A Sound Lifetime Investing Plan
If you are ready to get serious about money and your future financial security, you need to take the first steps. Build your experience with money so you are on solid ground before moving to more sophisticated investments, such as options.
Lifetime Investing Plan Sequence
How much experience do you have in managing and investing money? See where you are in this sequence.
- Open a checking account in either a virtual or bricks and mortar bank. Pay your regular bills from this account. Deposit money from your income source (paycheck) directly into this account. Consider depositing the entire check by direct deposit from your employer. This is important because it allows you to keep track of your money. The monthly records make it easy to understand where the money goes and how it is being spent. It allows you to track how much money is available to meet expenses and prevents you from spending more money than you have.
Bonus: Many banks offer free checking accounts to customers who make an automated monthly deposit.
- Start saving money. Remove some cash from that checking account on a regular basis, preferably every month. No amount is too small because one of the objectives in taking this step is to get into the habit of saving money. It is easy to plan to do it; it is easy to tell yourself how important it is to set aside money for future needs. It is often difficult for people to believe that they can afford to save any money. If you can afford to withdraw as much as 10% of your total deposit, that is an excellent savings level, but may be too steep for you at this time. That is not a problem. Put aside whatever you can afford to save — but do take some cash every month to add to your savings. Where to place this saved money and how to give it a chance to earn additional money is the very nature of investing. Savings accounts may pay next to nothing in interest, and that is unsatisfactory for meeting long-term goals. Interest rates fluctuate over the years and there may be times when a savings account is an ideal place to keep your savings.
For now, the basic goal is to get into the habit of saving money on a regular basis, it will make a significant impact on your future financial stability. It may be difficult to believe how important this is, but you will eventually recognize that making this commitment to save money — and you are never too young to begin — makes your life much easier.
Once the cash begins to accumulate, you may decide to invest it. That is the way to have your money grow over the years. Many investment choices are available, but for the vast majority of people, the stock markets of the world (more on this below) represent the investment path that is most likely (but not guaranteed) to lead to that secure financial future.
- Credit Cards. When you buy something now — especially when you do not need it, but want the instant gratification that comes with the purchase, and do not have the cash to pay for the item, it seems natural to buy it anyway — using a credit card. This practice must be avoided if you are truly concerned with future financial affluence.
This instant gratification comes at a very steep price. If you compare potential earnings from investing with the cost of paying interest at the extremely high rate that credit card borrowing costs, you will see that it is unrealistic to expect to earn more money from your investments than you pay in interest to the credit card company. Translation: paying credit card debt is so financially debilitating that it makes it impossible for your net worth to grow through investing while you try to pay off the credit card.
If you need it, and if you can afford it — buy it. If you can get along without it, for now, save the money and buy the item later. This advice is especially useful when considering the purchase of a car. The new graduate is best served by buying an inexpensive older car and saving money towards the purchase of a newer car, rather than by borrowing big bucks to own that shiny new car today.
Thus, your first smart investment is to eliminate debt. it is best if you avoid incurring debt in the first place, but if it is already too late to avoid that economic hurdle, then do yourself a favor and pay off that high-interest debt as soon as possible. Only then can you begin to save money for yourself.
- Education. There are so many places where cash can be invested that it is important to avoid being scammed. The easiest way to avoid such traps is never to take financial advice from anyone whose trustworthiness cannot be independently confirmed. For example, if you choose a financial professional to offer guidance, it is helpful when someone you know recommends that broker, planner, or financial advisor.
It is best to stay away from real estate, coins, art, etc because they require specialized knowledge and education that takes years to accumulate. Keep in mind that people who sell coins (especially gold) to you — buy those items at significantly lower prices and then unload those coins to you at a price above their current worth — and that means that your investment will be losing money before the ink is dry on your payment.
- The stock market is the best place for most people to invest part of their savings. The truth is that there are times when the results will be bad. There are also going to be bullish, exciting times when you earn lots of money. These ups and downs tend to work for most people who have a long-term investment horizon and who have the discipline to avoid panicking with every downturn. However, the stock market is not for everyone and you must understand your own feelings and whether or not it is for you. Important: do not take specific investment tips from people who claim special knowledge or insight.
If investing in the market feels right, begin slowly and please: do not attempt to pick individual stocks. Very few investors — and that includes professionals — can pick a stock portfolio that consistently beats the market averages. It is far better to begin by owning a diversified mix of stocks, and those stocks should be in different industries. The easiest way to accomplish that goal is to invest in ETF's or (better yet) index funds that come with very small management fees. Do not be tempted to buy mutual funds — especially when they come with a commission (called a front-end load) for the salesperson who sells the fund.
As time passes, as you continue to add to your savings, so will your knowledge and experience grow. If you have the time (and it takes a good deal of time) and inclination, you may want to learn how to do intelligent research into individual stocks, and perhaps (it's still a difficult task) try to discover companies whose future prospects are better than other investors realize, but we encourage you to stick with index funds.
- Options. When you are comfortable with taking money from your income stream; when you are satisfied that investing is something that works for you; when you would like to reduce the amount of money at risk and simultaneously increase the chances of earning money — that is the time to begin to learn all about stock options.
Warning: When people talk about options they often get far too enthusiastic about the potential results. Do not listen to these people. Do not jump into using options. Take the time to understand how they work so you know how to get started with options. Options can be used in a variety of strategies that allow investors to tweak their investments so that they:
- Perform better under specific market conditions. If you anticipate a bullish, bearish, or neutral market, you can earn more money when your prediction is correct. If you anticipate a volatile (or calm) market, you can use options to enhance your performance. In short, options are versatile and can be used in a variety of strategies.
- Provide less volatile returns; i.e., the value of your portfolio will increase or decrease by less than the overall market. You will earn less money during the most bullish years; lose less when the market declines, but, best of all, you will outperform the stock market every time that the market trades in a range, neither rising nor falling by a significant amount over any given time period.