Q. I went through a divorce after 30 years of marriage at age 51. Basically, I am starting life again with not much. I need some guidance on investing as banks don’t pay much interest.
I’m sorry to hear about the divorce. I know from first hand experience the pain that comes with such situations. Give yourself some time to begin healing!
From a personal finance perspective, before beginning to invest, I recommend that you consider a few other issues first:
- Take some time to figure out your goals. Your world has been rocked, so reconsidering your financial objectives makes a lot of sense. Where is it that you see yourself in the future? You have to know where you’re aiming if you expect to hit your goals!
- Create a monthly spending plan. I am a firm believer in planning where you want your money to go every month in order to meet your goals. It’s through this process that you can determine how much, if any right now, you can invest each month. Here are some tips to help.
- Build up your cash reserves. Not having cash available when an emergency hits usually leads to getting in debt. The exact amount you should have is a personal decision based on your situation, but here are a few guidelines to help.
- Eliminate your non-mortgage debt before investing. There are a lot of differing opinions with this issue, but I’m a big believer in getting non-mortgage debt out of your life as quickly as possible. Even if it has a 0% interest rate, the payment is still a claim on your future monthly income. Freeing up those dollars each month will fund a lot of wealth building for your future!
The only exception I can see to this guideline is if it would take more than two years to pay off your non-mortgage debt, especially if you have a 401(k) plan at work that offers a company match. In that case, it makes sense to invest enough in your 401(k) to get the company match, then focus on debt elimination with your remaining monthly cash flow.
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Once you’ve tackled these four items, you’re ready to invest!
I usually recommend you begin the investing process by considering your risk tolerance. Here’s a great tool at Vanguard to help you determine yours.
Always remember that there is a direct relationship between risk and return. I agree with your statement that banks are paying next to nothing in interest, but they are also virtually risk-free (if they are FDIC insured). To get a better return, you have to take on more risk! However, taking on more risk that you can tolerate often leads investors to bail out of their investments when the inevitable market correction occurs. The key is to balance your investments with your risk tolerance. The Vanguard tool above can help you do just that!
Here are some prior posts that I think will help a lot:
- My Top 10 Investing Fundamentals
- My Investing Strategy
- Are You Gambling or Investing
- Investing Control – You Aren’t Powerless
Investing doesn’t have to be complicated (in fact, I like to keep it really simple), but it is important to understand your risk tolerance before you get started. Remember, too, that investing is for the long term! Don’t worry about what the market is doing today! The money you’re investing now won’t be used for years (or decades). What happens this week, this month or this year will probably be irrelevant when you start using your retirement funds.
John is a CPA and personal finance coach. Email your questions to email@example.com.
If you need confidential financial coaching for your particular situation, please contact John for a no-cost, no-obligation discussion of your needs.