Investing Your Money, The Basics
I’ll break this post up into several posts otherwise you might get a migraine from reading so much on one page. I’m writing this after my friend Zi asked me about something she could read that gives a more basic intro/overview regarding investing. I’m also going to talk about personal finance a little. Get a cup of coffee and enjoy (or tea, I prefer coffee).
Your Debt – The Money You Owe
Let’s take a bird’s eye look at your financial image. Do you have any debt that you are responsible for? Regardless of how small it’s good to write it down on paper (spreadsheet) so you can visualize it. Also write down the interest rate associated with that debt. As an example, I still have a little left on my student loans. I owe somewhere in the $29,000 range and it stands at 2.75%.
- credit card
- student loan
- debt owed to a family member
- mortgage
- auto loan (auto lease is the same, it’s a debt)
- personal loan (from Suntrust, lendingclub etc)
Why is it important to know your debt burden? If you know how much you owe and at what percentage it accumulates at then you can decide whether investing even makes sense. You may benefit more financially by paying off a debt than buying stocks.
What’s Your Actual Income
Next, you need to figure out your income. This one is much tougher for most people because we generally know what our gross income is but many of us don’t have an accurate picture of what we take home (net income). This gets more complicated if you’re not a salary person, if you work part-time, per diem or as an independent contractor etc.
A quick example, if you make $100,000 and live in the state of Oregon, are single and don’t contribute to any retirement accounts then you will owe $34,550 for all your taxes (state, federal, payroll). That means your take-home is $65,450. My favorite online calculator is at tax-rates.org. You can play around here a little and get a good sense of what your approximate take-home might be. This is also called your net income. Your gross income is every last penny that’s paid to you, your total paycheck.
Your income taxes owed for $100k income living in Oregon.
Your Living Expenses
Next I’m sure you have some living expenses unless you are living with mommy… still. Your minimum monthly expenses generally include the following:
- rent
- mortgage
- car payments
- gasoline
- home utilities
- cell phone
- home internet/cable TV
- gym membership
- groceries
- eating out/entertainment
- travel expenses
- health insurance
- insurance payments (car, home, life, disability, umbrella etc)
- debt/loan payments
This is where most people bleed out the majority of their income. Going out for too many drinks, taking too many trips or just paying too much for your car insurance all adds up and hurts you in the long run. My best personal example was when I was shopping around for cheaper auto insurance. I was paying $1,800/yr for my 2012 Smart Car to get full coverage insurance. I decided to call 2 other companies including my current company at the time and the cheapest I could get down to was $1,600. I decided to ask around, a friend of mine told me about Geico. I had seen their commercials so I went online, didn’t even talk to anyone. First I realized that I didn’t need as much insurance as I already had. At that time I had enough money saved to replace the car if it got destroyed. Long story short, I got my insurance down to $388/yr… from $1,800! Are you kidding me?! It goes to show you, shopping around for what you are already spending is important. Of course now I have gotten rid of my car all together.
Your Disposable Income – The Money You Have That You Can Invest… Or Spend
Now that we know what your net income is, let’s say it’s $65,000, we can subtract your expenses from that number and we will get your ‘disposable income’. Assuming the above expenses are $4,500/mo. Multiply that by 12 months and you have $54,000. So you are left with $11,000 of disposable income. This is the money you could have fun with, invest with or pay your debt off with.
Your Debt Burden
Remember, you invest your money in stocks, bonds, real estate, peer-to-peer lending or in your 401k or company stock in order to create a return on your investment. That sounds so obvious but think about this. If you invest in a stock that gets you an 8% return on your investment but you have a 9% student loan then does it make sense to put money in the stock? Or should you pay off the student loan first? The answer is not quite as easy as I make it out to be but generally you should be paying off your debt before you start investing.
However, certain investments like your 401k, IRA, and Pension plans are worth investing in regardless because they will actually decrease the amount of taxes that you will owe. We will get into this more in the next few posts.
In Summary
- know how much debt you have
- figure out what your net income is
- calculate your disposable income, the money you can actually invest with
So… this concludes the first post in this series. Sign up with your email (scroll to the very bottom of this page) if you are interested in reading more. Stay tuned, over the next few days I’ll be delving into the topics listed below.