Why do so many people never obtain the financial independence that they desire? Often, it’s because they just don’t take that first step — getting started. Besides procrastination, other excuses people make are that investing is too risky, too complicated, too time consuming and only for the rich. The fact is, there’s nothing complicated about common investing techniques, and it usually doesn’t take much time to understand the basics. One of the biggest risks you face is not educating yourself about which investments may be able to help you pursue your financial goals and how to approach the investing process. Also, assuming investing is only for the rich could be your biggest misconception. Most often, it is the individuals who do not have the resources to allow for investment mistakes who should be working with a financial professional.
Saving versus Investing
Both saving and investing have a place in your finances. However, don’t confuse the two. Saving is setting aside money for a financial goal, whether that is done as part of a workplace retirement savings plan, an individual retirement account, a bank savings account or some other savings vehicle. Investing is deciding what you do with those savings. Some investments are designed to help preserve your principal — the initial amount you’ve set aside — but may provide relatively little or no return. Other investments can go up or down in value and may or may not pay interest or dividends.
The future is expensive. For example, because people are living longer, retirement costs are often higher than expected. Though all investing involves the possibility of loss, including the loss of principal, investing is one way to prepare for that future. You must take responsibility for your finances. Government programs such as Social Security will probably play a less significant role for you than for previous generations. Most corporations have switched from guaranteed pensions to plans that require you to make contributions and choose investments. Everyone has different reasons for investing. Understanding how to match those reasons with your investments is one aspect of managing money to provide a comfortable life and financial independence for you and your family.
What Is the Best Way to Invest?
• Get in the habit of saving. Set aside a portion of your income regularly. Automate that process if possible by having money put into your investment account before you have a chance to spend it.
• Invest so that your money at least has the opportunity to keep pace with inflation over time.
• Don’t put all your eggs in one basket. Though asset allocation and diversification don’t guarantee a profit or insure against the possibility of loss, having multiple types of investments may help reduce the impact of loss on one.
• Focus on long-term potential rather than short-term price fluctuations.
• Ask questions and become educated before making any investment.
• Invest with your head, not with your stomach or heart. Avoid the urge to invest based on how you feel about an investment.
Before You Start
Organize your finances to help manage your money more efficiently. Remember, investing is just one component of your overall financial plan. Get a clear picture of where you are today. What’s your net worth? Compare your assets with your liabilities. Look at your cash flow. Be clear on where your income is going each month. Are you drowning in credit card debt? If so, pay it off as quickly as possible. Every dollar that you save in interest charges is one more dollar that you can invest for your future.
Establish a solid financial base: Make sure you have an adequate emergency fund, sufficient insurance coverage and a realistic budget. Also, take full advantage of benefits and retirement plans that your employer offers.
Understand Time’s Impact
Take advantage of the power of compounding. Compounding is the earning of interest on interest, or the reinvestment of income. For instance, if you invest $1,000 and get a return of 8 percent, you will earn $80. By reinvesting the earnings and assuming the same rate of return, you will earn $86.40 on your $1,080 investment the following year. The following year, $1,166.40 will earn $93.31. (This hypothetical example is intended as an illustration and does not reflect the performance of a specific investment.)
Use the rule of 72 to judge an investment’s potential. Divide 72 by the projected return percentage. The answer is the number of years that it may take for the investment to double in value. For example, an investment that earns 8 percent per year will likely double in 9 years.
Weigh Professional Help
If you have the time and energy to educate yourself about investing, you may not feel you need assistance. However, for many people, it may be worth getting professional help in creating a financial plan that integrates long-term financial goals such as retirement with other more short-term needs.
Review Your Progress
Financial management is ongoing. Keep good records and recalculate your net worth annually. This will help you for tax purposes and show you how your investments are doing over time. Once you take that first step of getting started, you will be better able to manage your money to pay for today’s needs and pursue tomorrow’s goals.
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