This story is a text-book example of why real estate is such a clunky, and sometimes dangerous, asset to own, maintain and dispose, and why it is a poor asset
How should a young person invest money?
I want this to be the most practical answer I’ve ever given on Quora. Let’s hope I pull it off.
I started investing 25%+ of my monthly income in January 2015, and have since been growing my money at just under 7% compound annual growth rate.
But I never could’ve done it without the advice of 10 personal finance books, which are what I’ll draw on to answer this question.
When I look at how I’ve gotten to the point I’m at right now, it breaks down into three steps:
- Know why you’re saving and investing.
- Spend less than you earn.
- Grow the money that’s left over.
Let’s walk through them.
1. Know why you’re saving and investing.
When you’re young and have so much of life to go, it’s hard to set your eyes on a goal that’s 50, 60, 70 years away. An investor’s best asset, however, is time and right now you have a lot of it.
If you can figure out why saving and investing now is important to you, it’ll be a lot easier to stop putting it off.
In, Tony Robbins suggests these three investing goals, among others:
- Financial security – you can pay your rent, utilities, insurance, transport and basic food costs.
- Financial independence – you can cover the cost of entertainment, clothing and some luxuries too.
- Financial freedom – your investments pay for a significant amount of luxuries (vacations, cars, etc.) too.
I don’t know about you, but I’m swinging for the fences here. We only get one shot at this. Financial freedom it is!
As John Goodman put it in, I want the position of f**k you.
2. Spend less than you earn.
Before you do any investing whatsoever, you first need to have money left over at the end of the month. Plus, if you’re in the negative, because you have debt, that has to be eliminated too.
Here are the steps from the various books to help you do that:
- Make a list of all the fixed costs you can’t change in the short run (like rent and car insurance payments) – from .
- Look at where you’re spending money for convenience, entertainment and gratification – from .
- Now, make budgeting a game by taking on little challenges like
- Walking or biking to work
- Canceling your cable for a month to see how it feels
- Trying to beat your partner in who spends less for food in a week
- Not buying new clothes for a month – from .
- Put the first $1,000 you save this way into an emergency fund – from .
- Then, pay down your debts, starting with the smallest, moving from
- Your outstanding $25 phone bill to
- The $100 you owe a friend to
- The $1,500 TV you purchased on credit to
- Your remaining payments to make that $35,000 car your own – from .
- Now, grow your emergency fund to give you 3–6 months of buffer you can live on, whatever happens, which should be ~$10,000-$15,000 – from .
The result of these steps is you’ll free yourself from any financial burden that mentally weighs you down and feel safe enough to take the necessary risks to grow your money, because you have a buffer to fall back on.
3. Grow your money.
Now the real fun begins, because now that your liabilities are covered with money to spare, you can start building assets, which will put more money into your pocket each month, instead of taking more out.
- Start with investing 10% of your income. However little you have, 1/10th of it won’t hurt you – from .
- Take this money away before you spend on anything else, and treat it as if it’s gone forever – from .
- The best way to do this is to set up an automated payment to your investment account that sends the money right where it needs to go – from
- Take a value investing approach in which you minimize losses, focus on safe and steady returns and pick stocks for the long term – from .
- Since evaluating companies is not that easy, your best bet is to invest in safe, low-cost index funds, which model the stock market and thus, its average annual 8% growth rate – from .
- Start with the cheapest fund that’s available to you and then diversify across various index funds – from .
- Stick to a fixed budget you will invest every month or quarter, no matter the current stock/fund prices, which will allow you to average your costs – from .
- Add the 2% and 6% safety rules, so you’ll never risk more than 2% of your portfolio on a single trade and never more than 6% of it in any given month –
This approach will make your portfolio antifragile, meaning it’ll only get stronger from shocks and market crashes, because you can buy the same, valuable stocks and index funds at discounted prices when they happen and reap even bigger rewards long-term – from .
I hope this will give you security, independence and freedom. Maybe one day, you and I will both be in the position of f**k you.
I think this is the most practical way to get there.
I’ve summarized all these personal finance books and more.