Best Investments for People With Inconsistent Incomes
Recently, I asked what questions do you have about investments? And my husband asked this really great question – “What are the best investments for people with inconsistent incomes?”
The answer to this question is not straight-forward because it’s really not the investment. It’s the METHOD in which you invest. To me, one of the best ways to do this is something called Dollar Cost Averaging. It’s actually a method that applies for anyone with or without a consistent income.
But first, what is Dollar Cost Averaging?
Dollar Cost Averaging is the practice of investing a fixed dollar amount on a regular basis, and not trying to time the market. What does it mean to “time the market?” Well, we’ve all heard that we should “Buy Low and Sell High.” That’s of course great advice and the overall goal of investing. However, unless you have a lot of time to constantly watch the market (like this is your job) or you’re psychic, it’s actually really challenging to know when your investment is at its lowest and when it’s at its highest.
So, Dollar Cost Averaging is a strategy to take away the guessing and the timing of when to buy, so it reduces your Investor Risks. Here’s a little chart I put together:
Here’s how it work: On the same day each month, if you invest the same amount of money, overall you’re going to reduce the cost per share of your investment.
In my example, I took the Roth or Traditional IRA’s yearly maximum of $7000 (if you’re under 50), so in order to max it out, you’ll want to deposit $583.33/month.
You do this on autopilot with your investment platform, so you don’t have to remember that you need to do this. I picked the 12th of each month because it’s usually after all of the mortgage/rent beginning of the month stuff is due and also before the end of the month, where you may not have as much money left over.
Now, based on our conversation last week about Compound Interest, just depositing that money into your investment account doesn’t mean you’re actually investing in anything. Instead, when you’ve deposited the money, it’s being held in its own Cash or Money Market Account that may give you interest between 0%-5.5%, so it operates very much like a Checking or Savings Account.
And you can definitely leave that money in there and earn the interest. However, just like I mentioned in last week’s blog post, you want to maximize compound interest by earning as much as you possibly can, which means, of course, investing in the stock market because on average the S&P 500 has returned about 10% in the last 10 years and about 9% in the last 15, so we’re talking about almost doubling the amount of that Cash or Money Money Account. So, why won’t we want to take advantage of that, right?
OK so if the S&P 500 has returned these great numbers, can you just invest in the S&P 500?
Well, YES!
There are two ways to do that. You can invest your money in an S&P 500 Index Fund or and S&P 500 ETF, which stands for Exchange Traded Fund (a basket of stocks that tracks or seeks to outperform an underlying index).
In the example above, I picked an S&P 500 ETF with zero fees like SFY because it’s important to find an Index Fund or ETF with low or no fees, so it doesn’t eat into your earnings. This ETF is also a relatively low cost one to buy into, costing anywhere between $10-$20 per one share.
So, each month, on the 12th, if you were to deposit $583 and invest it into this ETF, the share prices change and so you end up buying more or less shares, depending on the price per share for that particular day.
Then, at the end of the year, you will have fully funded that IRA with $7000, and you’ve put in an amount that you’re comfortable putting in each month, and you did it with the least amount of effort, as well as, on average, a lower cost. Win-Win-Win!
Now, circling back to the question at the beginning of the blog post, if there are months where you’re not working and the amount of money you’re putting in isn’t feasible, then change that amount to something lower or don’t deposit money that month. Your average may change, but you’ll still come out ahead.
Do you have any questions about Dollar-Cost Averaging or anything else with Investing? Please comment below, and I’ll respond!
With Love & Gratitude,
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