Welcome to your free crash course on how to invest your money. This guide is going to cover everything you need to know as a total beginner. It starts off with assuming you're in debt and goes through what to consider doing as you start to make money and build wealth.
I'm not a financial advisor so do your own research. I'm a guy who went from being a broke and struggling English teacher trying to build an online business, to an expat who actually has an online business with enough cash flow coming requiring me to invest my money.
I mention this to let you know I've been on both sides of the proverbial coin. Let's get to it.
Enlisted consumer - Pay check to pay check
Most start off enlisted. That means you have a job, you have debt, you live for the weekends, you invest a little in your companies 401k or perhaps you started a Roth IRA yourself or dabble in crypto.
But the truth is you are generally living pay check to pay check. The higher ranking enlisted guys at least have a pension but the lower ranking consumers owe more that they are worth and barely make enough to live.
Nothing wrong with being an enlisted consumer if you're one of those people with a government job and a pension. It's a good life, if however you don't have a pension then you can't save your way to wealth. You need to invest.
Cadet - Pay off credit card and student loan debt
When you decide to take control of your finances I describe this as being a monetary cadet. You're no longer an enlisted consumer as you're goal is to get ahead financially. Your investing strategy is simple. Don't worry about investing and instead focus on getting out of debt. You'll get a bigger return on your money by eliminating debt as it's akin to having your foot on the break pedal.
I know this is a tall order for most. Credit cards on average charge you anywhere from 18% to 27% a month in interest payments. Just by paying this off, your income will skyrocket by this amount. We all get into credit card debt for various reasons, sometimes our own incompetence, sometimes just bad luck because when problems happen the credit card is your way out.
It's not always just being irresponsible and buying stuff we can't afford like a lot of money gurus love to assume. Sometimes we start a business that fails or perhaps we need the money to cover an emergency. I'm not judging, but before you think of starting any investment, you need to get out of debt, particularly credit card debt.
Next is student loan debt which is a true nightmare for many. I was watching the Dave Ramsey show and one guy had 1 million dollars in student loans! He was studying to be an orthodontist. All in all it will take him 10 years of schooling for his career field and then an additional 10 years to pay off his debt. So in 20 years he will finally start making money when he is in his 50s.
I paid off my student loan debt because I served in the Air Force Reserve and used the GI Bill. I also majored in finance and accounting and got a high paying salaried position at PWC.
There is no real strategy here, be very careful not to ruin your life with student debt and credit card debt. If you have this sort of debt, you must focus on paying it all off before investing any money.
Lieutenant - Save $20k to $30K, and open a tax-advantaged account (Roth IRA, SEP IRA etc)
Alright, so you slain your debt back to the fiery pits of Wall Street hell from which it came. You're significantly ahead of most people, believe it or not. Now is the time to lay the foundations of your basic investments.
First thing is to save up $20k to $30 in a high-yield savings account. You'll need an amount that can cover 6 months of expenses or more.
This will be helpful for a variety of reasons. You can use this money to prove you have income for visa purposes if you decide to live abroad or just money to invest into an opportunity or worst case if something happens and you need cash.
You can't do any of this if you only have $1K in your checking account and $8K in a savings account. Trust me, you'll feel much more secure and happy knowing you got a decent emergency fund in the bank.
Now you need to open a Roth IRA. It's a tax advantaged account. That means the earnings within this account grow tax free upon withdrawal at age 59.5. With a Roth, you can take out the principle you put in but not the gains until age 59.5.
You also can't write off any contributions with a Roth, but you can with s SEP IRA if you're self employed. The max amount you can contribute is $6k a year which goes up to $7k a year if you're over 50. There are limits if you make too much money as you're not technically allowed to contribute to a Roth IRA, but you can do a "back door" contribution.
A Roth IRA is a basic, boring investment all should have. You can open a Roth with any brokerage like M1 Finance or Charles Schwab. I personally would invest in boring index funds for the next 30 years or pick 5-10 companies max you believe in if you trust yourself. In general you go with index and ETFs if you don't know what you're doing.
Vanguard is also a good company for this, but with M1 Finance you can just model after the Vanguard time date fund and invest in what it invests in (which is public information). That way you have a bit more control over what your Roth is invested in. The only downside is you'll need to rebalance each year but again that's not a big deal.
Foreign earned income tax exclusion
I want to briefly mention the foreign earned income tax exclusion. If you're outside the United States for 11 months you can claim this tax exclusion which allows you to pay no state income tax (except if you're in California, Virginia and a handful of other states) and no federal tax on the first 100K or so of income.
This tax exclusion is possible if you're self-employed but are living abroad (another great reason to be a digital nomad) or perhaps you're an ESL teacher or have a remote position.
This is not to say you don't need to file taxes, you absolutely need to file a tax return, it's just an exclusion your accountant can leverage. But if you do take this exclusion, you are not allowed to open a tax-advantaged account like a ROTH IRA (source).
401k contribution match
Last, if your employer has a 401k contribution take advantage of that to the max amount. Simply ask HR what amount your employer will match. It's free money so you're crazy to not take advantage of it.
If you have money left over after putting $6K into your Roth and did your employer match for the 401K, you have two options:
1 - Invest the rest into your 401k.
Work in your career field for the rest of your life and simply budget your money by maxing out the Roth, contributing as much as possible to your 401k and enjoy your life.
Promotion to Captain
Congrats Lieutanant, you'll be way ahead of your peers just through this consistency over the years, and should have enough passive income in your old age.
Allowing for you to be promoted to a monetary captain. Not the highest ranking officer, but a respectable position to be in as you'll not have to worry about money when you're older.
2 - Invest in yourself to increase your income.
