(Chuck Saletta)
With high inflation driving up the cost of just about everything while wages aren’t keeping up, investing can seem like a luxury you can do without until things stabilize. Unfortunately, that thought process can cause you to fall further and further behind. After all, investing gives you the opportunity to let your money work for you, and over time, a strong portfolio can help you fill the gap that your stagnant salary won’t.
That makes investing more important now than it has been in a long time. After all, every dollar of unearned income you receive is a dollar you don’t have to cover with your salary. Add the composition The effect of your investments potentially growing over time, and a decent portfolio could give you your best approach to combating the runaway cost pressures we all face.
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Start by controlling your costs
Of course, with your costs on the rise, it can be challenging to find the money to invest in the first place. On that front, there’s a simple approach you can take to help you get ready to invest. Start by tracking your spending, every penny, for about two months. At this stage, there is no need to judge where your money is going, just write it down. In addition to that tracking, write down an estimate of the regular costs you face that don’t come monthly, like birthdays, holidays, and insurance.
Once you know where your money is going, review those expenses and mark them as red, yellow, or green, based on your own priorities. Money you are spending absentmindedly or otherwise don’t want or need to spend, mark in red. Money that goes to critical parts of your life that you can’t or don’t want to live without, check green. Everything else, mark yellow.
For red-coded expenses, the next step is simple: stop spending on them. Those are costs that you face that are not at all a priority for you. When it comes to green spending, it’s okay to stick with it, as long as it doesn’t overwhelm your income. Still, over time, you can look at ways to lower them, like paying off your mortgage to lower housing costs.
To meet your yellow costs, you have work to do. Those are things you’re spending money on that aren’t very critical to you, but that you’re not willing or able to do without entirely. For these costs, you need to optimize. For example, you might want to switch from coffee bought at the coffee shop to the homemade variety, or even free coffee that might be available in your office. Similarly, a programmable thermostat can help you reduce energy use without affecting your life.
Between eliminating red expenses and optimizing yellow expenses, you should be able to leave some space between your income and your expenses. If not, go back to your expense list and see if there are more yellow expenses that you can code red, green expenses that you can code yellow, or yellow expenses that you can further optimize. Your goal here is to free up as much cash as possible while minimizing the impact on the things you prioritize in your life.
Then deal with your debts
Once you have your costs where you need them, your next goal should be to get your debt under control. The most efficient approach to paying down debt is known as the debt avalanche method. To use it, start by lining up your debts in order from highest interest rate to lowest interest rate.
On all debts, except the one with the highest interest, pay the minimums. On that highest-interest debt, pay as much as you can above that minimum until it’s fully paid off. After you pay off that debt, take all the cash you had been paying off and add it to your new debt with the higher interest rate. Repeat the process until almost all of your debts are paid off.
It may be okay to keep some of their debts out of the avalanche, paying only the minimum of them until they are settled. For that to be true, the debt must have a low interest rate, a low payment, and serve a key purpose for your future. Debts that may qualify are typically mortgages, medical debts, or car loans on modest, reliable transportation.
Finally start investing
By getting both your day-to-day costs and debt under control, you may find that you’ve freed up a lot more cash to invest than you initially thought possible. Make sure you set up a modest emergency fund, and then get to work investing for the long-term future.
If you haven’t invested before, a broad, low-cost base index fund is a great choice. You’ll get market-like returns with very little effort. Furthermore, it is likely that Outperforming the vast majority of Wall Street’s best and brightest active fund managers over time. Once you’re there, you’ll be at the point where your money can work for you and help you fight the crazy inflation we all face.
Start now
The sooner you start with this approach, the sooner you can get to the point where you have a powerful tool at your side that can help you keep up with ever-increasing costs. Make today the day you start your journey and give yourself the best possible chance of getting to the point where the returns on your money can cover a decent portion of your costs.
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