Want to build a passive income? Save for retirement? Reach a new financial goal? Then you just need to learn how to make your money work for you.
There are many different ways to invest your money and create high returns. But what’s the best investment strategy?
Let’s cover the steps needed to put your money to work and discuss the #1 strategy: real estate investment.
The 6 Steps to Making Your Money Work For You
Before you start investing, you need to take a few steps to ensure that your finances are stable and stretchable.
Would-be investors are often hindered by high debt, lack of extra income, and too many financial obligations. These obstacles prevent them from finding extra money to invest or cause them to withdraw from investments prematurely.
For example, you might own $20,000 worth of stock that’s growing in value every day—but if you default on a loan and suddenly need cash, you’ll have to sell your shares to cover your debt. You’ll lose your investment, which would be especially painful if the investment is poised to keep growing.
If you want to have more money and greater financial stability to invest, you need to rein in your finances. You can do this in 6 steps:
Get financial advice
Pay off your debts
Create an emergency fund
Save your money
Invest in passive income streams
[ Thinking about investing in real estate? Register to attend a FREE online real estate class and learn how to get started investing in real estate. ]
1. Get Financial Advice
First, you should seek financial advice. If you have the means, you might consider speaking with a professional financial advisor. These are licensed professionals who can help you sort out your finances. They’ll help you figure out which expenses and debts need to be prioritized and which don’t.
A financial advisor is very useful if you’re raising a family. If you have a family, then your financial obligations are larger and more complex. You might need to save for your kid’s college fund, and you’ll have to consider unique expenses like life insurance and childcare costs. Furthermore, you’ll have to make sure that you and your spouse effectively manage your dual incomes as a cohesive single income.
There’s a lot more to account for when raising a family, so a financial advisor can help you pore over the details and see the bigger picture. They’ll usually charge an hourly or monthly fee that’s well worth the cost.
If you’re single, you might want to seek advice from somebody you know. If you have a friend or family member who’s found financial success, you can ask to meet them for lunch or coffee so you can pick their brain.
Be prepared—come with a list of questions that you want to ask, and be sure to take notes.
2. Start Budgeting
One of the best ways to gain control of your finances is to start budgeting.
There are many different tools available to help you with budgeting. You could download budgeting apps like Mint or You Need A Budget. Online banking apps also have similar tools to help you with budgeting. Or, you may choose to forgo apps altogether and use a good old-fashioned spreadsheet.
The “50/30/20 rule” is a popular way to budget. Under this rule, you’ll allocate 50% of income on basic needs (rent, food, utilities), 30% on wants, and 20% on savings/paying off debt. This budget is effective because it prioritizes your most essential expenses while also limiting your spending on unessential items.
Make sure that your budget is tailored to your financial situation. Give yourself enough money to pay your living expenses and be realistic with how much you’re allocating to debt repayment—paying off debt should be a priority for any aspiring investor, but you shouldn’t go house poor doing it.
Creating a budget is one thing—sticking to your budget is another. Budgeting apps are helpful because you can set alerts for when you’re nearing spending thresholds. Many budgeters choose to carry cash for all their “wants” spending because cash gives them a more tangible understanding of how much money they have available.
3. Pay Off Your Debts
Before you start investing, you should try and pay off most, if not all, of your debts. Your debt will siphon a lot of money from your budget and you won’t have as much money to put toward investments. Common types of debt include:
Credit card debt
Home improvement loans
You don’t necessarily need to get your mortgage loan paid off because mortgages are costly and require years of contributions. You also don’t need to worry about securing expenses, like alimony.
There are different methods you can use to get your debt paid off:
Debt Snowball: The debt snowball method is the fastest way to pay off your debts. First, pay off the smallest debt. Once you’ve paid off the smallest debt, pay off the next smallest debt, and so on. As you pay off each debt, your budget will “snowball,” and you’ll have more and more money to contribute to your larger debts.
Interest First: If you have two or three long-term debts, you might choose to pay off the debt with the highest interest rate first. High interest rates will cost you lots of money over time. So if you’re saddled with a student loan and an auto loan, you’d prioritize the one with the higher interest. This isn’t necessarily the fastest way to pay off debt, but it’s an effective strategy if you’re going to be locked into a couple of big loans for several years.
You may not be able to pay off some loans—like student loans—in a reasonable amount of time. If you can pay off smaller debt, like credit cards and medical bills, you’ll find the big loans much more manageable. You should be able to start investing even if you have one or two long-term loans that you’re still paying off, especially if you’ve developed a good budget.
