Before I, or anyone else, can tell you what you should with your money, we first need to know what you need your money to do for you. Here’s a 7 step process you can use to figure that out.
1. Read, Study, Learn
Occasionally I get calls with someone wanting me to tell them what they should do with their money. The first question I ask them is "Have you read any books on investing?" Don't rely on someone else's advice until you've learned the basics. If you don't know much the best thing you can do with your money is invest in books, quality financial magazines and classes to learn more. Read investment books and financial magazines before you invest. For example, do you know the difference between a stock and a bond? If you don’t, you’re not ready to invest.
Learn more: 4 Ways To Keep Learning About Investing
2. Set Expectations
Before deciding what to do with your money, check out historical rates of returns for savings, stocks and bonds. This will give you an idea of what you might expect in good economies and in bad ones. This series of charts shows you best and worst returns for different types of investments.
Learn more: Best And Worst Returns
3. Know Your Time Frame
If you have a short time frame, don’t take risk unless you’re just as willing to lose money as make some. If you take risk and put it in a stock expecting it to double, you need to realize it is just as likely it will lose half its value. Safe investments are appropriate for short time frames. Growth investments are appropriate only for longer time frames.
4. Decide on Acceptable Investment Risks
If earning 10% returns was as easy as picking the right stock, everyone would be doing it. You know there’s no free lunch, right? Safe investments pay low returns because there is no risk, and those returns are available to everyone. Growth investments contain risk; accepting risk is the price you pay to potentially earn a higher return than what you could get in a safe investment. Focus on managing risk. All investments have risk, and you need to know what that risk is before you commit your money.
Learn more: Decide On Your Level Of Investment Risk
5. Make an Investment Plan
Instead of rolling the dice, before deciding what to do with your money, make an investment plan. Then follow it. People don’t plan to fail, they fail to plan. Successful investors follow a disciplined process, and they stick with it. An investment plan helps you align the investments you choose with their intended purpose.
Learn more: 5 Steps To Make An Investment Plan
6. Avoid Bad Investments
There are a few simple rules you can follow to steer clear of bad investments. Learn them and use them. Most importantly, remember, if it sounds too good to be true, it is.
Learn more: 5 Rules To Avoid Making Bad Investments
7. Ignore Investment Pornography
Every time I see a “Hot Stocks” or “Best Funds” list I cringe. Researchers go back and track the returns these “best of” lists earn. Their results show you’ll do better buying an index fund. There is an industry term for these types of articles. We call them “investment pornography”. Following the advice in those types of articles is like going to Vegas; maybe you’ll win, maybe you won’t.
Learn more: How Should Investors Interpret Financial News
8. Get Advice When You Need It
Once you’ve followed the steps above, you should have a much better idea of what you should do with your money. If you don’t, consider talking to a financial advisor. They’ll ask you questions about your goals and objectives and put together an investment plan for you.
Learn more: How To Find A Financial Advisor
A word of caution: when you ask a question like “what should I do with my money” it’s like walking into the pharmacy and asking “Hey, what kind of medicine should I buy?” What good does a cough suppressant do you when you have a splitting headache? If someone offers you advice without learning about you, be cautious. They may be suggesting cough syrup because that's all they have to sell, not because that is what you need.