Time to get into the more exciting stuff. Starting now, my primary focus will be on investing and making your money work for you. When it comes to personal finance, we’re not focusing as much on short term trading (although I will cover that extensively at a later date), because we’re in this for the long haul. We’ve all heard the success stories as well as the catastrophes that others may have experienced while investing. I’m here to help manage your expectations, develop your risk management skills, and help you decide which of the many methods of investing suits your lifestyle and goals.
Instead of reciting the encyclopedia of the various types of investments, I’ll share what I’ve tried and how they’ve worked out for me. I couldn’t possibly explain things better than some of the links that you’ll find over in the Resources section, so head over there or comment below if you have questions!
Certificates of Deposit (CD): I was able to save up around $1000 as a young teenager and decided to invest it in a 1 year CD. CDs are issued by banks to individuals willing to lend them their money for a prescribed amount of time for a specified interest rate. Typically, interest rates range from 1-3% APY. The interest rates vary, depending on the length of the CD. Shorter term CDs will always offer a low interest rate than longer term CDs. There can also be early withdrawal penalties, in which you would forfeit any interest gained. Anyways, I don’t have much to add about CDs since I only tried it once, when I didn’t really understand them. At this point in my life, the rate of return just doesn’t make sense for me and I feel that my money can do more elsewhere. Moving on!
IRA & 401ks: The Marine Corps offers the Thrift Savings Plan (TSP), which is it’s version of a retirement/investing account. Many employers offer a 401k, which is similar, that you can contribute to and some even match your contribution. If this option is available to you, I would highly recommend getting started with automatic deposits as soon as possible. The earlier you start the better. Since the Marine Corps offers to match up to 5% of your contribution, I began depositing 5% of my monthly pay about 3 years ago. At this point, I don’t even miss the money or realize it was ever there and the amount and speed at which the account has grown is nothing short of amazing! If you don’t do any other form of investing, at a minimum, start contributing to either a Roth or Traditional IRA or your employer’s 401k.
Index funds & Mutual Funds: My next investing milestone was investing some extra cash into an index fund. An index fund tracks a particular market such as the S&P 500, Nasdaq, or Dow Jones Industrial Average and many others. These indexes contain a basket of holdings, or companies such as Apple, Microsoft, Pfizer, etc. and the index funds themselves are not managed by anyone (for our purposes here). Mutual funds are managed funds, where equities and other assets are chosen by a professional and offered basically as a package deal. Example: if that professional saw that General Electric was performing poorly, they would remove it from the mutual fund and replace it with a better performing stock in order to improve overall performance of the fund. Mutual funds typically have higher fees since it costs money to pay someone to manage the holdings. I chose to invest in an index fund that tracked the S&P 500, since it averages between 7-9% annual returns. This was a very easy process and something that did not require management on my part. Eventually, I wanted to take a more active role in my investments, so I withdrew the money (after making about 4% in 2 months or so) and moved on. I do plan on moving money back into a fund at some point, so don’t let that deter you.
Peer-to-Peer Lending (P2P): P2P is a relatively new concept of investing. It’s basically a system where you put up your own money the same way a bank would, and loan it to someone else at a specified interest rate. Interest rates vary from around 5 to +20% annually, and can serve as a way to diversify your investments. Lenders (you) come together to fund loans in small increments (usually $25). So, an investment of $1000 would help fund up to 40 different loans, which reduces your risk, should one default or miss payments. Once the full amount of the loan has been financed, it is issued for either 36 or 60-month terms. Your $25 investment is spread across the duration of the loan and you receive a portion of it each month, plus interest. Loan applicants are vetted by the service you are using and given a rating as well as an interest rate. Obviously, the higher interest rates are offered to those with lower credit or otherwise determined to be more of a risk. Feel free to check out sites like LendingClub.com for more information!
Individual Equities / Stocks: The idea behind buying shares of stock in a company is that you buy shares at a certain price, the company performs well and the price increases, thus increasing the value of your investment. Publicly traded companies trade under shortened tickers/symbols such as Apple (AAPL), Amazon (AMZN), and Tesla (TSLA). Returns vary wildly as the value of each share of a company is directly tied to things like company performance, overall market performance, and the effects of buyers and sellers of the stock. It should be noted that 90% of those who trade in the stock market, lose money. So before going out and buying what appears to be a good deal, spend time researching until you fully understand what you are investing in. Trading nearly every day, I was not profitable for almost a year. However, I studied for hours and hours every day like it was my job, until I started to understand how everything works. Eventually, my consistency increased and I have become profitable.
Options & Futures: I currently trade mostly options contracts and have recently gotten into trading futures. However, I’ll hold off on discussing those until the site develops and it becomes appropriate.
As I mentioned at the beginning, if you have further questions, feel free to drop a comment or check out the Resources page and visit some of the links I’ve posted!