Posted in Money on May 10th, 2017
I see these types of questions a lot on reddit and quora. Many have opinions on what to do and how to invest. Some are good and some are great advice. It is overwhelming at times, considering there are so many ways to invest in a lump sum of money. Not all situations warrant aggressive investing. Whether it is to save, invest, or spend, the advice is vast and wide. So, what should I do when I have ten thousand dollars?
We have talked about having emergency savings in the past on FinTekNeeks. We also wrote about strategies using conservative certificates of deposit with laddering structures and alternatives to CDs. In the USA, there are many options for people to invest. Besides stocks, there are bonds, insurance policies, options, futures, forex, index funds, exchange traded funds (ETFs), bitcoin and cryptocurrencies, and recently approved crowdfunding of startups.
Initially, financial planning first involves emergency savings. Once that is established, we can think about our goals, our baselines, and perspectives on various investments available. If you have not read our article regarding baselines, please read it now. Should I be more conservative or take more risk based on my baselines?
Since everyone’s situation is unique, it is not practical to give guidelines. One must choose and decide what is prudent in one’s own situation. Here, we provide three hypothetical scenarios that may offer some ideas for one’s situation.
Alice is in her early 20s and she lives in an Asian country. She has a relatively decent job that allows her to save a considerable amount of her salary. After a couple of years, she has saved about $10,000 equivalent. She wants to invest in bitcoin but thinks one coin cost too much. After reading FinTekNeeks, she realizes that one can actually buy a small portion of a bitcoin, even down to a $1.00 US dollars worth, or even smaller. Because transaction fees are significant if she buys a couple of dollars worth, she decides to only invest about 1% of her savings to invest initially. She decides to save the rest for an apartment she can purchase or some sort of real estate opportunity. Even though her baseline is relatively low, she still has a bit way to go to make achieve her goal. Although most of her friends are going out and enjoying their early twenties, she decides that she wants to aggressively save and live way below her means, so she frequently declines invitations to party. She may partake in friends’ birthday parties, but she limits them to her few close friends. Because there is risk of inflation in her local currency, she decides to change 10% in to a foreign currency. She is able to make a small trip to Singapore as one of her vacations, using the discount airlines that only costs her around $30 US dollars round trip while being able to convert the 1% of her savings into Singaporean dollars. Singapore has a relative stable currency, where they do not immediately outlaw banknotes like what India just did last year. If need be, she can exchange the Singaporean dollars at the local bank, even though there may be hefty exchange rate fees. The last resort option is to visit the local black market, where she can get higher exchange rates for hard currency, if all else fails. The local banking system seems pretty secure for now and she is able to put the remainder into an account that achieves a decent interest rate. Keeping a close eye on inflation, she may decide later to convert some of the money into gold or silver bullion. Hopefully in a couple of years, Alice will have saved enough for a place of her own with prospects of advancement in her company, and her country overall has been growing at a rapid pace due to changes in politics and increased trade.
Bob is in his early 30s, and have steady income above the median household in the USA. He already has 3 months of emergency savings per what he researched in reddit/r/personalfinance. He wants to invest his extra $10,000 US dollars, but he is not sure about his emergency savings. He already saves 6% of his income into his 401k, which he gets 3% total matching. Looking at FinTekNeeks baseline article, being in line with his baseline he is on track to meet his goals at retirement. He decides he can take more risk with the extra money he has. He adds $5k into his emergency savings to get towards a more comfortable cushion. He has been following news about bitcoin. He decides to read more about it and set aside $2k for cryptocurrencies. He has been thinking about investing in silver with the remainder. He has been tracking prices for months and researched historic prices. He learned the recent low was $15 back in 2016 and low as $12 in 2008. Also, he understands the uses of silver and thinks silver should be above $25. The US treasury has used up all their strategic stockpile back in 2002 and possibly holds only 7 million ounces. In order to mint more silver eagles, they have to buy from silver refiners. With the recent price pull back from $18.50 to $16.50, Bob considers that this may be a good time to buy some coins. This can in part be used as emergency and as an asset for inflation hedge.
Charlie is in his mid 40s. You can say he has a good career and is way above his baseline. After 10-20 more years he will be able to retire and his children will take care of his basic needs. He has inherited an equivalent of $10,000 US dollars from a recently deceased parent. Although he doesn’t live in the US or a rich first world European country, he has access to high speed internet at home and the political and economic climate is somewhat stable. He decides to invest in cryptocurrencies. He decides done extensive research and understands the risks involved. He decides to keep 10% as additional emergency fund. He also keeps another 10% as local investment fund. He wants to invest locally, providing some capital to a small business who would provide a small return. He decides to keep $1000 to spend for his wife, vacations, and charity. He believes in giving as well as treating his wife. He decides to split up $5000 into several cryptocurrency exchanges. He thinks he has chosen several exchanges that he can trust, but wants to make sure things go smoothly and not keep all in the same place. He deposits a small mount to transact and make purchases. He then tests out a secure trusted wallet he has gotten. Making sure to keep security as priority, he encrypts his wallet and keeps his recovery key safe where his wife only knows. His purchases are transferred safely and he is not worried too much about the little transaction fees. With recent price movements, he decides to buy a small portion as a starter position. He has heard about Tim’s course on cryptocurrency and he joins the course and researches recommendations on value investing on various cryptocurrencies. As a side project, he decides to spend the rest of his remaining $2000 US dollars on learning more about blockchain technologies. He researches extensively and also takes a free course on Coursera.org about bitcoin. Even though he doesn’t program in java to complete the course, he gets a good foundation of blockchain technology. He decides to first learn how to build a bitcoin node with small components. He gets further interested in mining and builds a system he has learned online. He has a small system, but he is excited about the idea of “mining” where he collects small amount of cryptocurrency that is enough to pay for meals, if needed, since where he lives has very low cost of living.
These are some scenarios that may give you some ideas on what could be done. It is up to you, but one should err on the side of caution. The law of compounding is valuable and should be remembered.
This article covers a token or element in the cryptosphere. The cryptosphere is new and exciting, but changes rapidly and often in ways that do not benefit users. By the time this article is published, changes may have already occurred. Most tokens in the cryptosphere are complete scams that are get-rich-quick-schemes for insiders. Often, we cannot know this beforehand and only later discover this. A person should only trade with money that they’re willing to lose because losses are guaranteed. If you choose to participate in purchasing a token in the cryptosphere, you should do so with the full expectation of a loss and you should also expect it to change in a manner that does not benefit you. There are very few good ideas in the cryptosphere. Finally, by reading this post, you agree that you’ve read our disclosure.