No matter how large or small your salary is, it is important to learn how to invest and make some wise investments. Wise investments can help one’s money to grow exponentially and can provide one with sizable savings over time. Following are some tips on saving money and investing wisely. This is my first post in the series for Learn How to Invest
Important Things to Consider
1. Put aside a certain percentage of income every week. The importance of doing this cannot be overestimated. It is important to set aside this portion of your income as soon as it comes in. Do not wait until the end of the week to see what is left; chances are that daily expenditures and unnecessary purchases will eat up what should have gone into savings. Ten percent is a good amount to put aside in savings, although you can set aside even more if your financial situation permits. It can be a good idea to divide savings into two categories. On one hand, you will want to keep a savings account that is not touched except in an emergency situation. On the other hand, a portion of your savings account can and should be invested in order to generate more cash. Have a balance between investing and saving money. You can do either 50-50 or 60-40, as you see fit. Or perhaps set aside one month’s income towards savings and the next month’s income towards investments.
2. Make a Plan and Set Goals. Everyone should have a financial plan. The old saying “failure to plan is planning to fail” very much applies to money management. The first step is to draw up a monthly budget. Consider how much money you spend on a monthly basis for food, rent/mortgage payments, utilities, entertainment, transport and so forth. Then make a budget of how much you intend to spend each month and stick to it.
After making a plan, start setting goals. These goals should be specific, clear and quantifiable. A goal such as “I will save more money this year than last year” is way too vague. Some good examples of quantifiable goals are:
• I will set aside $500 in savings every month.
• I will cut back my entertainment budget from $200 a month to $150 a month.
• I will pay off all my high interest loans by (set a specific date).
Entrepreneurs should set goals for how much money they want to make on a weekly, monthly, quarterly and yearly basis. These goals should be posted somewhere visible. Check off your progress and see how you are doing. If your goals are unrealistic, you may need to modify them. If you are easily reaching or surpassing your goals, try to make them more challenging. Specific goals include:
• I will make $1,000 a week in gross profits.
• I will make $400 a week in net profits.
• I will cut operating costs by 10% over the next six months.
3. Start Investing. Investing money can be risky but it can also be very financially rewarding. Take the time to consider various investment options consider each one’s risk factor.
It is impossible to say when the right time to invest is across the board. You will need to consider your financial situation and see when you have sufficient money saved up. Some investments, such as the Forex market, require that a minimum amount of funds be invested. What can be said with certainty is that one should never make an investment he or she is unsure about or has not researched thoroughly.
4. Build a Nest Egg and Emergency Fund. As was noted above, anyone can save money by setting aside a percentage of income every week. There are not many valid excuses for not having emergency money and/or a nest egg.
Emergency money is cash on hand that is not tied up in investments. This money should only be used in an emergency situation. It should ideally be kept in a savings account but can also be kept at home if one has a safe.
A nest egg is not necessarily the same as emergency money. A nest egg can be assets as opposed to hard cash. Home ownership is often viewed as a nest egg; the home can either be used for retirement or sold to provide retirement income. Other nest eggs include investments such as gold, stocks and bonds. Once again, one should not invest in a nest egg without proper research. In some instances, the advice of a lawyer is needed before making certain investments.
5. Invest in the right investment books. Investment books can help you better understand your options and choose the right way or ways to invest your funds. Investment books can be bought at a local bookstore or over the internet. Following are some books that a prospective investor is sure to find helpful and informative.
• “The Little Book of Value Investing” from Christopher Browne is particularly helpful and gets good review ratings. It deals with value investing and is a good guide for those who do not have experience in making stock market investments.
• “Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor” is also a good buy. It provides good advice on portfolio management.
• “IRA Wealth: Revolutionary IRA Strategies for Real Estate Investment” is a helpful book that covers the ins and outs of investing in real estate.
• “The Boggleheads’ Guide to Investing” is yet another good investment book. Unlike the books mentioned above, it deals with a variety of investment options. It is written in an informal, almost irreverent style, making it an enjoyable read for a prospective investor of any age.
6. It helps to consider true to life examples when making investment decisions. The following examples can give you ideas of how to wisely invest your money. Billy has $1,000 to invest. He considers the various options and decides which ones (i.e. real estate) are not feasible. He then decides to diversify his money. He invests $400 in the stock market, $400 in gold and silver and $200 in oil ETFs.
He has a diversified portfolio that contains both high risk and low risk investments. If one investment does poorly, he has other investments to fall back on. Pamela, on the other hand, decides to invest $500 in gold and silver and $500 in low risk stock options. Her profits increase incrementally but are not particularly high because she has invested all her money in low risk assets. This method of investing is often considered wise, as it protects one from losing a large quantity of money. At the same time, it does not give you the opportunity to generate the profits that you could be generating.
At the other end of the extreme, we have Gary, who has invested $600 in high risk stocks and $400 in mutual funds. Gary may turn a 100% profit next month or he may lose the whole $1,000 and end up in debt. It depends not only on the exact funds and stocks he bought but also on twists and turns in these markets that are nearly impossible to predict. As you may have gathered, the first example demonstrates the best way to go about investing money, generally speaking. Pick some high risk and low risk investments; this way you will gain both profits and a certain degree of security.