4. Create An Emergency Fund
Many Americans don’t have an emergency fund of any kind. An emergency fund is money that’s set aside for unexpected financial downturns. You may need to use emergency funds if:
You lose your job
Your house is damaged in a natural disaster
You have an unexpected medical or legal expense
Without an emergency fund, any unexpected costs could force you to sell your investments to cover them.
Your emergency fund should cover three to six months of your expenses. Before you start contributing money to a savings account, you should make contributions to an emergency fund. It might sound like a tedious contribution, but an emergency fund can be effective in shielding both your savings account and your investments.
5. Save Your Money
The more money you save, the more you’ll have to invest. A good budget will help you cut your spending and give you more cash for investing.
If you’re having difficulty cutting your expenses, consider doing any of the following:
Move to a Cheaper Home: Rent is one of the largest budget items, and you could save a lot of money by moving to a cheaper house or apartment. Even if you’re only able to save $200 per month, that amounts to $2400 in savings in a year and $4800 in two years. That’s a lot of money that you can put toward your debt or investments.
Change Your Entertainment: Americans spend a huge amount of money on streaming services and cable packages. Consider using only one or two streaming services or finding a cheaper cable package. You could also try “free activities,” like hiking, or you could pick up a hobby. If you regularly eat out or go drinking with friends, consider restricting those activities to weekends only—dining expenses add up.
Be a Minimalist: It’s easier to cut your spending if you live a minimalist lifestyle. Only buy things that you truly need or that will bring you long-term emotional value (in other words, avoid buying Amazon knick-knacks). Not only will you save money, but your mental health will get a boost, too. It’s nice to peel back from the materialism and constant marketing that drive our society.
6. Invest in Passive Income Streams
By now, you’ll have a little money to start investing in passive income streams. This is when you really make your money work for you.
Investing in the stock market is a great and relatively simple way to start generating a passive income. Here are a few popular securities in which you can invest:
You can invest in most of these securities with only a small amount of capital and time commitment.
The Best Way to Make Money Work For You
Real estate investing is the best way to make money work for you.
Although securities tend to generate steady returns, they don’t often provide a significant return on investment unless you’ve held them for decades. Individual stocks can provide high returns, but they also carry lots of risk.
On the other hand, real estate can provide substantial returns with arguably less risk than individual stocks—for most investments.
Some of the most popular real estate investments include:
Cash flow income
Real estate investment trusts (REITs)
Real Estate Appreciation
Real Estate Appreciation
Most properties appreciate in value, so you can think of a home as an investment. Many real estate investors purchase a property and hold it for years until it grows in value. Then they sell for a profit.
You can do this with your primary residence, but you can also purchase an additional property to be used exclusively for investing. The Investment property doesn’t have to be vacant—you can rent it out to tenants to gain additional income or pay off the mortgage.
Cash Flow Income
You can generate a strong cash flow by renting out your investment properties. You can offer leases to residents, or you can make it a Vacation rental if it’s located in a desirable area.
If you’re going to rent out your property, make sure that you understand your obligations as a landlord—you’ll have to collect rent, handle tenant disputes and maintenance requests, and advertise your property if there’s a vacancy. If you want your rental property to truly be a passive investment, consider hiring a property management company to handle the property for you. They’ll collect a small commission, but you won’t have to do very much landlord work.
Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) is a company that pools money from investors and uses the funds to finance a variety of different real estate projects—from new developments to house flipping.
A REIT may be a good option for you if you want to invest in real estate, but you don’t have the capital for or interest in purchasing an investment property. In fact, if you’re trying to save for a down payment on an investment property, an REIT may be a good way to generate capital.
Real Estate Sub-Specialties
You don’t actually have to own property to lease a rental property. You can rent a commercial office space that’s in poor shape, fix it up, and lease it to a company at a much higher rate. It’s almost like fix-and-flip investing, but for commercial rentals.
This can be a tricky investment strategy, and you’ll have to make sure that you understand your local area’s rules—and the lease stipulations—on sub-leases. But if you’re a savvy real estate investor, you can generate huge returns for a small amount of risk.
Before you can make money work for you, you need to make sure you have a strong financial foundation: get advice from a financial advisor, create a budget and emergency fund, pay off your debts, and do your best to save money. Then you can start investing in passive income streams, like the stock market. But the best way to make your money work for you is to invest in real estate. When you invest in real estate, you can make money in appreciation, rental cash flow, REIT investing, and sub-specialties.
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