Today we have a guest post from Evan who blogs about the stock market and personal finance at stockinvesting101.net.
Technology has made it fairly easy to save money these days. You can set it up to where you have money taken directly from your paycheck and put into retirement accounts or saving accounts. You should be aiming to save at least 15% of your salary, but more is always better.
Deciding on what you should do with the money you are saving is much more difficult. Within the past 10 years tech stocks, the real estate market, and the entire financial sector have crashed so it makes sense that people do not know what to do with their savings.
So what can you do with your money after you have the saving part down?
Welcome to Investing
The general rule is to subtract your age from 110 to determine what percentage of your savings you should invest in the stock market.
If you are thirty years old, it’s suggested you should be investing 80% of your money in the stock market, [110-30= 80%] and the other 20% should be invested in safer, less volatile investments such as bonds and CDs. The 110 rule is great because your portfolio will become slightly more conservative as you get closer to retirement, which is what you should aim for.
What you do with the money that you are investing in the stock market is important. It all comes down to how much time and effort you want to put into your investments.
If you are like me and you have a passion for the stock market, then I suggest you invest in a diversified portfolio of 7-12 individual companies. You will likely end up getting the best returns and the most satisfaction this way.
If you cannot tell a balance sheet from an income statement and you have no urge to know the difference between the two financial documents, investing in index funds or mutual funds is going to be your best bet.
Index funds are passively managed and will mirror the returns of the broader stock market, which is what you should be aiming for. Mutual funds are actively managed, which means there is a person in charge who routinely buys and sells shares of different companies. I’m a fan of index funds because they charge roughly 1/10th of the fees that mutual funds charge. Every percentage point counts in investing, especially over time once compound interest kicks in.
Is Real Estate For Me?
I tend to favor the stock market over real estate as an investment for a few reasons. Historical averages show that over time the stock market may generate an 8% return while real estate tends to average 5-6% annually.
Also, you can buy and sell stock in multiple companies with just a click of a button. Buying real estate takes much more time and effort.
Finally, you will need to pay property taxes on your real estate investment in some cases which will eat into your return.
For some people, saving money is simple. It’s the confusion of the next step that can cause some problems. Hopefully this post helps simplify your next money move.
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What are you doing with the money that you are currently saving and in what changes are you planning on making in the upcoming years?
Thanks again to Evan and make sure to check out StockInvesting101.net!
Photo: AComment
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Here’s some recent blog carnivals FF has been featured in:
Personal Finance By the Book – Carnival of Money Stories 2: Bob Gibson
Budgets Are Sexy – Carnival of Personal Finance: Dollar Doodles
CreditCards.com – Carnival of Personal Finance: March Is the Month of What?!
Being Frugal – Carnival of Personal Finance: Tour of Ireland
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That’s a huge percentage in stocks…=) I have heard of that rule, and I know it’s especially applicable for people past 50 (so that they protect their assets close to retirement), but never thought of it for myself!
Thanks, I’ll try and be more aggressive- though I AM trying to save for a downpayment in my first home.
*sigh* so many places to put your money, so little money! =)
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Austin Reply:
March 23rd, 2010 at 9:02 pm
That is on the aggressive side, but no one’s ever complained about having too much saved for retirement, right?
One downside of understanding your money is you realize how much is needed to maintain a day to day life. Good luck with the downpayment!
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I definitely understand the dilemma – you save money – now what? Some still have problems with the saving part. When I was in my mid-late twenties, I invested in mutual funds b/c that was safe and I didn’t know as much about the stock market. Happy I did, however definitely could have improve my return on investment by going with stocks instead. The comment about real estate does have some truth to it, however, the way the market is in some places, being an investor may not be such a bad idea. Pick a place w/decent prices and rents, you could have yourself a winning combination.
Thanks for post. Will continue to follow you.
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