Saving and investing your hard earned money can be a great way to safeguard your financial future. The key to investing successfully is to establish a repeatable process and turning this into a habit. You don’t build Rome in a day and it is the same for the principle of building wealth. Investing successfully requires a step by step approach, slowly and surely building your financial peace and security. Let’s take a look at these steps.
Before you start to investigate the “hot stock” or the “best Mutual funds” you have to start with the un sexy stuff first! Hah! Hey, I know that you want to build some good cocktail conversation around your hot stock, but hey, we all start looking the same first thing out of bed, and that is a mess…Start with the basics first and take a shower, deodorize and put your pants on one leg at a time.
The Budget…yes, the Budget
How do we do this? The first step? You are going to cringe, go ahead and do that now. The first step you need to take in your journey to financial security is setting up your budget. Yes, your BUDGET!!! As unsexy as that sounds, every successful corporation, company and wealthy person first started out with a budget. Budgeting doesn’t mean that you can’t do the things you want to do, far from it! Rather, budgeting is all about you telling your money what to do. I love listening to Dave Ramsey, but one of the worst things that can happen as you build wealth is running out of money before running out of month.
The benefit of having a realistic and well thought out budget is “clarity”. You know what goes in the front, and you know you know what comes out the rear, and hopefully it doesn’t stink. Budgeting allows you to see what is most important to you and what is unimportant. If you are able to keep track of expenses and it shows $29 a month at Starbucks, it will make you think…do I really want Starbucks or do I like my $29…it will help you prioritize choices. Knowing what needs to be spent on necessities (keeping a roof over your head, food, utilities) and how much is for discretionary (do you really need that lotto ticket?), can give you a realistic understanding of what can go into your savings plan.
What Next…Get Ready for a Rainy Day
Another BORING subject! Eeegads, this article isn’t really helping me at all. In my 17 years of financial planning experience, spanning from 1997 through 2013, the most successful folks and retirees had an adequate amount of rainy day funds. They understood something…rainy day money is NOT an INVESTMENT!!! Yes, it is not part of your investment portfolio, rather it support your investment strategy because it helps you employ discipline.
In 2008…when the world imploded…retirees who depended on their investments for income were devastated. They were taking money out of their investments when the price just cratered. Since they sold more shares (depressed investment prices) to pay for income, they had less shares for when the markets bounced back. They are now in a situation where they may not have enough for the rest of their lives and they have to make tough choices. Imagine if they had an adequate rainy day fund of 6-18 months, and live off that when the market imploded…could have saved the situation huh???
It is just Murphy’s law that as soon as you start an investment program, is the same time your car breaks down, your toilet leaks, or fill in the blank…..Having a 6-18 month emergency will help you maintain discipline with your investment strategy.
Now am I ready to Invest?
Almost! The next step is to understand the different types of accounts you can put your investments in. I like to put a fancy term called “asset location” for this. Different types of retirement accounts such as your company 401k plan, your Individual Retirement Account or Arrangement (IRA) may allow you to take advantage of immediate tax deduction an have this money grow tax deferred. This is great if you are in the higher tax brackets because this deduction is worth more to you. There are also retirement accounts such as the Roth 401k or IRA, that do not give you immediate tax deduction but shield the money in the accounts from paying taxes…EVER!!! Well almost. There is also the plain old taxable account that you can hold investments in. You will pay taxes on any gains, interest and dividends along the way, and soon you will be best friends with your accountant because of your 1099…
Now You are Ready
Once you finished steps 1-3, then you showered, you brushed your teeth and put your pants on. Great job! You are now ready to tackle the world of risk adjusted investment returns, sharpe ratios, asset allocation, tactical allocation…HAH!!! Don’t worry; we will have more to come to help you make the right decision each step of your investment journey.