November 2019 – Way of the Rich

Some people end up in a cycle of getting paid, then paying off existing debts or bills. Even those with a financial plan may overlook the fact that after paying bills, fixed expenses, and necessities, they should start investing their money instead of spending it. There are many forms of investing like investing in real estate. buying shares in a company, investing in mutual fund, etc. The goal of investing is to create wealth and to provide income in the future. Investing is important. In this article, we will look at why you should be investing, and I’ll even give you a step-by-step guide to start investing and securing your future. Why You Should Start Investing Early Investing early puts you ahead of the game. If you are in your 20’s, you should begin to consider what investments to make, and look into starting a plan. There are a few reasons why you should invest as early as possible. For one, the earlier you invest, the more time you have to compile compound interest, which is when the interest you earn, also earns interest. For example, if you have $100 in the bank, and you get 5% interest per year, you will earn compounding interest each month. In the first month, you will make some money in the form of an interest payment. Now you may have $101 total invested. Now, you get interest on $101 for the next month instead of $100. This means you are earning interest on the interest you just made. If you start when you are young, you have many more months and years to let that compounding interest work for you on a month to month basis. The older, you are, the less time you have to accumulate compound interest, compared to someone in their 20’s who can have many more years to earn compound interest. You Can Retire Early with Investing This can have an affect on your retirement plan, which brings us to the next reason. By investing early, you have savings in your retirement fund and can be closer to retiring, compared to those who start investing in their 30’s or 40’s. As a young person in their 20’s, you tend to have fewer financial responsibilities such as having a mortgage. This gives you more time to put your money elsewhere, and you don’t have to invest as much monthly to get a large payout in the end. Let’s go back to the idea of compound interest. You invest $100 a month in the stock market at 20 years old, and you get 1% compounded interest a month. By the time you are retired, you will have over 700 thousand dollars. Your coworker who is the same age as you, doesn’t begin investing for retirement until they are 50 years old. They invest $1000 a month at the same compound interest rate, but still won’t have as much as you in the end. Thirdly, investing early gives you the opportunity to take more risks because you have more time to bounce back if something goes awry, such as investments that are more risky but have a much larger payout. To tie it all together, investing early means you have greater financial flexibility and better security. How Much Should You Invest When You Start Out You are probably wondering how much you should invest. Well, that depends on your bottom line and your financial goals. You should never invest more than you can afford. Just Start Investing Anything to Get Started The main thing is to just get started. If you are not investing now, get started. If you are already investing, invest more. It is never to early or to late to start investing. There is a saying: “When is the best time to plant a tree? It was 20 years ago. When is the next best time to plant a tree? Today.” Even if you are only investing $10 a week, that is better than $0. The Goal Should Be Investing 10% of Your Income Start saving $10 a week then move up to 10% of your income. If you make $2500 a month income from your job, then you should be saving and investing $250 each month. I know it is hard but if you start at $10 each week you will invest $40 a month. The next month, increase the amount to $20 each week. The next month you will invest $80 each month. Month after month, increase the amount each week by $10. You should make your goal to get to be saving and investing 10% of your income. After a short while, you will be saving $250 each month which is 10% of your income. Set Your Goals for Your Future Think about what your future goals are. They could be starting a family, making extra income, sending your kids off to college, or retiring at a reasonable time or even early. It may seem overwhelming, especially if you are young and don’t have a very lucrative career just yet. Chances are that over the years, your income will gradually increase, so you can adjust your goals as needed. The main strategy is to prioritize and focus on one goal at a time. For example, depending on how much you earn in a year, and at what age you want to retire, you need to calculate how much you would need to put away each month in order to reach that goal. It could be more or less depending on how much you take home monthly. Your Personal Spending Plan An important determining factor in figuring out how much to invest is your personal spending plan. If you are saving what you have leftover after expenses, this creates a sporadic investing plan, where you only invest when you have the extra money available to do so. Which will most likely be investing nothing each month. This can negatively affect investing because sometimes monthly expenses run high and you can’t afford to invest, which can throw off your goals. You could potentially run into a place where you are going into debt or spending your savings and investing money. This would be counter productive. For example, it can throw off your plan to retire at a certain age because you already calculated how much money you need to invest a month to reach that goal. If you miss that goal several months out of the year, you could be retiring much later than you originally intended. A solution to this is to do it in reverse and determine your expenses around your investment goals. For example, instead of determining how much you ‘can’ save after expenses, manage how much you can spend on expenses after you invest. Focus on investing first, then spending. Make up your mind that you are putting your investing first. Of your $2500, you are automatically deducting $250 (10% of your income) as if it were a car payment. That would make sure you are investing and not spending that money. A tip would be to have the $250 deducted automatically every time your paycheck is deposited into your account. Should You Hire a Financial Adviser Figuring out how to invest can be complicated and stressful, especially for those with no financial background or are just beginning to invest and create a financial plan. For those who don’t know, a financial advisor is a professional in finance who can assist people like you in financial planning. They can clarify, for