Why Invest Your Hard-Earned Money & Can You Afford It?

Simply put – investments give you the potential to allow your money to work for you. I highly recommend that almost everybody invests at least a small amount of money on a regular basis.

It’s common to wonder whether you can actually afford to invest a percentage of your paycheck or if that money would be best spent elsewhere. You will first need to figure out how much money you actually have left each month after you pay bills and other regular expenses.

Another thing that is important to consider is whether you should save extra money for an emergency fund, use it to pay down debt or use it for investing in assets like stocks or cryptocurrency. This post will help you figure whether you should invest or not.

Savings Accounts

Before you can consider investing, you need to have a savings account first. This savings account should be considered an emergency fund that isn’t touched unless it is absolutely needed. For example, if you get laid off from your job and can’t find work for three months, that is when you utilize your savings account.

In general, most people recommend 6 months of your regular expenses as savings in an emergency fund. In reality, that money will just sit there untouched, often for years and can even lose its true value over time because of inflation. However, if you actually get laid off at a low point in the national economy, six months or even a year’s worth of savings will often not be enough to sustain your bills and normal lifestyle even if you make drastic spending cutbacks – many people found this out the hard way during the COVID pandemic unfortunately.

The practice of saving six months or even a year’s worth of your expenses can be a daunting task. If you’ve never saved or invested money before and don’t have a lot of extra cash each month, this task can actually take years in the real world and won’t seem very realistic. What you do is ultimately up to you depending on the level of risk you’re willing to take.

Personally, I don’t always have six months of earnings in my savings account because I like to invest and haven’t truly needed an emergency fund in 15+ years. However, I’m also very mindful of my income and expenses and always try to leave at least two months of buffer cash to avoid stress with monthly bills, especially since I’m self-employed and don’t get a set paycheck each week.

Paying Off Debt vs Investing

This part is tricky. While it’s great to invest money, if you have debt you will need to take that into consideration first. In the long run, if you will pay off a debt in full, you are better off paying it first if the interest rate exceeds the earning potential of an investment. For example, if you have $100 extra cash each month and a debt for $2000 on a credit card with a 21.99% APR, then your best bet is to pay off the debt with that extra cash first and then start investing that extra money each month when the debt is paid.

The real key here is whether you have good debt or bad debt. Good debt is at a very low interest rate that can be beat with investment earnings. This could be a mortgage, for example. If you got a pandemic mortgage or had your house refinanced during that time, you might have an interest rate of 3% or possibly even slightly better. You’re much better off long-term investing extra money each month with that mortgage instead of paying extra to get rid of your mortgage quicker because you can earn more than 3% a year from investments.

Simply identify what kind of debt you own to figure out a game plan for yourself. Pay off your high interest debt first, and then start investing extra money each month while making minimum payments to low interest debt. Over time, your low interest debt will still get paid off, but you’ll also have a healthy investment portfolio too.

Investing Can Be Tricky

On one hand, investing can be scary from the fear of losing money. I can pretty much guarantee that if you do invest money, you will at least see some temporary losses and those will scare most people into selling to cut their losses. If you pick the right investments, history says that you’ll always get your money back and make a profit if you wait long enough and bet on the market as a whole. Whether history will continue to repeat itself is anyone’s guess, but it’s generally considered safe to depend on that historical reference.

In reality, investing in one specific asset does not guarantee you’ll make a profit if you wait long enough. There are index funds that allow you to invest in the S&P 500 stocks, and those index funds are designed to represent the market as a whole and should provide a profit if you wait long enough. Your other option is to thoroughly research companies before you invest to decide if they will still be successful in the future. As long as you pick good companies, your investment balance will grow over time.

Why Invest?

So why should you actually invest? Investing can be a way to make your money work for you. Working a job, your earnings are capped each year by your salary or hourly wage. The only way to make more is to run your own business, have a side hustle or invest. When you invest, your goals are usually to increase the value of your initial investment over time and/or earn a percentage of your investment as passive income each month. This allows you to grow your net worth and/or monthly income over time without ever receiving a raise at your job!

The idea is to eventually reach a point where your investments and social security earnings will pay your bills and you won’t have to work – this is a comfortable retirement. The younger you are when you begin investing, the more money you’ll accumulate by retirement age since you’ll contribute earnings for more years and those extra earnings will have more years to compound interest to grow your nest egg.

How to Start Investing

In the USA, the easiest way for any person to start investing is online. Fidelity.com allows you to open brokerage and/or retirement accounts for purchasing stock. Coinbase.com allows you to purchase cryptocurrency. Simply set up an account and link to your bank account to fund. These platforms will typically allow you to start buying instantly, even while they wait for your bank transfer to clear.

If you are a complete newbie to investing, you should really take your time though. If you are thinking about buying something, take note of the price and wait to buy it. Watch the price over the course of a couple of days or even a week or two. You’ll often begin to notice patterns with the high and low prices that are hit within each day.

Most stock or crypto assets will typically trade within a particular band of prices short-term. You can give yourself an initial boost when you buy at the low end of these price bands. Long-term the prices will likely break outside of those bands, but as long as you choose a quality asset to purchase then you should make a profit over time even if the price drops shortly after you buy.

To immediately dip your toes into the investing waters, can could buy some shares in an S&P 500 index fund for stock investing and buy some bitcoin and ethereum for crypto investing to give yourself some initial diversity while still avoiding the need for in-depth research. Over time you should research your investments and imagine where a company will be in 5 or 10 years to only invest in those with a bright future.