Always wondered where to invest those extra dollars you saved from your last paycheck? Here’s a list of tips given by famous investors like Warren Buffett and Charlie Munger.
1. High-yield savings account / Liquid Assets: Maintain a liquid asset (easily accessible immediately) equivalent to your 6 months of salary. Most of the high-yield savings account like Capital One, HSBC offer good interest rates (around 1.5% to 2.0%) and does not require any minimum balance in the account. You can withdraw money anytime you need using an ATM or online access.
2. 401K / IRAs (Individual Retirement Accounts): Most of the employers match 50% to 100% of employee’s contribution (up to an annual limit of 6% of employee’s salary). It’s a great way to save tax on your salary and receive additional money from your employer for retirement. Note that there could be a penalty to withdraw money from these accounts before you 59.5 years of your age, however, you can take a loan from 401K without any penalty if you repay it immediately. Traditional and Roth IRAs are other options where you can keep some money aside for your retirement.
3. Certificate of Deposits (CDs): If you don’t want to invest in stock market then CDs are your best option. Few of the CDs offer around 2.25% interest rate on a 1-year term. If you go for a longer-term like 3-5 years then you can get a higher interest rate too. However, keep in mind that there could be penalties to withdraw money from CDs before the maturity date. The good thing about CDs is that most of them are FDIC (Federal Deposit Insurance Corporation) insured up to $250,000. So invest the money in CDs that you don’t need for a while without any risk of a market crash.
4. Index Funds / ETFs (Exchange Traded Funds) / Mutual Funds: According to Warren Buffet, index funds like S&P 500 can give you a 10% annual return on average for a period of 10 years. The annual interest rate may vary from 5% to 25% but on average it’s usually 10% at the end of 10 years. Vanguard is one of his favorite S&P 500 index fund (ticker: VOO).
5. Value Stocks: If you don’t have much experience in the stock market then start slow with larger companies like Apple, Amazon, Microsoft, Kroger, Disney, Coca Cola, Walmart, etc. These are some of the companies which have been operating for multiple years and are expected to grow in the future. Even if the market crashes, they are expected to revamp in at least 10 years. As a beginner, invest in a value stock with a thought that you are ok to leave money in that stock for the next 5 years (even if the market crashes tomorrow). The big companies would mostly recover from market crashes but you must know how to resist selling your stock when the price is going down. However, always keep in mind that the worst things have happened to even bigger companies in the past (Lehman Brothers in 2008 market crash is a good example). Never invest in the stock market with a loan. Make sure your pocket can handle the losses for the amount you are investing in the stock market. Understand your risk tolerating power and your temperament before investing in the stock market as a beginner.
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Disclaimer: We are not financial professionals so please consult with your financial advisor before any investment.
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