What to Do With Your Money: A Step-by-Step Guide

1. Pay Off High-Interest Debt

Before investing, tackle any high-interest debts, like credit card balances or payday loans. Here’s why:

Let’s say you have a credit card balance of $5,000 with an interest rate of 20%.

• If you don’t pay it off, you’ll pay about $1,000 per year in interest (20% of $5,000).

• If you instead invest that $5,000 in the stock market and earn an 8% annual return, you’d only make $400 per year.

Net result? You’re losing $600 annually.

By paying off the credit card first, you effectively “earn” the 20% interest you avoid paying—a guaranteed return you won’t find anywhere else. Once the debt is gone, you’re free to focus on building wealth.

2. Build an Emergency Fund

Life is unpredictable, so it’s essential to have a financial safety net. Your emergency fund should cover 3-6 months of living expenses and be kept in a high-yield savings account (HYSA) for two reasons:

• Higher Interest: Unlike traditional savings accounts that offer 0.01%-0.05% interest, HYSAs typically pay 3%-4% risk-free interest.

• Easy Access: You can link an HYSA to your checking account for seamless transfers. Keep just enough in your checking account for day-to-day needs, and let the rest grow in your HYSA.

Set up alerts to ensure your checking account doesn’t run low, and transfer funds as needed. This setup gives you convenience and better returns on your savings.

3. Establish Your Money Goals

Think about where you’re driving. Are you saving for retirement, a house, a wedding, or just general long-term growth?

Your investment account is the vehicle, and your investments (stocks, ETFs, etc.) are the passengers.

A retirement account (like an IRA or 401(k)) is a long-haul vehicle.

• The doors are locked until age 59½, but it comes with tax benefits to help your money grow more efficiently.

• Perfect for long-term savings you don’t need until retirement.

A non-retirement account (like a brokerage account) is a standard car.

• The doors open whenever you want, giving you flexibility for short- or medium-term goals.

• Ideal for saving for a home, a wedding, or other big purchases.

The key: The passengers—your investments—can be the same in both vehicles. The difference lies in how long you keep the doors locked and the tax advantages you get.

4. Decide on the Passengers for Your Investment Vehicles

Now it’s time to choose the passengers—your investments—that will ride in your vehicle. This depends on your:

1. Risk Tolerance: How comfortable are you with market fluctuations?

2. Time Horizon: The longer your money has to grow, the more risk you can take.

3. Macroeconomic Factors: Current economic conditions, like high interest rates, can influence your decisions.

General Recommendation: A 50/50 Split

50% Cash or Cash-Like Funds (Low Risk):

• Includes your HYSA and checking account for liquidity and safety.

• Provides a buffer for emergencies or short-term goals.

50% Investing (Higher Risk):

• Includes stocks, ETFs, or other investments for long-term growth.

• Helps build wealth faster than cash over time.

5. Understand What You’re Buying: Stocks and ETFs

When you invest, you’re buying ownership in businesses. Here’s how it works:

Stocks: Owning a Piece of a Company

• Buying a stock means you own a tiny piece of that company.

• You share in its success through:

1. Dividends: Cash payments from the company’s profits.

2. Growth: The stock price increases if the company does well (determined by market participants like you).

ETFs: Curated Collections of Investments

• ETFs are like collections of stocks or other assets curated by professionals.

• Think of it as a Spotify playlist: Instead of picking individual stocks, you let someone else create a mix of the best ones for a specific theme (like the U.S. stock market or healthcare).

ETFs are generally the best way to start investing because they:

• Offer instant diversification (you own pieces of many companies at once).

• Require less research and effort than picking individual stocks.

• Have low costs and are easy to buy and sell.

Recommended ETFs

1. The S&P 500 ETF (SPY): Your All-Star Playlist

• Tracks the 500 largest U.S. companies (e.g., Apple, Amazon).

• Historically outperforms most professional investors over the long term.

• Best For: Reliable long-term growth.

2. Vanguard Health Care ETF (VHT): Essential Services

• Focuses on healthcare companies like Johnson & Johnson, which perform well regardless of the economy.

• Best For: Stability and steady growth.

3. Utilities Select Sector SPDR Fund (XLU): Powering Stability

• Invests in utility companies (electricity, water) that are always in demand.

• Best For: Low-risk, recession-resistant income.