Where And How To Invest Your Monthly Salary

It was a lot like one of those horror movies– when the characters can’t get out of the house where the murderer is.

On a day when the Dow Jones Industrial dropped by 1,175 points (a 4.6% decline- and a record, in terms of number of points), many prominent online investment firms had their websites crash. Clients could not access their accounts and make transactions.

As if investing wasn’t hard enough already.

So, I get it. With all of the volatility and anxiety in the stock market, it’s human nature to wonder if your investment decisions are wrong. If you’re thinking about where and how to invest, here’s a plan for you.

If you’re recovering from a financial setback, this article may help.

Create a personal budget

Before you make decisions about specific investments, you need to decide on an amount to save and invest each month. To come up with a savings amount, create a personal budget. Here’s how:

Determine your net monthly pay: If you’re an employee, you know your net income per month (excluding bonuses). Self-employed people can estimate their net income, based on their earnings in the last few months.

Document all expenses: Start with a piece of notebook paper, and write down a spending category on each line. Your list will probably include food, insurance premiums, car payments, etc. Once you have all the categories, go through your bank statement and credit card activity to add up your total spending by category for the prior month.

Analyze variable expenses: Now that you have each category with a spending total, separate your categories into fixed spending and variable expenses. Your insurance premiums and your car payment are fixed costs, while your entertainment and weekly spending on work lunches is variable.

Make some spending cuts: Take a hard look at your variable spending, and make some cuts. Remember: the payoff here is that you can use the savings to invest each month. Maybe you dine out twice a month, rather than three times- and you decide to bring your lunch to work a few days a week.

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The end result is that you have a monthly amount that you can invest. To discipline yourself, have your bank automatically transfer the monthly savings amount from your checking account into savings.

The magic of the 401(k) plan

Ok, now how do you invest? Start by looking into your workplace retirement plan options (if you have them). In this case, you reduce the amount of net pay you receive each month, rather then fund a separate savings account.

The most common employer-sponsored plan is a 401(k) retirement plan, and these plans offer several great benefits:

Diversification: You can create a diversified portfolio of stock and bond investments. Many plans offer the same type of mutual funds you may buy for your other investment accounts.

Tax-deferral: The dollars you invest are not taxed, meaning that the gross pay you add to the plan is 100% invested. Taxes are taken out when dollars are withdrawn at retirement. Your total return over time is much higher, because your earnings are not taxed each year. If you invest, say, $100 of your gross pay, the entire $100 is contributed, and none of the earnings are taxed until you withdraw funds.

Employer contribution: Here’s the best reason of all: your employer may match your 401(k) contribution, which means even more tax deferred money in your account. Make every attempt to maximize the dollar amount of the company contribution. If, for example, your employer matches up to 3% of your gross salary, figure out a way to contribute your own 3% (by cutting personal expenses).

If you’re self-employed, you have some retirement plan options.

Final step: Talk to a financial advisor to evaluate the amount of risk you’re willing to take, and other investment issues.

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

Co-Founder: accountinged.com

(email) ken@stltest.net

(website and blog) https://www.accountingaccidentally.com/

(you tube channel) kenboydstl

This post was originally posted on my Quora page. This post is for educational purposes only.

Image: Bullseye, Jeff Turner CC by 2.0