I have stressed in the past about having an emergency fund how to save for it. My emergency fund was basically split into 3 equal parts; 2 savings accounts and 1 long term investment account. Recently I switched things up and decided to move most of the money from the two savings accounts and place them in stock investments. I did this because during a recent check on my long term investments, I realized that my investments were doing better than I thought.
I usually look for my long term portfolios to have a 20% annual growth. Well, from January 1st until now, I realized that my portfolios were up almost 25%. That is when a light went off in my head. I have money that I have not touched in years sitting in my savings account waiting for an emergency to happen. My savings account makes 0.01% and 0.025% APY. Without even comparing that to 25%, that is nothing. So that is when I decided that while I will continue to save my money and budget, my savings will mostly be in investments.
Let me give you a deeper look at investing for the long term before I go into how I choose my stocks to invest in. With a goal of at least 20% annual growth for the stocks in my portfolio, if you initially start with $10,000 here is a table of how much your portfolio will be worth:
I used the 401K calculator on Bankrate.com to show how much I money I would have after 40 years of investing in a 401K with a $60,000 salary. I use US averages for all of the information filled in.
You would have $3,803,004 after 40 years and contributing $414,526 to a 401K. I am not telling you this to deter you from opening a 401K or a retirement account. I would actually like to encourage you to use your retirement account to your advantage. You can invest the money in your retirement account into the stock market. This can have many tax advantages as well. The main tax benefit being that once you retire, your account will be free from taxes.
When investing long term in a stock I start with companies that I, my peers, family, etc are familiar with. For example, I am familiar with Apple because my iPhone could blow up and I would go to them the same day and get the same phone. Most of my friends are like that as well. So It would pique my interest to try to invest in Apple because even though they are selling the current iPhone for almost $1,000, the pre-orders are more than likely backlogged.
My next step is to research the company. I do this by going to the company’s website and taking a look at how the company plans to make money and their balance sheet (assets, debt and equity). What kind of company is it? Is this a company I see sticking around and growing for the next 20+ years? I look at the company’s revenue and year to date growth. I usually like to see companies that have grown 20% or more yearly for the past 5 years. The past couple years of growth in a company is usually a good indication on the direction of the company and how it is progressing.
Yes, having a savings account and/or emergency fund is important. But why have it sit in a bank barely gaining interest when you could be gaining some pretty decent annual return rates when investing in stocks. Think about the last time you actually dipped into your emergency fund. My emergency fund sat in my bank account for years and did not get touched. I can now only imagine how much I would have for an emergency now if I would have invested it from then.