You know that a great way to achieve financial security is through passive income, yet you are unsure whether and where to invest your money to generate that income. I hear from young professionals all the time citing uncertainty on how to actually invest and put their money to work. There’s a great deal of confusion, scam artists and bad investments out there, so it’s important to think through who you can actually trust with your money. This article will explain how to keep more of the money you earn and where to put it.

Trust Yourself

If you are a young professional and you are early in your career, know that you have many years ahead of you to earn money and learn to manage money. Establishing good spending and saving habits now will ensure that you adequately fund your lifestyle no matter what stage of life you are in.

Trust your Budget

Your first order of business is to craft your personal and household budget. If you do not know where your money is going, you cannot hope to have control over it. Preparing a budget is not a complicated task – get some paper and a pencil and simply list all of your monthly expenses. These may include:

• Rent or mortgage
• Renters or homeowners insurance
• Utilities (heat, electricity, water, sewer)
• Cable and internet
• Cell phone
• Car payment
• Fuel and tolls
• Car maintenance
• Car insurance
• Other commuting expenses, if no car
• Student loan
• Medical insurance
• Medical copays
• Clothing
• Food
• Household maintenance items
• Personal grooming
• Holiday gifts
• Entertainment
• Hobbies

Next, record a dollar value next to each item. You can consult your bank and credit card statements if you do not know or cannot estimate what you spend on each item.

Add it up. Ideally, the total of your monthly expenses will be less, much less, than your monthly income. If not, you are going to run into trouble.

Why? Because you will start to charge expenses to credit cards and not pay those cards off each month, incurring interest at high rates. That is the equivalent of throwing your hard-earned money away.

Live Within Your Means

Take a look at your list of expenses. Where can you spend less? Can you go out to eat twice a week instead of three times? Can you turn the heat down in the winter and up in the summer? Do you need the most expensive cable/internet package or cell phone package? Can you ask for a student loan repayment plan that provides for a lower monthly payment?

Learning to live within your means is the first step to gaining control of your financial situation, and when you do, you will feel confident that you can trust yourself to do the most with the money you earn.

Pay Off Credit Cards

Now that you have a household budget and have resolved to stick to it, you must pay off your credit cards. While young professionals need to use credit cards responsibly to establish a positive credit history, you can quickly get in over your head if you do not pay them off in full each month.

Make a regular credit card payment part of your budget, and do not use your cards until they are paid off. Yes, this may take months or even years; however, this is the best use of your money right now.

Once you have paid off your credit cards, use them for expenses you would usually pay cash for, such as gas or groceries. Then pay them off each month with the cash you would have spent. This way, you are using the credit card’s money for free, establishing good credit use practices, and perhaps gaining perks such as cashback, airline miles, or points.

Establish Emergency Savings

Once you have a budget, are sticking to it, and your credit cards are paid off, start an emergency savings account. This money will come in handy should you suffer unexpected job loss or reduction of work hours, a medical calamity, or a major car or home repair. Having emergency savings will give you the financial security you need to pay for unexpected expenses without relying on credit cards.

You may be thinking to yourself, well, this is why I have credit cards! You must change your way of thinking about this. Let’s say you lose your job. You know you will quickly find another one, but in the meantime, you are strapped for cash if you have no emergency savings. You take a cash advance from your credit cards in order to survive, and you find a comparable job within three months. Whew, crisis averted!

But was it? Let’s say you have $3,000 in expenses each month. Between the cash advance and charges, you owe $9,000 on a card with a low-interest rate of 12%. Sure, you have a new job and plan to pay that off, but at what cost? You resolve to pay $300 a month – that’s 10% of your expenses! – in order to pay this debt off quickly. In fact, it will take you three years to pay this debt off, and you will have paid $1,765 in interest. That’s $1,765 wasted!

What if you are not lucky enough to have a credit card charging only 12%? What if your card charges 18%? It will take you three and a half years to pay this debt, and you will have paid $3,080 in interest. That’s over one-third of the money you charged that you will pay just for the privilege of using the credit card company’s money.

If you had saved that $300 a month all along, it would have taken you only two and a half years to save the money you needed for that financial emergency, and you would have saved thousands in interest payments.

How much should you save? At least six months’ worth of expenses in the bank will make you feel as if you can weather any financial crisis. And when that crisis occurs, and you spend that money, you simply begin saving again.

Most people find that once they are in the habit of saving, they just continue to do so regardless of the balance of their account. When you find yourself in this position, know that there is something more productive you can do with your money once you have fully funded your emergency savings.

Trust Your Retirement Plan

If your employer offers a 401(k) or 403(b), enroll in it. You contribute to these individual retirement accounts (IRAs) with pre-tax dollars, meaning, your income is reduced by the amount you contribute prior to being taxed, putting you in a lower tax bracket so that you keep more of the money you earn. Have you heard of win-win? This is save-save.

If your employer offers to match contributions, you must enroll in the plan and contribute at least as much as is matched; otherwise, you are leaving free money on the table.

Your plan will give you options about the types of investments you make. A good rule of thumb is to invest in the more volatile markets when young and many years away from retirement, gradually shifting your investments to those with less risk as you near retirement. The stock market rises and falls. This way, you weather the low points earlier in your career and shield your investments from them in your later years.

Trust (But Verify!) Your Investment Resources

You are living within your means. You have paid off your credit cards. You have fully funded your emergency savings. You are contributing to your IRA. What’s next? Gaining financial freedom through generating passive income!

Open a Roth

If you have no interest in exploring the myriad investment opportunities out there and getting personally involved with investing your money, open a Roth IRA. This is a type of retirement account where you contribute to it with after-tax dollars, meaning that you will not be taxed on withdrawals once you retire.

One cannot anticipate what the income tax situation may be when you retire. Having a Roth in addition to your 401(k) or 403(b) means you have a tax-free source of income in addition to an income source that will be taxed at that future rate.

Explore Online Investment Opportunities

If you are in a position where you have some extra cash and want to “play” with it, go right ahead. You only learn how to invest by doing it.  With companies like Evolve Bank & Trust, you can learn to explore where your money can go and how it can work for you in the long run. It takes a lot of practice and education to learn what your opportunities are, but once you do you’ll be glad you did.

There are online platforms that allow you to invest in the stock market, in stock futures, in real estate investment trusts, and in microloans to underserved populations. As with anything online, be sure to do your due diligence prior to depositing your money. Read online reviews as well as reviews from trusted financial media. Look at the historic returns as well as the fee structure. I would recommend starting with low-cost index funds as you get into investing.

In particular, investing in commercial real estate has become more accessible to the average investor. Until recent years, only accredited (high-worth) investors could participate, but online platforms such as Fundrise have made shares in real estate investment trusts available for as little as $10 for beginners. Getting your feet wet with a small investment may teach you what you need to know to confidently invest more considerable sums, generating more passive income yet.

Following this guide will teach you to trust and rely upon yourself to achieve financial stability, then security, then freedom. Good luck!

About the Author

Roni Davis is a writer, blogger, and legal assistant operating out of the greater Philadelphia area. She frequently works with FNRP, which is in the business of investing in commercial real estate.

Disclosure: Some links will earn me a commission.