What is the best way to invest money? Part of this will depend on your circumstances, which will dictate the returns you can receive.
If You Are in Debt
One of the best ways to invest money is to pay down your debt. Credit cards routinely charge 10% interest rates. Paying off the credit card debt is then a 10% rate of return, something hard to achieve in the stock market today. Furthermore, this return is tax free. For example, the several hundred dollars a month you no longer have to send to the bank to make these payments is after tax income. You’ll save significant amounts of money and improve your monthly cash flow by paying off debt, without having to pay taxes on it.
Don’t forget to eliminate student loan debt in this process. While student loan debt typically has a low interest rate, federally backed student loans have the full force of the federal government behind them. Miss a payment, and the federal government will start by intercepting state and federal income tax refunds. Next comes wage garnishments and bank levies with almost as much impunity as the IRS. Unlike credit card debt, you cannot get rid of student loan debt by declaring bankruptcy. If you have student loan debt, ensure that you have financial freedom in the future by paying it off.
Invest in Yourself
This is a complex decision to be made on a case by case basis. If you have an associate’s degree in nursing, earning a bachelor’s degree in nursing is a two to three year program completed while you are working. The payoff is a 50K a year job and the ability to work for large hospitals that require a bachelor’s degree for employment. A nurse with a bachelor’s degree who takes two or three years to earn a nurse practitioner degree, a masters program in most states, could see her income jump to 80K to 90K. In these cases, additional education greatly increases one’s income potential.
Additional education in other areas lacks a similar guaranteed jump in income. For example, earning an MBA has become so common place that it no longer guarantees a management position or even a raise. Teachers who earn a master’s degree may get a 2K bump in salary from the school district, but that increase is offset by the cost of the degree. The return on investment for the master’s degree is no longer guaranteed.
Investing in yourself does not have to mean returning to school. Improving literacy skills, learning tax law, attending sales seminars or passing certification exams in your career field all improve your marketability and income potential.
Real estate historically has been the way to make money. Kings and lords fought for the right to be the land owner. They made their money charging tenants and peasants rent to work the land. Today’s investment opportunities are more diverse.
A neglected form of real estate investing is simply paying off your own home. Many people find an additional thousand dollars a month in free cash flow by paying off their mortgage. Too many people borrow against their home, trying to be their own bank or lock in a low interest rate, then find that they have less money each month in retirement because they are still making house payments.
Suppose you have paid off your own home or have years of working life left prior to retirement. You could buy a house, fix it up and then sell it. This is colloquially known as flipping. You potentially could make 50K if a property in poor repair is brought up to standards. However, you could lose money if the property doesn’t bring in the money you expected or rehabilitation costs are greater than expected. Find asbestos or another environmental hazard like a leaky heating oil tank that requires abatement, and your profits on the project are lost. Buying properties that require significant repairs can generate liabilities many new investors are unprepared to handle, whether it is lead paint removal, bringing property up to code or an unclear title. If you have the cash to invest in real estate, though, you gain a number of benefits. The tax code lets you roll over the capital in a rental home into a more expensive rental property like multi-family housing without paying capital gains.
You could choose to own real estate investment trusts or REITs. This is an investment in shares of a trust that owns real estate. Most REITs own multi-family housing, but there are health care REITs that build doctors’ offices and nursing homes. Commercial REITs own shopping malls and strip centers. The benefit of REITs is that you can buy and sell your shares, whereas most real estate is anything but liquid. The REIT only pays out 80% to 90% of the profits it receives, less than if you owned the properties themselves. However, you gain a more reliable income stream since the REIT owns many properties or a very large property with many tenants.
The best way to invest money is to pay off your debts including your home, invest in yourself in ways that improve your income earning potential and in real estate.