In recent articles I’ve discussed how to assess your personal finances and how to reduce your expenses in order to improve cash flow. Now that you have disposable income, what do you do with it? In this article I’m going to give you a number of options for investing in a proper instrument to meet your goals.
Do you have an emergency fund? Many experts believe that you should have 6 months of your essential expenses in cash reserves that you only access in a circumstance with no other options. In an ideal situation I would agree that having cash reserves is essential for security and piece of mind however in reality few people maintain a cash reserve of that size. My advice is to save an emergency fund that equals 1 month of household expenses (mortgage, utilities, groceries, etc.) plus your highest medical deductible. For most of us that figure is between $3,000 and $5,000, however it is most important that you as an individual are comfortable with your financial position. These savings need to be quickly accessible and in a NO risk financial instrument such as money market or savings account. With interest at all time lows, to maximize return your best option is an online savings account such as ING’s Orange Savings Account or Ally Bank’s Online Savings Account with APR’s of 0.90 % and 0.85 % respectively.
Once you are comfortable that you can handle any unexpected expense it is time to plan your next phase. At this point, your choices should be dictated by your goals. For what you are saving money is not as important as how soon the funds will be used. If you are saving for anything within one year it would be wise to use the savings accounts recommended above. If you intend to use the funds within 1 to 3 years you should use a LOW risk financial instrument such as a bond fund or high yield CD. Anything 3 to 8 years out, a balanced fund is a reasonable investment. Anything over 8 years can and should be in the stock market although it is important to measure your personal risk tolerance and stay within your comfort zone.
For those who choose to invest in stocks, mutual funds are a wonderful option. A dilemma you will now encounter as a new investor is that many mutual funds require a minimum initial investment typically in excess of $1,000. As a new investor you may not be ready to sink this amount of money into an investment. Fortunately, investment options such as T Rowe Price and Sharebuilder exists. I prefer T Rowe Price in this instance as there are no fees associated with investing. If you set up an automatic investment of $50 or more per month into the mutual fund of your choice there is no required initial investment. Couple this convenience with a wide array of investment options and T Rowe Price is easily the best option for first time investors.
In an upcoming article we’ll deal with selecting the proper mutual fund, however for now it is only important that you have assessed your financial position and know where you want to go. If you’ve done that, you’re halfway home. Congratulations on taking the first steps to financial security.
By Jeremy R Woods