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High return investment advice for Olivia
Olivia asked:
Greetings Matt,
Do you know of any investment return situations for lower income people? (We would be interested in lending money through Lending Club, but don’t make enough to qualify.) The best out there for our situation seems to be ShareBuilder, or CDs. The idea of a “side hustle” has crossed my mind as well, like selling on eBay, or writing more extensively. Doing daycare, heavy lifting, anything that ties up the car, etc. are not options. Thanks for putting your mind to this.
Regards, Olivia
Here is what I would do Olivia:
If you have debt…
The easiest way to make a high return on your investments is to pay off debt. Do you currently have any high interest debt? If so then focus on paying that off. When you pay off debt you continually lower the principal value of that debt thus reducing how much your debt costs you each month. I currently choose debt reduction over investing because I earn more by reducing debt. When that debt is gone I will shift my focus to building my Emergency Fund and investing in low-cost index funds.
If you do NOT have debt…
Do you have a 3 – 6 month Emergency Fund already in place? If not then open a high yield savings account and begin funding it with automatic monthly contributions. I prefer ING Direct, but choose what works for you. You could also go with CDs (or CD ladders); personally I shy away from them because I like immediate access to my liquid funds. CDs do not pay much more than high yield savings accounts, and depending on the amounts your investing the difference may be negligible, especially when considering liquidity preferences.
If you already have your Emergency Fund in place, (since you cannot invest with Lending Club) the most sound investment advice I can give would be focus your efforts on long-term, buy & hold investing using low cost index funds or ETFs. Since you have income limitations you may want to invest with Schwab Mutual Funds or ETFs, but if you have at least $10,000 already saved I would suggest using Vanguard as an investment broker.
Whichever broker you choose, definitely focus your efforts on index funds with a buy and hold position. I have a ShareBuilder account, but I do not have any funds committed to it. I opened the account 8+ years ago before ING Direct bought them, but do not use it because I do not like messing around with stock trades, etc. the stock market is simply too unpredictable.
Whatever strategy you finds works best for your situation, your biggest ally is probably automation. Make sure you set up regular, automated contributions to the savings/investing plan that best suits your needs based on the advice above.
Regardless of debt amounts…
You mention starting a “side hustle” – I would recommend you follow through on this. Making money from a blog is possible, but is not easy, is very time consuming, and is usually slow to show returns. Unless you can afford to work for approximately 6 months with no return, then a monetized blog may not be your most lucrative route.
Make sure you choose a business idea you are passionate about. Life is too short to spend our time doing things we do not like for money. Sell things on eBay and freelance writing are solid ideas. Here is a list of 50 side businesses you can start on your own – use this to help drum up som additional “side hustle” income ideas.
In Summary…
Pay down debt. Build your Emergency Fund in a high yield savings account. Open a brokerage account with Schwab and invest in index mutual funds or ETFs (whichever you prefer.) Automation is your best friend. Lastly, start your own side hustle.
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{ 16 comments… read them below or add one }
Good advice, Matt. I completely agree with the priority:
1. Pay off high-interest debt.
2. Build emergency fund (size depends on security of job, kids or not, etc)
3. Contribute to IRA/401k.
And I second the vote to focus on low-cost index funds or ETFs!
Also, depending upon Olivia’s income level, she may qualify for the Retirement Savings Contribution Credit–a tax credit that provides a bonus for contributing to an IRA or 401k.
Sound Mind Investing
Index funds are good, but better is possible. Christian investment newsletter, best $9 I spend every month.
Robert is correct, SMI is a great source for Christian-based investments. I actually have just begun an affiliate relationship with Sound Mind Investing and am good friends with Matt Pryor (the founders son.) I simply have not yet had time to promote their excellent newsletter.
Before spending money on (and more importantly, following the advice of) an investment newsletter, I’d urge investors to read the following paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=937407 (Specifically, section 5: “Persistence.”)
