A lot of young professionals I talk to will all ask me a similar question: “Ben, I’ve got a little extra money laying around that I’d like to invest, but I just don’t know how.” That’s a fair question. Although $2,000 won’t break the bank, it’s not an insignificant amount. We work hard for our money and although we’d like to see it grow in a responsible manner, we’ve worked too hard for it to see it be lost. Investing is certainly outside of our comfort zone, but for us to thrive in this life, it’s a chance we’ll have to take. No risk…no reward! Here is a list of several things you could do with your money, ordered from least risky to most risky. Decide for yourself!
0) Yes, I’m starting with the number zero.
If you do in fact have an extra $2k laying around, do yourself a favor and check your retirement account and emergency fund. For the latter, yopros should have 3-6 months of cash stashed away in a bank account. Depending on your needs, it should be at least $3,000. On the former, retirement isn’t going to be that nice if we don’t put any money away now. Yopros should be saving somewhere between 5% and 15% of their salary for their retirement. If either of these funds isn’t where they should be, take that $2,000 and get it to where it needs to be.
1) Keep it under your mattress.
For those of you truly terrified of investing and of banks, perhaps the mattress is the place for you. Don’t put it all in one spot, though, as you’ll have trouble sleeping. This method is probably the least risky way to use some extra money. The only real risk is theft or inflation, but you can be fairly sure that you won’t lose it any other way!
2) Savings account.
Head on down to your local bank and deposit that money into your savings account. Your money is insured by the FDIC for up to $250K, so you can be certain that barring the entire shutdown of the US government, your money will be safe. The reward? You’ll earn anywhere from 0.015% to 1%. If you’re not earning at least 1%, you’re doing it wrong. Check out an online bank (I use Capital One) that pays 1%.
3) Invest your money in a CD.
A CD, or Certificate of Deposit, can be opened at your local bank as well. CDs are opened for a period of time, anywhere from 6 to 60 months. You can’t touch your money until the end of the term without paying a penalty. CDs will earn more depending on the size of your investment and the time you’re willing to let it sit there. Rates could be as high as 1.35% with American Express or 1.6% with Ally Bank. Thankfully, your money still is insured by the FDIC so your investment won’t be at risk.
4) Invest in an index fund.
If you do feel that you can afford to take on a little riskier of an investment (but not too risky), you’ll probably find yourself jumping into the stock market. A good starting point is an index fund. This is a special type of a mutual fund. Its investments are spread out in such a way that you are essentially trying to treat the market as a whole, so an index fund essentially tracks the market. When the market has a good day, so will this fund. It’s probably regarded as one of the safer types of mutual funds. You’ll probably see a $10-$20 transaction fee, charged by your brokerage (I’m with Scottrade for example), for each time you buy shares in the fund.
4) Throw it into a specialized mutual fund.
Pick a good industry or investment strategy that suits your needs and you’ll find a mutual fund for you. International stocks? Emerging markets? Focus on dividends? Medium-sized companies? Try to first pick the type of mutual fund you are looking for and then pick the mutual fund, and not the other way around. Because you’re investing in a more specific area of the market, this will be a little riskier than just an index fund.
5) Pick a winning stock.
Probably the riskiest of all of the options, you can always put your money in an individual stock. Stocks are what mutual funds are made up of, so if you know a good stock that you believe will grow in the next few years, why not put more of your money into the stock than a mutual fund that will invest in hundreds of stocks? You also won’t have to pay fees to the mutual fund manager (which can get pricey) with a stock, and saving money is always nice.
Hopefully this list will give you some ideas of where to invest that extra $2,000. For most readers (assuming you’ve completed step 0), probably #3 (index fund) will be your best bet, especially for those newcomers to investing in the stock market. An index fund will offer a little more reward for taking on a little more risk and will help get you acclimated to the stock market!
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Do you have any suggestions on how an IRA (or any other mutual fund portfolio) should b ideally broken up? Should it be 50% dividend, 25% emerging market, etc.?
It’ll really depend on your risk tolerance level. Some people are risk averse, and prefer to put their money more in dividends whereas some are more risk takers and will put more of their money in growth stocks.
The thinking for young professionals is that we have years ahead of us for our money to grow, and to not worry too much about ups and downs that will occur in the market. Over a long period of time, we’ll expect to see our money grow.
Every person will be different but here’s my recommendation for a YoPro:
20-30% Large cap
20-30% Mid/Small Cap
15-25% Emerging Market
10-20% Dividends
5-10% Bonds
We’ll want to put more of our money in stocks because although they are riskier, we expect in the long run to see more of a return from them. The older we get and the less risk we can take (we’ll need it sooner), we’ll move it more into dividends/bonds.
I’m surprised to see precious metals not included in your allocation. While it’s a speculation play to think the price will go up with the inflation ultimately expected by the Fed’s tinkering in the economy, it’s also an insurance play. Other investments may become worthless, but not gold and silver. And don’t forget platinum. It used to be priced higher than gold, but it is now (3/25/2016) priced at a discount to gold.
_aleph_