| I don't want to sound like a financial advisor because I am not. Your financials are different than mine but I hope that the below can allow you to relate so as to choose the best strategy for you. My approach is a bit more traditional. I take each salary as the static factor (i.e. I will not get a raise in the future). This way if I get more money later on that would be a good surprise, otherwise I have my plan set. The key factor for you at the moment is to get out of debt - all debt. I sat down and wrote my income. Then from that I subtracted the necessary expenses i.e. rent, utilities, transportation etc. I also subtracted a relatively small amount for food allowing a bare minimum of eating out and socializing. I cut all unecessary expenses and then paid the bare minimum on all of my loans and whatever was left was the money that I could spend on anything. Let's assume for a moment that this amount was $500. I then opened a savings account and put that $500 there. I did the same thing for the next 3 months until I ended up with $1500. That money served as the immediate emergency fund. The number is arbitrary and I have since increased it to $2000. Your interpretation will depend on your own situation. Say you had a problem with the car, unexpected expenses etc. - that is the fund that would help you get out of a very unpleasant situation later on. So if you needed say $200 for a car repair you could get it from there but you would replenish that amount as soon as you can. The emergency fund would need to have $1500 at all times. This gives you also a sense of accomplishment and security. Once I had that done, I started attacking all the credit cards and loans. I started with the first one, the one that had the lowest amount. Once I paid that off, I went to the next one, the next one etc. Once everything was gone, I made sure that whatever I would spend I would be able to pay it off the next month. This way I would never pay any APR and would use my money for myself. The next step would be to set up a 401K. A Roth IRA would be a nice place to start and you can choose a conservative strategy to minimize your risk. After this is set up, you will need to start setting a long term emergency fund. This would help you in the chance you lose your job and have nothing. Some people set aside 3-6 months of pay to help with any layoff. If this is set up, you will be able to pay your bills for 3-6 months and have a bit of time to find another job. My point is that you cannot rely on the future since you do not know what will happen. Work with what you have today and you will be better off in the future. I hope the above helps. |
1. In many ways it is about time horizon. If you are sure that you will not need access to the funds in the short term (conservatively, in the next 10 years) then you can invest in high risk vehicles. But remember, this is not necessarily because the funds are in a 401(k) or IRA account where there is a large early withdrawal penalty, but also because high risk instruments could have fallen greatly in value at the time you need the funds, and if you have to withdraw them at that time you’re forced to take a large loss.
2. If you think you have a long time horizon make sure to do the math to actually be sure - ndimopoulos’s advice above about having an emergency fund is good.
3. If you have a long time horizon, there is no need to discount 401 K plans and IRA plans. Tax-free growth, or tax deferred growth as depending on which flavor you choose, is an amazing thing.
4. If you’re really interested in extremely risky investments in an effort to expose yourself to the largest upside, there’s been some recent work around lifecycle investing where some relatively well respected academics are proposing a model that includes some small amount of leverage for folks who have a long time horizon and a large amount of risk tolerance. This will road, if you choose it, bears quite a bit of research before you start. Take a look (as a start) at http://www.amazon.com/Lifecycle-Investing-Audacious-Performa...
5. Remember that being rational with money is a lot easier when its not yours and when it’s not decreasing rapidly. It probably bears some effort on your behalf before jumping into any high risk investments to project yourself into the future and understand how you would feel if your life savings drop by 50% or even 80%. Make sure that you’re OK with this.
Just a couple of thoughts, hope this helps.
P.S. I am the cofounder of the recently launched YC Summer 2010 company FutureAdvisor. Our current product targets specifically optimizing an existing portfolio, so not much help in this situation, though this is definitely a scenario we hope to support in the future. Thanks for sharing your story, it helps us understand what folks might need out of a investing product.
(written with the aid of speech recognition, please excuse the occasional bewildering error)