Investment Basics: Where should I start?
Contrary to popular belief, investing doesn’t start with stock market research or mutual fund comparisons. It begins with an honest look at your cash flow and financial commitments. Once you decide how much you can actually afford to spend you are ready to begin. Far too often, I’ve found that new investors can get overzealous (this is especially true after they get a taste of capital gains).
Never forget that investing is simply a means of accruing resources for the future. If you are sacrificing money that you need in the present, you hurt your chances at following through with the investment plan you create. Think of beginning an investment plan like starting a new workout plan at the gym. You know you can get fit, and you might be excited to do so. However, if you try to lift 500 pounds your very first day, or if you try to run 5 miles right away, you will injure yourself. How so? You’ll miss several weeks of workouts, and will wince every time you move. Even when you’re fully healed you will experience apprehension when it’s time to head back into the gym because the pain will be fresh in your memory.
If you commit a large sum of money to your brokerage fund and wind up losing it on a risky move, you will be very upset indeed. Moreover, if you need the money to meet a financial obligation, you may have to borrow the money.
Hence, we arrive at lesson 1: Never invest more than you can truly afford to lose!
So, once you find out how much discretionary income you have what should you do? Commit to a regular contribution. Don’t worry about the exact stock or financial instrument yet. Focus on committing the same amount every week. Consistency is the key. Set a goal for yourself to be consistent, but don’t worry if you can’t afford to set aside money one week. Be 100% honest with yourself. Do you really need the new set of golf clubs or that new pair of shoes? If not, then do yourself a favor and contribute to your future financial freedom. Remember, saving is not easy, but it is rewarding.
There are many ways to go about it, but I’ve found it the easiest to make contributions to my portfolio fund at the exact moment that I receive my paycheck. Here’s why. Your discretionary income only decreases after receiving your paycheck. It only becomes harder mentally to actually set money aside as time elapses. If you’re serious about investing, see if this technique works for you.
Lesson 2: Pay yourself immediately after receiving your paycheck.
After you establish a solid routine of saving, you will accrue a significant amount of cash in a relatively short period of time. What’s next? Find out about your employee benefits. Find out if your company offers a 401K account, and more importantly do they match the 401K? If so, then one of the better investment decisions you can make, is investing in your 401K. Think of it as an investment. If they match 10% of your money, you are reaping a phenomenal profit immediately. There are no stocks, bonds, ETF’s, etc. that can guarantee a 10% return in such a short amount of time.
If your company doesn’t offer a 401K then remember that you have other options. You have the ability to open up your own IRA (Individual Retirement Account). Once this is open, you are able to contribute up to $5,000 annually. This is an amazing advantage for two reasons. #1, it accrues compound interest, and #2 It is a tax-free contribution. As long as you don’t touch the money prior to retirement, you are setting yourself up for financial freedom in the long run.
Lesson 3: Before testing the waters on the open market, seek out an IRA.
Stocks are tax-free contributions, but require you to pay a capital gains tax on your earnings upon sale. Mutual funds require constant bookkeeping, as market managers buy funds and sell them when they appreciate which means that you must pay taxes on any capital gains from any security in the portfolio that gets sold. Still, if you have more than $5,000 to contribute annually, then you should consider stocks, bonds, mutual funds, and more, after conducting extensive research and determining what your goals are for each particular investment.