If you want to get to get promoted to a field grade officer like Major or Colonel, you'll need to invest in yourself.
Side note - Bitcoin,
Bitcoin may prove to be one of the most valuable assets to own in time and to ignore it is a mistake. No one can predict the future but to only be in equities and real estate is a mistake.
I would strongly suggest anyone reading this to get to at least 0.3 BTC and get a cold storage wallet to take self-custody.
As for alts and Ethereum, I'm not saying don't buy into projects you think have potential huge upside, but don't risk your rent money or yolo into something because you think it's going to the moon.
Get yourself some BTC first and foremost.
- Have significat savings, at least 30K.
- Have a full funded ROTH IRA.
- Max out your 401K from your employer for the matching contribution.
- If you still have cash left over the 401K is a good place to park it.
- Get to 0.3 BTC
Monetary Major - Increase your income, start dividend investing and diversification of assets
Now that you have the basics down which is tens of thousands of savings, a fully funded Roth IRA (unless you're an expat) and a 401K each year, it's time to grow your income so you can get to a point where you invest thousands each month, not just 6K a year and some money into Bitcoin.
You can do that by becoming self employed, living simply, or to move up the corporate ladder but also not increase your monthly expenditures.
Grow your income
First and foremoest, you need money to invest money. Yes, while it's very important to invest $100 a month when you're 20 years old you do want to focus on growing your income and increasing your earning power while lowering your costs.
You want to get to a point where you can invest a solid $1K or more each month. The idea is to sacrifice the things you can buy now with that money for the long term earning potential that money can make you.
A lot talk about automating your finances and I love that, but there are two sides to the coin. Frugality and earning a higher income. If you're making enough to invest $50K a year you're going to be in fantastic financial shape. Also, it gets easier as you invest. It's daunting to think of ever having a 200K investment portfolio but everyone starts with zero.
Once your money grows and compounds you'll need to make less and less contributions over time. Instead of investing 70% you make, you can scale that down as your money grows.
Dividend investing is where you invest your money into individual stocks and ETF's (there are ETF's that only track dividend-paying companies) that pay dividends. This style of investing I love because your portfolio grows slowly in value but you get paid for owning the stocks.
That means you don't need to sell off your shares but rather you can spend the dividend payments. You could eventually get to a point where you have a million dollar portfolio but get $30,000 a year in dividend income.
Yes it's not rich by any stretch of the imagination, but that's a pension for the rest of your life you just built for yourself on top of growing your own business. Also, depending on how much you can invest, you can reach this goal pretty quick which is why at level 2 you want to focus on making bank so you can get this setup and growing so in 10 years time you're well off.
The truth is you don't know how long you'll have with regards to earning money so it makes sense to live a middle class life and build your own pension.
I'm personally bullish on crypto if that is not apparent. You should prioritize your Roth first, but do consider getting some BTC as I stated earlier. You'll want to be exposed to it as well as to understand how it works.
Not understanding Bitcoin and ignoring it is like it being 1999 and having no idea what email is.
I'm an expat and have no desire to own a house. I don't want to be tied down or worry about a property or a property management company and associated taxes. To each their own.
Everyone needs there castle and perhaps when my income is larger, I'll consider buying apartments in foreign cities I enjoy living in, but for now I'll keep renting.
If you're like me, then you may want to look at Fundrise. You own part ownership of a bunch of different properties and get paid dividends as rent. Please note that these dividends are not taxed as dividends at 15% but are taxed as regular income. Regardless, Fundrise is a way to diversify your income and investments with exposure to real estate.
Taxes for the self employed
Last, if you're determined to go the self employment route I strongly suggest you get an accountant once you start making over $40K a year or around $3K a month. Let's just say $2500 per month.
An accountant is invaluable because they will do everything right with regards to your filings. They will also inform you of how much to pay quarterly because you will have to start paying quarterly as an America.
So, once your accountant informs you of this number, maybe it's $1500 every quarter for example you should then add that amount up which would be roughly $6000 in taxes and put that in a high yield savings account or a stable coin.
Promotion to Colonel
Congrats Major, once you stay consistent and build out a wide variety of assets, you're well on your way to being low key rich, which earns you a promotion to the highest field grade rank, Monetary Colonel.
Bitcoin, money in Fundrise or perhaps a REIT, a dividend-paying brokerage account, a fully funded ROTH IRA, a big savings account, a 401K from your employer or a SEP IRA if you're self-employed (and not an expat).
You now have real assets that grow and pay you for owning them. Helping to create a massive divide between you and the enlisted consumer.
Monetary General - Venture capital
The last promotion is once you're genuinely rich, you'll find yourself amongst the Monetary General VC's. As a monetary general your responsibility is the proper allocation of capital.
You can part take in private investments, art as a way to skirt your tax liabilities or better, fund scientists, scholars and failing institutions that have the potential to make the world a better place.
Monetary Warrant Officers - F.I.R.E.
The last rank I want to mention is the Monetary Warrant Officer. This is the person who is starting to hit FIRE (financial - independence - retire - early). Your money is growing from dividend payments and asset appreciation from your real estate and Bitcoin.
You're not rich like a Monetary General nor have you focused hard on working all the time to rise to a Monetary Colonel. Instead, you opt for a different path. One of more freedom of time and flexibility at the expense of getting very rich.
As a Monetary Warrant Officer you're now making enough off your money to know you can stop worrying about money. At this level keep working on cool stuff you like, making money and investing. When you want to take some cash your money made you then follow the 4% rule where you start paying yourself.
How to invest conclusion
No one is coming to save you. It's nice to expect the government or your parents to bail you out if you got into debt but the reality is that you're going to need to focus hard, pay off debts and buy assets that pay you to own them.