Written By Travis Hornsby, CFA®, CFP®
Updated on July 18, 2024
Besides student loan questions, the most common inquiries I get are about investing. Even if you could wipe away your student loans with a magic wand, it won’t do you much good if you don’t know how to invest.
Knowing how to handle your student loans is only part of the equation. You must also know how to set yourself onto a trajectory where you won’t have to worry about your student loans one day.
Don’t believe me? It’s possible. That’s why I’m going through several questions that readers submitted about investing with student loans, and how the pandemic recession might impact your strategy.
What if you don’t have access to a 401k or a 403b?
If you don’t have access to an employer retirement plan, you’re either:
- A W2 employee at a company that doesn’t offer a retirement plan
- A 1099 contractor
W2 employees must use a traditional IRA or a Roth IRA, even though many have to use a backdoor Roth IRA. Student loan borrowers tend to opt for a traditional IRA because it lowers your taxable income, which can lower your student loan payment.
If you’re a 1099 contractor, you can set up your own retirement account called a SEP IRA, or a Simplified Employee Pension. Any investment company should allow you to set up the account on your own.
You should be using a 401k or a 403b account if you have access to one, even if your employer doesn’t give you a match. It allows you to put up to $19,500 into the account.
Can you cover real estate math in-depth?
Interest rates in the economy have fallen to such low levels that it’s justifying prices for real estate that are very, very high. Keep in mind that you shouldn’t spend more than two to two and a half times your income on a house.
Becoming a landlord is another option, and that brings up the 1% rule. The 1% rule says that you should buy a rental house only if you can charge monthly rent that equals roughly 1% of the purchase price. For a $100,000 home, that means charging $1,000 per month in rent.
I don’t recommend investing in a rental property if you’re only going to buy one. The best way to make money as a landlord is to invest in multiple properties. When you do that, you have systems in place to manage everything more efficiently.
What are some side hustles that can provide extra income?
Side hustles can be quite lucrative. The problem is that you’re unlikely to equalize your hourly wage as a veterinarian, dentist, lawyer, or other high-income professional as a DoorDash driver. Instead, the best side hustle is to pick up extra hours with something that requires your education.
For higher returns, consider having your own small business. If your employment contract does not prohibit you, make extra money on the side using the knowledge and skills you have in the professional industry you already work in.
A side hustle like that could turn into a full-time business, which gives you the advantage of being your own boss and making more money.
If you get a big windfall, what should you do now that stocks are so high?
If you get a big windfall, the first thing to do is to fully fund your emergency savings. From there, you can:
- Invest in your retirement
- Set up regular contributions to your brokerage account
- Pay off your car loan
- Put some toward your mortgage
- Pay off some of your student loans (if it makes sense for your repayment strategy)
You don’t need to choose the “on right thing” with your cash. It’s okay to pursue a few options, as long as you use the money for something that generates a positive net worth.
Can you cover investing outside of VTSAX and VTIAX?
The two investing options I recommend most often are VTSAX and VTIAX from Vanguard. But several other choices exist if you want to invest somewhere other than Vanguard, like Betterment.
Anything outside of your core investment holdings shouldn’t equal more than 10% to 20% of your income. You could buy income-share agreements, invest in real estate crowdfunding, buy personal loans on LendingClub, or any other options.
True wealth doesn’t typically come from returns on a random investment platform. If you want to become wealthy, you need a good savings rate and a long-term investment plan.
How much would $1 be worth in 30 years?
This question focuses on the growth potential of investing. If you go back in time to 1990 and put $1,000 into the S&P 500 index fund at Vanguard, you’d have about $17,000 today. That equals 17x growth over 30 years.
Where to get help managing investments if you’d rather spend time doing other things?
For full-service financial planning, take a look at our financial planning resources. You can also listen to an interview I did with Tom Bodin, CFA, CFP®, from Buckingham Asset Management, on a previous podcast episode if you want to know more.
A robo-advisor is a cheaper option, though you don’t get the personalized service like you would with a financial advisor. I recommend Betterment and Wealthfront if you’re interested in that.
Should you do something different with your emergency fund if you have a very stable job?
The standard advice is to have three to six months of living expenses saved in an emergency fund. I tend to be more conservative and recommend 12 months of savings. However, you might be able to get away with three to six months of savings if your job is very stable.
If you’re a business owner, you have more risk and should have enough cash in the bank to cover your expenses for a year or two for more financial security.
What if you don’t have a lot of money to invest right now?
If you don’t have a lot of money to invest right now, there could be a good reason. Maybe you lost your job or are dealing with a health condition. Several reasons exist that are out of your control as to why you don’t have a lot of money to invest. Hopefully, this time is temporary, and you can get through it.
If you don’t have an earning problem, in the sense that you are making money, then you have a spending problem. Look at your biggest expense categories and find ways to cut your expenses to get access to capital to invest. A few ideas you might consider are:
- Live with a roommate if you’re single
- Downsizing if you’re married and have a really big house
- Get out of your car loan and into a used vehicle that’s paid off in cash
Investing during the pandemic recession
These are just some of the questions I covered on the full podcast, which you can listen to below. You’ll find answers to many more questions on how to manage your money during the pandemic recession.
Even though the past few months have been stressful, the U.S. has been through way worse financially than this period. The markets will go up long-term. The problem is that the long-term can be a long time. So hang in there. And remember: a solid investment plan is a great way to build wealth.
And if you need help to determine a student loan repayment plan, book a consult and get financial peace of mind.
Not sure what to do with your student loans?
Take our 11 question quiz to get a personalized recommendation for 2024 on whether you should pursue PSLF, Biden’s New IDR plan, or refinancing (including the one lender we think could give you the best rate).
