Tuesday, May 31, 2011

Investment - When Savings are Small

A reader writes:

I'm thinking of investing my money. After I pay my monthly bills and set aside an amount for entertainment and what not, I have enough to put a little more than 10% in my savings. Where do you think could I best invest my money? I'm still single so no family to support.

One of the best investments a person can make if there isn't a whole lot of cash to go around is finding ways to reduce monthly debts and obligations - especially if those debts involve accruing or capitalizing interest.

Look at your monthly obligations and break them into categories:

  • Debts that can be paid off [Car loans, student loans, mortgages]
In the debts that can be paid off, setting aside some extra money to pay off these debts actually can save you in the long run. The reason is that these financial obligations usually carry interest - which can make that debt more expensive as the interest compounds over the life of the loan.

Consider a $10,000 car loan at 8% APY. If you set up a plan to pay it off on five years, and make regular scheduled monthly payments, the total interest paid is $2165.84. Now, lets assume the same scenario, except that the loan is on a payment plan to be paid off in four years. The total interest paid is $1718.20. You save $447.55 by just paying it off one year earlier.

If you found this information useful, and would like to calculate your own loan, visit this link:

Loan Calculator

  • Debts that can not be paid off [Phone service, electric, heat/ hot water]
In the debts that can not be paid off, the best way to save money is to cut out things that are not being used. If you have a gym membership, but don't go to the gym, discontinue the membership. Depending on where you go, that is a savings of $150 to $800 a year.

Other ways are developing good habits about home appliance usage. This doesn't mean unplug your coffee machine or other little things. Consider larger, more obvious habits - such as leaving a computer or TV on all day. Some computers consume as much as 1kilowatt hour worth of power - if you look at your electric bill, and evaluate your kilowatt hour usage, you can get an idea how much effect this will have on your bottom line. Since I live in NJ, it costs about 9 cents per kilowatt hour. It would cost roughly $65/mo to keep a 1,000 watt computer running 24/7.

  • Recurring habits [Smoking, impulse buying, upgrading]
Anybody who smokes knows how much a single pack costs. If you find yourself short on cash, you might want consider kicking the habit.

Another recurring habit is impulse buying - do you find yourself leaving the store with more than what you had planned to buy? Does this happen often? This might be the reason why some of your money is disappearing.

The last and arguably most prominent habit is the need to *upgrade*. If you are someone who likes to stand in line for the latest release of X gadget, spending three times the market value that the item will be marked at a year later, but find yourself strapped for cash for other, more essential things, it might be time to start holding out.

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