I think the ‘Second source of income’ thread took a turn towards a topic that deserves its own thread, that is how to go about investing. For the record, I’m not selling anything and have no financial interest in whether anyone does or doesn’t follow the advice given here. I hope to get a lot of input of what to do, and probably more importantly, what not to do from all the other members. So, my take in order of importance. If a step doesn’t apply in your specific case, ignore that step and go to the next. Several links are embedded to define terms and reference what I’m saying:
Put into your company’s 401k whatever is required to gain their maximum match. This is 100% return every two weeks (if it’s dollar for dollar match) which is the best deal you’ll every see. This really is a case of free money and you’re a financial fool if you’re not taking advantage of it.
Pay off any high interest debt and don’t accumulate more of this debt. By high interest, I mean anything more than about 5 or 6%. Some would say this should be #1 on the list, but I can’t turn down free money (see my #1).
The next extra $6,000 you can come up with should go to a Roth IRA. Some would advise saving an amount for an emergency fund, but the Roth lets you both save and have your emergency fund. You’re funding this investment account which will grow tax free forever - this is good. AND if that dreaded emergency does come up, you can always remove your contributions (not any growth that has occurred) from the Roth with no tax (you’ve already paid tax on the contributions) or penalties. If no emergency, then it continues to grow tax free forever. There are max income limits for contributing to a Roth, so check on that before you do it.
If you still have more money to invest, go back to the 401k and contribute to it up to the max ($19,000 for 2019). If your plan offers ‘Designated Roth Contributions’, I would recommend putting the remaining amount up to $19,000 there rather than in the normal part of the 401k.
If you STILL have money to invest (good for you by the way), I recommend looking into your company’s 401k plan to see if they allow you to make after tax contributions. Doing this, you don’t gain a tax benefit now but the money will grow tax deferred until you take it out.
The combination of all these accounts (401k, Roth IRA, Traditional IRA [not previously mentioned], designated Roth contributions) cannot exceed the IRS’s limit, $56,000 for 2019.
As far as what to actually buy with this money you’ve put away, I advise S&P 500 index funds totally if you’re young and the target date funds as you get to within 10 years of retirement. A comparison of the two is here.
The main point of contention some will have with the above strategy is my advice to direct your funds to the Roth and Designated Roth categories when Traditional IRA and 401k avenues were available. Basically, my strategy has you pay your taxes now on only the contributions and never pay taxes on the account again. The alternative allows you to not pay taxes now on the contributions and pay taxes later (when you’re 59.5 years old or older), at which time you’ll pay taxes on both the contributions you made and any growth that occurred. I advise this (and practice this myself) due to my belief that tax brackets will be higher in the future. With 20+ trillion in debt and socialist winds of change blowing stronger everyday, I think higher tax rates in the future are all but certain.