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Investing is a subject a lot of people don't want to think about. And there is good reason for that. Investing seems scary. It either sounds like something only the rich do or something that only a skilled professional can do. But the truth is that investing is something that everyone can and should do—as soon as possible.
Why should you start now?
Think about this. There are two ways to make money. You can exchange your time for money or you can make your money work for you. Most of us work 40 hours a week. In this case, you are trading your time for money. But wouldn't you rather earn more than you are making? If you are making $1,000, wouldn't you rather be earning $5,000? Most people think the only way to earn more is to work more. Work overtime is their motto! But there is more to life than working. Investing gives you the chance to let your money work for you—saving you time and earning you money.
But is the purpose of investing to get rich?
Some people don't invest because they think that investing is something you do to get rich. They figure they'll never earn enough to get rich, so why bother. But that's not what investing is for. Investing is a way for you to be able to maintain your current lifestyle.
Think about this: what if the company you worked for suddenly closed down? What are you going to do when you get to retirement? Sometimes working more is not a viable option. Investing gives you another source of savings and earning income. You don't invest to become a multi-millionaire (of course no one would stop you if that happens); you invest so that you can provide for yourself in the way you are accustomed to both before and after retirement.
Many people are convinced that investing is the right thing to do at this point, but, there are some misconceptions people have about investing that prevents them from actually doing it. These misconceptions are that:
Investing is too hard
Investing is too risky
You need a lot of money to invest
Let's look at each one of these misconceptions.
Investing is too hard
You may think that investing is just too hard. But a lot of that has to do with the terminology of the investment industry. I mean who knows what Fed Fund rates, mutual funds, indexes, or blue chip stocks are? But you don't need to be scared off by a bunch of words—in the end they are just words. Just like you probably didn't know what PMI was before you bought your first house or what APR was before you got your first credit card, you can learn what these things are. And you will find that they aren't so hard to learn. And if you seek the advice of a professional, they can explain it to you.
Investing is too risky.
Some people have the idea that investing is risky. Movies such as “Wall Street”, no doubt, lead people to think that. But the fact is that investing is only as risky as you want it to be. Do you want to take huge risks? You can invest in international stocks. Want to play it safe? Go with bonds. The risk level is up to you and only you.
I can't afford to invest.
Many people think they can't afford to invest. But when you look at the alternatives (social security may not be there, job security is not 100%), you really have to ask yourself how can you afford not to invest. And the earlier you start, the more money you will earn. Even if it's only a small amount, the money you invest today will earn you big in the future.
Few of us have any formal training when it comes to dealing with our finances. Most of us learn the hard way -- through the school of hard knocks. For some those lessons cost very dear in the form of bankruptcy and lost homes. Others are fortunate to ride the storms out and come out on the other side battered but not beaten.
I have learned my lessons the hard way. I do not come from money and my family had to work hard for every penny. Bad choices and bad luck meant hardship and expenses that had to be paid for with even more sacrifice. However it doesn't have to be that way. Here are the five important lessons, or steps, that will make your road to financial security easier for you and your family.
Step One is simply tracking your expenses. No you don't have to go the route of carrying a little notebook around and jotting down every candy bar or even getting receipts for your morning coffee. However if you want to get a real handle on your money then you need to know where it goes. This means keeping track of all your major expenses and watching the pocket money you set aside for smaller purchases (such as coffee and candy bars). Within a few weeks and certainly by the end of a month you'll know what expenses are eating up your budget which gives you the power to make changes so you can meet your goals.
Step Two is to create a budget. Once you have your basic expenses charted then you need to draw up a budget. First outline all the monetary commitments you have made including housing, transportation, food, clothing, entertainment, etc. Now make a note of your goals such as savings, retirement, etc. What adjustments (if any) do you need to make to meet your goals? The golden rule of financial security is only to spend money you have. That means not using your credit cards unless you can pay them off every month. It is not about making more money but simply living within your means. If you want to spend more money then you need to find a way to either save money in one area or increase your income.
Step Three is planning ahead. Do you have a rainy day fund? What happens when you have unexpected car repairs, dental or medical expenses, or some other unexpected expense? How will you fund this? While some unexpected expenses are just that -- unexpected (and that's why it is good financial planning to have a rainy day fun) -- others can be anticipated. You know after so many miles that your tires will need to be replaced and after so many years your hot water heater can be expected to fail. Start saving before the event so you don't have to utilize your credit and even better if you take the time to shop around and save money too!
Step Four is start saving. You can have just one savings account but likely once you get going you are better off looking into other savings vehicles. Obviously saving your retirement money in your basic savings account is not a good strategy for the long-term. However you can use your savings account to save money for short-, medium- and long-range plans. I start saving for Christmas in January and this strategy means I don't have those depressing post-Christmas bills to pay. It is easy to save a little bit every month and then not worry about how to fund the holidays. Similarly I save for vacations so I don't have to put my fun on credit.
Step Five is doing your homework. It could be as low level as clipping coupons and shopping the supermarket specials but it can really pay off when you look at major expenses such as mortgages and car loans. Should you refinance? Should you simply add another $50 or $100 a month to your mortgage? What are the tax implications of one strategy? Doing your homework certainly means researching and shopping for all major expenses as well as regular bills. My parents moved their cable, telephone and internet service to one provider and saved money while gaining high-speed internet access in the process. I put our utilities on the budget plan so it was easier to control expenses. Our mortgage payment was eligible for a lower rate when drawn directly from an account at the bank holding the mortgage. I designated a savings account and made that account my designated savings account for Christmas and vacations which means most of the time our balance is over the $500 minimum needed for a free account.
This is not tough and it is not a terribly ambitious strategy, but I guarantee if you follow these five steps you will find yourself on the road to financial security.