How To Prioritize Your Investments For Financial Independence (2024)

First off, I’m not a professional financial advisor and I’m just sharing what worked for me. If you need help with your investments, you might want to talk to a financial advisor.

When I got my first job, I had no idea how to invest my income. I never had any extra money before and investing was a foreign concept to me. I knew how to be frugal and to save money, but I knew nothing about investing. Luckily, my dad pushed me to start contributing to my 401k right away. This was a great advice and it started me down the path of investing instead of the typical American consumerism lifestyle.

Many people aren’t really sure how to invest their money when they first start out. I went through the public school system and 5 years of college and I never had a class on investing. We really should make basic financial literacy a part of our education. I was really lucky that I had someone who convinced me to start investing as soon as I started my first job.

So here is my attempt to help those that want to start investing, but are unsure what to do. We’ll start off with the high priority items and then go down the list.

Priority 1 – Grow your savings

The first thing everyone should concentrate on is growing your savings. This means increasing your income and decreasing your expense. Your career is probably the single most important investment you can make. That’s where the majority of your income will come from over a lifetime. You can get an advanced degree, technical certification, or just learn new skills to improve your chances of getting ahead.

Another way to grow your income is to find some side hustles that you enjoy. I met many people who house sat, blogged, consulted, and otherwise figured out a way to make a bit extra on the side. Some of these side jobs can grow to be an enjoyable full time gig as well.

Don’t forget about the expense side of equation. A lot of people have high income, but they spend it all. You need to focus on growing the difference between your income and expense. That’s just a fancy word for saving, but it’s a huge first step to financial independence.

Priority 2 – Pay off Debt

High interest debts are killers. If you are carrying a balance on your credit card, you are paying a ton of interest every month. You are just making the credit card company richer and you need to get rid of that balance fast. The average interest rate of a credit card is around 15%. It is very difficult to achieve this kind of return with your investments. Concentrate on paying credit card debt off first if you are carrying a balance.

Mortgage, student loans, car loans, and other lower interest rate loans are more debatable. It’s still good to pay them off, but perhaps don’t need to be prioritized as much.

Priority 3 – Tax deferred retirement accounts

As mentioned above, the 401k was my first foray into investment. I made some mistakes along the way, but I learned quite a bit as well. It’s great that you can defer tax on the contribution and everyone should take advantage of it. Anytime you can put off paying tax, you really should.

1. 401k up to matching. Many employers will match a certain amount of your 401k contribution. That’s an instant 100% return on investment. I would concentrate on index funds in your 401k. You can build up a stable foundation here and diversify elsewhere.
2. Max out Roth IRA contribution. For 2013, you can contribute $5,500 to your Roth IRA. The contribution will be after tax, but you won’t have to pay any tax on the capital gain when you withdraw in retirement.
3. Max out 401k contribution. Once you max out your Roth IRA contribution, concentrate on maxing out your 401k every year. For 2013, you can contribute up to $17,500. That might sound like a lot of money, but you will see that it’s nothing compared to what your retirement portfolio will look like in 20 years.

Some young folks hesitate to contribute to their retirement accounts because they won’t see the benefit until they are 60. This isn’t strictly true. We maxed out our 401k and Roth IRA for over 10 years and it gave me the confidence to leave my career. If I didn’t have my retirement accounts as a fallback, I don’t think I could bear to walk away from a steady paycheck.

Priority 4 – Taxable accounts

After this, it’s more flexible. You can try all of these in parallel or concentrate on one thing at a time.

• Taxable brokerage account. After a few years investing in mutual funds, you’d probably want to invest in individual stocks. You can open a brokerage account and invest in whatever company you like. I started out investing in growth stocks, but recently I converted most of my portfolio to dividend stocks to generate some income.
• Bonds. Bonds are pretty boring and usually not as lucrative as stock investing. However, in a down market, bonds usually increase in value. You can sell some bonds and buy stocks when the price is down. Everyone needs some bonds in their portfolio to balance out their stock investment. One easy way to start is to buy I Bonds from the US Treasury. You can also buy some certificate of deposit from your bank.
• Rental properties. Some people like tangible assets and enjoy being a landlord. Usually rental properties require more money to get started though so you might have to save up and wait for the right time to enter the market.
• Peer to peer lending. This is a relative new way to invest. Lending money to consumers is a tough business, but many people are getting decent ROI. This is a good way to generate a little income, but we don’t know if it can sustain the high ROI in a bad economy. Our investment at Prosper.com is returning 8.66% at this time. Also, I wouldn’t invest more than 5% of your net worth in P2P lending.
• Diversification. We also need to diversify our portfolio with investments other than stocks, bonds, and properties. You can try investing in REIT, precious metals, energy companies, or commodities.

Priority 5 – Other investments

• Pay down mortgage. This is pretty low on my list. I don’t mind carrying some low interest mortgage debt. I guess it just depends on your personality.
• 529 plan (saving for college.) We want to help RB40 Junior with his college education as much as possible. I would hate for him to start life off with a huge student loan.
• Life insurance. Yes, I’m getting on it and just emailed my insurance guy to get the ball rolling.
• Annuities.
• A lotto ticket. Powerball jackpot is $235 million dollars! 🙂

These are a bit lower priority and probably could be delayed for most people. Actually, I guess life insurance should be higher on the priority list. Did I miss any of your favorite investments?

I hope this is helpful for some of our readers who need a little help getting started. The goal is to keep building your net worth and reach FinancialIndependence.Let me know if you have any addition to this list.

If you need more help with your investment try signing up with Personal Capital through this link.It’s a free service to go over your portfolio and they might be a good fit for you. (affiliate link.)