Is Now the Right Time to Invest?

The following email was sent in by Freelance Finances reader Zack. I’ve edited out some of the personal details and shortened other sections for reprinting purposes:

Hello, my name is Zack. I’m 18. I recently left college so I’m currently $5,500 in debt from student loans, and now in order to keep up I have to buy a car so that I can get a job to pay off that debt, along with the $10,000 or so that I’ll be in debt for a loan on the car.

I know compared to others’ debt $15,500 really isn’t horrific, but I’ve never had a job before, and no real source of income. Also, my entire savings is gone thanks to college expenses. So now I’m stuck, I need to pay roughly $400 a month for rent, $200 for food, $65 for my school loans, and $300 or so for my auto loan (which I have yet to take out), also another $100 for insurance and finally a last $60 for gas. I can’t pay $1,125 every month!

If I took a part time minimum wage job I’d only be making $870 a month, and that’s before taxes, leaving me in the hole each and every month. I don’t want to live like that, and especially not this young. My parents will help with rent and food, possibly even insurance for a little while. I also have 6 months before my student loan payments start up. So I suppose my question to you is: what do I do?

I have web coding and graphic design skills, so freelancing might be a way to start up some income and build a buffer. I have only $65 to my name at the moment, but once I get some more what I really want to do is invest it in something, and try to start making a return with it.

So I suppose aside from “what do I do?” I’d also like to know how I can smartly spend and save my money. I’ve looked into CD’s, Bond’s, and Money Market accounts, but unless you have $10,000 to begin with the interest on them seems nearly negligible. Perhaps stocks could provide the turn around I’m looking for but then I have to pay broker costs and trade fees and the stocks themselves aren’t very cheap. Is there any way I can start investing without having much more than $100 to begin with?

Sincerely Zack

Hi Zack,

You can’t consider investments at this point. But more on that in a minute.

First things first, you said that you haven’t purchased your new car yet, and that’s good. Don’t! There is no way you can afford a $10,000 car right now. Even with your parent’s help. You don’t have a job. I would recommend that when you do start working, you buy a cheap used car for $3,000 or less. I know new cars have warranties and all that, but cars lose half their value just driving them off the lot. That’s a $5,000 warranty you’re buying there, and nothing else.

A cheap, reliable used car would significantly cut your monthly expenses.

As for rent, would you be opposed to living with a roommate or in your parent’s basement for a few months? Both could cut rent significantly until you get your head above water. I’ve lived with a roommate for the last few years now while paying off my debt and socking money away. It’s not ideal, but cutting utilities and rent bills in half is wonderful for anyone’s budget.

Also, if you’re really looking to build up your emergency fund, or “buffer” as you called it (great term), have you considered a part-time job in the evenings to supplement your full-time job during the day?

You could treat freelancing as your part-time job. That’s how I started. For the first three years I freelanced, I worked full-time during the day for a local non-profit social services agency. I couldn’t afford to live on either job alone at the time.

As for your investing question, I suggest you wait before you tie up any of your money. You have a lot of things that need to be taken care of before you can invest. Investments should be long-term, they should be money you don’t plan on touching for five-ten years or longer. And you just don’t have that kind of extra money to part with right now.

High-reward investments, like stocks, are also high-risk investments, meaning, in the short-term, your stock’s value could go down. Mutual funds, especially those that invest in Bonds, are a safer bet, and what I invest heavily in, but they are not guaranteed to always grow either.

So here’s the plan I am suggesting for you:

• First, get a job. Work on balancing your monthly budget. You need to have a positive number when you subtract your expenses from your income.
• Second, you’ll want to build your emergency fund, or buffer. $500-$1,000 would be a good start for any emergencies that come up. But eventually, 3-8 months of living expenses would be ideal.
• Then begin attacking your debt with any extra money you can find in your budget. Any bonuses at work or birthday or Christmas money, should all go towards debt. I suggest paying off the car first, as the interest rate on the auto loan will most likely be higher than on the school loans and the amount should be lower, so you can get it paid off and snowball that payment into your student loan payment.

All of that needs to happen before you can consider investing. It won’t happen quickly, but you’re young and eager to start down the right path, so that’s good. When you’ve paid off the debt you have now, send me another email, update me on where you’re at, and we can talk investing at that time.

Tagged as: Budgeting, Investing, mutual funds, stocks