“If you want a secure retirement when you’re older, you should be investing 15% of your money today.”

This is what you’ll hear many financial gurus say when asked what percent of your income should be put away for retirement. Allow me to let you in on a little secret…. I’m a personal finance nerd….and I don’t invest 15% of my income in the stock market. Quite frankly, I know that the stock market has grown by an average of nearly 10% a year, but I see the rising debt load of the United States government and the turmoil overseas, and I just can’t help but think that the stock market might be gearing up for another plunge. Why on earth would I want to load up 15% of my income into the stock market each month if it might be on its way down?

I’m Investing My Money in 3 Areas

chart showing investment returns

“So Derek, if you’re not investing 15% in the stock market, how do you expect to retire?” First of all, you need to understand one thing. When financial gurus state that you should invest 15% of your income, they don’t necessarily mean that all of it has to go into the stock market. There are plenty of other areas where one can stash their money for a decent return. They’re definitely non-conventional, but they work. As an example, I’m going to put myself out there and let you know how I am personally investing my money.

1) Index Funds

Yes, I do invest some of my money into the stock market. Through my employer’s 401k, I contribute 7% of my after-tax dollars into a Roth 401k – mostly into various types of Index Funds, which is a simple, low-cost way of investing in the stock market. On top of this 7%, my employer contributes a 3% match, a 3% yearly bonus, and a 4% quarterly contribution, which flows into a regular pre-tax 401k. All together, these contributions total 17% of my yearly income. Not too shabby. If I were the average person, I would stop there and then cross my fingers that the stock market won’t drop like a rock someday. For me, this isn’t good enough, so I’m focusing on two other areas as well.

2) Rental Homes

My wife and I are natural savers. When we met two years ago, I was vigorously paying off my mortgage debt and she was fixing up a foreclosure that she purchased just a few months before. By the time we married, she sold her house with tens of thousands of dollars in equity, and my house was completely paid for. In a short period of time, we saved up the biggest bank account either of us had ever seen, and it has come time to invest in the big stuff – rental homes.

We are currently sitting on that money, looking to pay cash for our first rental home – a small single family home. Within just a year or so, by saving nearly 70% of our take home pay (remember, we have absolutely no debt), we’ll have enough money to buy another rental house. These investments will not only yield cash flow, but they should also increase in value as well (typically by 3% each year), which make them fantastic investments as a whole.

3) Sweat Equity – Real Estate

Not only do I like real estate for rentals, but I like their appreciating value as a residence as well. I bought my house four years ago for $75,000. Since then, I replaced the floor, some interior walls, all the windows, and am currently painting the exterior of the house. By putting about $20,000 into it, it has really turned into a gem of a house and is worth $130,000 or more today. That’s a gain of $35,000 over four years just by doing a little bit of work myself.

Liz and I intend to stay in this house for 5-6 more years, sell it for a tremendous profit, and then buy the next fixer-upper to live in for the rest of our lives. We’ll buy it right, make it shine, enjoy it for years and watch its value grow (all while growing our rental property business of course).

Bonus: HSA Account

I can’t technically include this in my areas of investment yet, but I soon will. An HSA account is a tax-free savings account where you can build up funds if you have a qualified high-deductible insurance plan. By contributing a couple thousand bucks into the account, you can actually start investing the funds into the stock market (again, I will likely be investing in low-cost Index Funds). The money can only be used on medical expenses or you’ll be penalized, but the typical out-of-pocket expense after the age of 65 is $240,000! I’ve convinced myself that it would be in my best interest to start stashing some cash into my HSA account, and I intend to do so in the next couple of months.

That’s where I’m investing my money. Where are you investing yours?

Derek Sall
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