you, what different financial decisions mean for you and can also counsel you on investment decisions and executing those investment decisions. They know pretty much anything and everything regarding your finances. Especially something like learning how to invest in real estate. This is something you should not do on your own and should absolutely get coached on how to do it. You can lose lots of money if you do not do it right. Ultimately, it is up to you on whether or not you include a financial advisor in your investment decisions, regardless on how versed you are in the area. However, investing can be risky and a lot can be at stake, which is why you should consider hiring a financial advisor. This can help you be prepared for future situations where something goes wrong or your goals become more in reach. For example, once you hit that time where you are almost ready to retire, your financial advisor can confirm with you if you are on the right track to retire on time. There are also specific situations where you may want to seek out a financial advisor. You may receive a large inheritance and need advice on where to put it, or you may be going through a divorce and need advice on how to invest being newly single. It could also be as simple as not wanting to mess anything up and have your ducks in a row. You can also hire a financial planner for a one-time thing, or full-time. You should probably consider hiring a financial planner full-time for situations needing on-going advice. This can be tax planning, retirement, putting children through college, etc. You should seek out one-time financial advice on specific issues or questions, such as helping you build a road map and visualization of your investments. Of course, financial advisors are not always your saving grace. For one, financial advisors are another expense. They can be cheap or expensive depending on which firm you hire from. Secondly, financial advisors earn off of commission, so they can convince someone who is naive to buy and sell more than is necessary, so they can earn more money. Also, there is always the risk of bad planning. Financial planners aren’t psychic and there is always the risk of a bad investment. Not to mention, things can happen in your personal life that a financial advisor cannot predict if they don’t know your personal situation well enough. How to Invest on Your Own If you are feeling bold and brave and don’t want to fork over the cash for a financial advisor, you can make investments on your own. A tip to consider is to know your limitations. Invest in areas you feel confident in and are knowledgeable on. Even though you feel confident enough to advise yourself on what investments to make, you may still need assistance on the money management side of it all. The bottom line is it is possible to invest on your own and be your own financial advisor. No one knows you better than you know yourself and you can create an investment plan that is more precise because you can predict financial issues you may come across in your personal life much easier. It most likely won’t be easy, but it can be done. Investment Options for Millennials Millennials make up a huge portion of the population. Many are taking their finances seriously than ever before and are taking their dip at the investment market. Millennials are slower at investing compared to other generations. Their parents suffered through the Great Recession of the 2000s, and so they are wary of the stock market and of taking risks. That doesn’t mean millennials don’t invest and can’t start. As explained earlier, millennials should invest because they have the opportunity to take more risks and get more compound interest, but what options do millennials have? There are a couple routes you take: short-term and long-term. Short-term investments, say 5 years or less can be treasury bonds, or peer-to-peer lending. A millennial investor, for example, can invest in the U.S Treasury, considering the U.S has a track record of paying off its debts. Treasuries aren’t a get rick quick scheme, but they do payout as quickly as 1 month to 30 years. Some long-term options for millennials to consider (5 years or more) are individual stocks, Growth Mutual Funds, Target Date Funds, and Exchange-Trade Funds (ETFs). Individual stocks are great for millennials because they typically have more time to invest and take risks. How to Start Investing with Little Money What do you do if you want to invest but have little money? Everyone starts somewhere. You don’t need to be rich to make investments nor do you need to invest large sums of money every time. Starting out small and invest in a savings account at your bank. You earn little interest but it’s something, and you have zero risk of loss. Another way to invest little money is to consider your employer retirement plan. It deducts from your paycheck, so there is little hassle. Another investment is in treasury securities, where you can play it safe and with little risk until you are ready to go into higher risk investments that offer higher returns. How Much Should I Invest Each Month As touched upon earlier, how much you invest each month will depend on what your goals are, when you plan to achieve those goals, and your monthly income. A strong suggestion is to invest at minimum 10% of your gross income from your job. Again, that would be investing $250 a month if you make $2,500 income. Also, it is not a one-size fits all and is particular to your situation. Let’s say your goal is to retire in 15 years. Based on your income, you need to calculate what the maximum amount is you need to put away monthly to reach that goal. Someone with a 25 year plan to retire will need to invest a different amount. It all comes down to your bottom line and what your goals are. What Investing Account Should I Open It can be overwhelming trying to decide what investment account to open. There are different accounts, each with different purposes. Let’s begin with Brokerage Investment Accounts. There are two kinds: cash and margin. Cash brokerage accounts are standard and is funded by cash. A margin account is similar to a cash account, except you can borrow from the brokerage when you make a trade. Retirement Investing Accounts come in two forms: Traditional IRA and Roth IRA. A traditional IRA allows you to save and invest for retirement. A Roth IRA is different than a traditional IRA in that when you withdraw, you don’t pay taxes on it. How Do I Manage My Accounts Successfully to Make Money The bottom line is, you need to keep track of how much money you have in your accounts, so you know how much money you are earning on interest. In the digital age, there are apps you can download that allow you track where your money is going and if you are prospering from your investments. You can also check up with a financial advisor to see if you are on the right track.