How to Invest When You Plan on Renting

Before 2009, buying a home was considered a standard measure of financial success—a crucial step toward realizing the American Dream. The housing crisis flipped that notion on its head, however, leaving us to question the credibility of a system in which buying a home led many to financial ruin. And while wages are on the rise for some, our economy is increasingly becoming one that relies on consumer debt, and that debt is growing fast. For many, the dream of owning a home takes a back seat to paying off student loans, credit cards, and massive medical bills. Not to mention the current unemployment crisis and frequent reporting of yet another recession has led to many folks feeling shaky about their finances and wary of financial commitment. Many young people are also opting out of homeownership by choice—or at least questioning whether buying or renting is the smarter financial move.

“This is a question that not everyone agrees on, not even financial experts,” says Amanda Holden, a former investment counselor, who now writes and speaks about investing. “Looking purely at the return on investment, or ROI, there have been much better-performing asset classes out there, like the stock market,” Holden says.

So how should you save and where should you invest when owning your own home is out of the question or simply something you’re not interested in? “It all depends on what your goals are,” says Leslie Geller, a wealth strategist at Capital Group. “You always have to start with your goals, risk tolerance, and investing timeline. Then, you take a look at the options that exist and find the investments that provide the closest match.”

Generally speaking, renters should invest like anyone else. It starts with figuring out your savings goals and timeline, and a handy savings calculator like this one from NerdWallet can help with that. But assuming we’re talking about long-term investing, like for your retirement, you should have a portfolio with a diverse mix of companies and industries. In fact, you might already be investing if you have a 401(k). “That’s how so many people inadvertently get started investing,” Geller says. “They automatically default to making contributions to their retirement account that they have through their jobs.”

But if you don’t have retirement savings through your job or if you want to invest outside of your employer, it’s best to talk to a professional to get set up. “There are people who are interested enough to do the research and understand their options, to put in the time to make the right decisions,” Geller says. “I’m sure many people don’t have that time, so it’s really important to have a good financial adviser guide you through those decisions.”

Holden built a course to make investing more accessible. “A common myth is that investing is only for old, rich dudes and Wall Street bros,” Holden says. “Or that investing is hard or that you need a lot of money to get started. Young people got the shit end of the economic stick in a lot of ways, but one benefit to the current money management environment is that it's easier than ever to get started.”

Index funds are a popular first step to get started with investing. Simply put, they’re an investment vehicle made up of a bunch of different types of individual investments (like company stock) and designed to mirror a certain market. For example, an S&P 500 index fund would include 500 of the largest companies listed on U.S. stock exchanges. If the S&P goes up in value, so does your index fund.

“But I think the most important first step is education,” Holden says. “A great starter book is The Little Book of Common Sense Investing by John Bogle or Broke Millennial Takes On Investing by Erin Lowry. There are also tons of educators giving away free investing education, like the Afford Anything podcast by Paula Pant.”

There are also ways to invest in real estate, even if you’re renting. For example, many investors buy Real Estate Investment Trusts, or REITs. “Here's the gist of REIT,” Holden explains. “Lots of investors pool their money together so that the manager can make a bunch of different real estate investments, building a diversified strategy within the fund.” REITs own or lease commercial spaces, collect rents, and then pass along those profits to investors in the form of dividends. “It is possible to buy REITs that specialize in anything from cell phone towers to malls to hospitals to corporate office spaces,” Holden explains.

Homeownership isn’t the only way to create a stable financial future. Smart investments and a commitment to savings can help renters create a financial safety net, all while avoiding a potential money trap.

Originally Appeared on Architectural Digest