservative 10% interest rate you are looking at $1.8 million! What makes this really interesting is if you put in 31 years. You get 2+ million. So in other words, waiting a year to start investing with this formula would cost you $200k. Starting early will have a HUGE impact on your overall portfolio.
