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Three questions to ask yourself when investing spare cash

If you have a small sum of spare money lying around, ask yourself these three essential questions before investing it anywhere.

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    When you have spare money, pay off your debts firstly, form an emergency fund, and, if you have some money left over, invest in what you know in a retirement account like an IRA.
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Many people ask me what the best way to use their spare money is.  What stock should I buy? Should I invest in real estate?  Well, for those of us that don't have thousands of dollars sitting idle in a bank somewhere foreign, here's my recommendations on how to invest your $100 in the best way possible.

First Question: Do You Have Debt?

If you do, you should put your $100 towards that first.  The first priority would be credit card bills- these have some of the most expensive interest rates, and should be paid off first, followed closely by student loans.  Debt like this should be paid off before thinking about investing in anything.

Second Question: Do You Have an Emergency Fund?

An "emergency fund" is dependent on your needs, but typically it's a few (3-6 months) worth of expenses that can be used in an emergency, like a medical payment or losing a job.  This is important to take much of the stress away when you need liquid cash the most.

 Third Question: What Do You Know?

If you've paid off your debt, and you have a good emergency fund, then it's time to think about investing.  If your company has a 401K, you should be maximizing any matching they may offer- the sooner you start saving, the more your money will be worth when you choose to retire.

If you've done that, you'll want to contribute to your own IRA, which you can contribute $5,500 to per year tax free for retirement.  In this account, you can choose which stocks you wish to invest in, much like a brokerage account.  So, what companies do you know and respect?  For me, I have studied the entertainment industry for a very long time, and have followed the Walt Disney Company through its ups and downs over the last 15-20 years.  For me, I feel very confident investing in a company that I understand like Disney.  They, to me, make great products, whether that be theme parks, movies, consumer products, or sports entertainment in the form of ESPN.

For you, this may be different, like a department store or a car manufacturer.  It's different for everyone.  But, in essence, I follow Warren Buffet's advice of "buying what you know."  If you just follow what someone else says, like buzzwords such as "social media" or "biotech" without fully understanding them, you may lose money.  Not that those industries won't make you money necessarily, but it's important to not follow the crowd and form opinions for yourself when you're investing your own money.  So, in summation, pay off your debts, form an emergency fund, and, if you have some money left over, invest in what you know in a retirement account like an IRA.

The Christian Science Monitor has assembled a diverse group of the best personal finance bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link in the blog description box above.

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