Yes, it’s absolutely possible to outperform index funds–almost by definition, a large number of investors will outperform the market each year. But it’s important to recognize that:
1. There’s little to no evidence of persistence in investment newsletter performance. (That is, the fact that an investment newsletter has beaten the market previously is nearly meaningless as a reliable indicator of future performance.)
2. Most studies indicate that the majority of investment newsletters underperform the market. Hulbert Financial Digest’s data estimates that about 80% of newsletters underperform.
Exactly. The energy spent trying to beat index funds in the long term is simply not worth it… if you can beat them at all.
That said, the SMI newsletter is full of wisdom, but like Mike mentions… it is not free.
Thanks all of you, for your counsel.
We have no debt and we just reached the 3 month mark on our emergency fund. We’re budgeting what we can into it. My husband has a small IRA and a small pension through the denomination. (He’s a pastor.)The only downside is we don’t have tons of lead time. (We’re in our 50′s, with kids still at home.) The upside is there’s no manditory retirement age. So this is where we have to trust God to provide and give us wisdom as our situation is a bit unsual. Prov 15:22, Mal. 3:10, Ps. 37:25
Olivia, since you are already funding your IRA, make sure you check into the Retirement Savings Contribution Credit that Mike mentioned. Based on your income, this credit could offer quite a bit of tax relief.
Lastly, walk in obedience to Gods word and he promises to be faithful to provide for our needs… so make sure you exercise your faith and trust in his promises!
If you have debt at an interest rate that is higher than your marginal tax rate. Pay that off.
If you have debt with a rate lower than your marginal tax rate, contribute to an IRA/401k for the tax deduction until they are maxed out.
If you have debt with an interest rate that is really low (~<2%) and you already maxed out the IRA/401k option, I would rather open a broker account than pay off debt. It is easy to get returns above 2%.
If you want to invest to increase your income, income funds do exist. I prefer closed-end funds myself like EHI and EOS. To do so, find a zero commission broker and buy when you have money. These pay about 10% annualized on a monthly basis. However if you are in the lowest income tax bracket, I would go for qualified dividends instead, like MO or T which yield 5-7%. You will be paying either 5% or even 0% taxes on those.
Okay, just saw the comment above. At 50+ you should have catchup contribution limits which I believe are $6000 for both of you on the IRAs. (Better check, IRS publ. 590). Max those out. If you are also very close to retirement age be very careful about committing fully to a market index fund. Lots of people close to retirement age were 100% in index stock funds and they got hurt pretty badly last year.
Olivia, since you have no non-mortgage debt and you have 3 months worth of EF, you should max out your IRA contributions, and remember that if eligible… your contributions may be deductible. Also, as Jacob @ ERE said you can make IRA catch-up contributions. Definitely do this if possible. Here is a post I recently wrote on IRA contribution limits.
Speed mortgage repayment if possible because less debt pays EXACT returns no matter what, and if your husband ever loses his income… less debt really pays off.
If there’s one thing I missed then that having an emergency fund. How could I’ve been so careless. It’s time for me to focus on this one, especially now that I have a child. Thanks for this.
Great to hear Walter… that way you can use your Emergency Fund savings instead of a credit card if you have an emergency.
You can use my Savings Advice page to find a solid bank that offere high yield savings accounts.
Mike Piper’s advice for the IRA contribution credit was spot on. Looked over Trent’s “50 Side Businesses…” article you linked to, and noticed he cited Esty quite a bit. Did you know they also deal in “vintage” items, not just crafts? That’s something worth pursuing. This has been a very helpful discussion. Thanks again.
Hi Olivia, just curious how old your kids are if they are still at home?
If they are of working age, perhaps politely ask them to leave or pay u guys rent to save/make money?
One is in community college and is paying some of his own way. The other is in eighth grade.
Do you think that your advices in the article are sound? Mutual funds and ETF?
Be careful in giving out financial advices!
Thanks Rich Dad Wisdom. I weigh every piece of counsel carefully and make a distinction between funds needed to live off of (household monies) and those that can tolerate well thought through risk (small bits of personal side earnings earmarked for “dream goals”).
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