Where to Invest Money in 2016: 5 Great Ideas

By Selena MaranjianFool.com

Photo: Pictures of Money, Flickr.

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When we don't make plans for our money, much of it can somehow just disappear in the course of our daily lives as we spend a little on this and a little on that. With a new year around the corner, consider spending at least some of your money strategically, by investing it in ways that can strengthen your financial condition -- or pay dividends in other ways.

Here are five suggestions for where to invest money in 2016.

Pay off or pay down debtBefore you can think about investing in great stocks or mutual funds, you need to be free from high-interest rate debt, such as debt from credit cards. (Low-interest-rate debt, such as a mortgage, can be just fine.) If you owe just $1,000 but are being charged 25% in annual interest, that debt can balloon to $1,250 in one year and $1,563 in another year, and $1,953 the next year. Steep interest rates can be deadly to your financial health.

One way or another, you need to pay off that debt as soon as possible. It can be done, too, even if your debt load is massive. Our discussion boards contain many stories of people paying off tens of thousands of dollars -- and even more than $100,000. It takes discipline and some sacrifice, but it can be done and it can leave you in a much happier and promising place. Strategies include taking on a second job for a while, selling items you no longer want or use, and no longer carrying credit cards with you. You might also try negotiating with your lenders to lower your balance and/or interest rate.

Photo:TaxCredits.net.

Establish an emergency fundUnexpected and unpleasant things happen -- and we all need to be prepared. You don't want a job loss or expensive medical issue to lead to your losing your home or being unable to pay your bills. Unless you're independently wealthy, you'll need an emergency fund, with enough assets to keep you afloat for at least three months or, to be more conservative, six to nine months. Don't keep it in stocks, as they can dive temporarily at any time. Instead, look for more stable places, such as CDs and savings accounts.

Invest in an index fundOnce you're out of debt and have an emergency fund, you should be investing for your retirement, or other financial goals. Many of us don't have the time, interest, or skills to study and carefully select individual stocks or mutual funds. Fortunately, we can just invest in inexpensive broad-market index funds, which tend to outperform most managed stock funds over the long run. For example, the S&P 500 outperformed about 82% of large-cap stock funds over the decade concluding at the end of 2014.

Some good funds to consider include the SPDR S&P 500 ETF , Vanguard Total Stock Market ETF , and Vanguard Total World Stock ETF . Respectively, they distribute your assets across 80% of the U.S. market, the entire U.S. market, or just about all of the world's stock market.

Consider dividend-paying stocksIf you are willing to choose some individual stocks for your portfolio, give extra attention to those that pay dividends. A company that pays dividends is likely established enough with relatively predictable cash flow to commit to a regular payout for shareholders. Better still, healthy, growing companies tend to increase their dividends over time.

When assessing dividend payers, don't just look for the fattest dividend yields. A particularly steep one might be the result of the stock cratering on bad news. Also, even with two healthy companies, if one has a lower dividend yield but is growing its payout more briskly, its payout may soon outstrip the other company's dividend. It's important to look for solid dividend growth, too. Finally, consider the company's payout ratio, which reflects the portion of earnings that are being paid out as dividends. If it's, say, 80% or more, then there isn't much room for significant dividend growth, and if it stays above 100% for long, the dividend might have to be reduced.

Invest in those less fortunateFinally, if your financial ducks are in a row -- and even if they aren't, but you do have some extra cash -- consider improving the lives of those less fortunate than you. You may not feel that rich, but you're actually living in better conditions than most kings in history did. And even today, about 71% of people in the world -- many billions -- live on $10 or less per day, with about a billion or more living on less than $2 daily. Many millions are hungry or without clean water, and many have insufficient access to healthcare.

Our annual Foolanthropy campaign is raising money for the very worthy Fistula Foundation, which can save the lives of many women injured in childbirth -- for just $450 for necessary surgery. Learn more and consider joining us in giving.

The article Where to Invest Money in 2016: 5 Great Ideas originally appeared on Fool.com.

Longtime Fool specialistSelena Maranjian, whom you can follow on Twitter, owns no shares of any company mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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