You can only invest money that you have saved. The most powerful and effective strategy for building wealth is to pay yourself first. Which means you should prioritize savings above all other expenses. To retire early and rich with wealth, begin cultivating wealth and investments daily.
When you make your budget, the first amount you write-in should be to yourself. Decide on an amount you can commit to for at least six months and pay yourself first by depositing the money into your savings, retirement, mutual fund or brokerage account. You must do it every month! Then, pay your other bill. If you find that you do not have enough money to cover all the expenses, reduce your spending or find a way to raise the money. If it means you have to cut back on your entertainment, choose another vacation destination, change your eating habits, work a few extra hours or cancel your magazine subscriptions, do it. But do not cut into your savings amount!
Think of it this way. Is the pain of changing your lifestyle greater than the pain of being in financial bondage? Remaining in the same financial situation for the rest of your life? If you are using debt as a means of upgrading your lifestyle, the problem will probably grow worse with time. And you will never attain your goal of financial security.
Maintaining control of your finances creates a real sense of empowerment that will enrich your life forever. Financial freedom means you and your family’s future will be well taken care of. Financial independence is far more important than impressing others with material goods.
Investing is not a get-rich-quick scheme. Learn to invest and take control of your personal finances. The benefits will astound you. Asking banks and investment professionals to make decisions about your money leaves you in a vulnerable situation as only you know what is best for you and your money.
Investing means learning how to use time to earn you money by compounding your earnings, year after year. Smart investing is about putting your money to work to earn even more money for you 24 hours a day. While you are working long hours for your employer, sleeping or socializing with friends, your investments will continue earning you money to maximize fully your earnings potential.
Honor your savings and investment commitments
Being successful means honoring your commitments. Do not back track on your financial goals. It is important that you do not miss your savings commitment on your monthly budgets. Strict discipline is all important. If you will miss one payment, then another can follow for another reason. Your resolve can waver and you may stop saving altogether. The secret to success is not how much you earn but how much of your earned income you are saving. Regular investing persistently will do the rest.
Fundamental principles of saving
The first concept is that $1 today is more valuable than $1 a year from now. A dollar will probably buy less goods and services in the future due to the forces of inflation. Second, a dollar saved to day can be invested and earn a return in the form of dividends, interest or capital gains.
Time is money and the founding principle of the power of ‘Compound Savings’
An important concept for building wealth is the time value of money. The key to financial independence is realizing the potential value of every dollar. Money is like a food. You can consume it or you can produce it to insure ever abundant supplies. So plant a money tree and take good care of it. It’s fruits will give you all the wealth you desire.
Armed with the knowledge of compounding savings, you can make better budgeting decision. Once you understand this concept, it becomes clearly obvious that the small luxury items you think nothing of buying now, are really costing you thousands of dollars in future wealth.
You may invest your money into stocks, bonds, mutual funds, ETF’s, real estate or begin your own business. It does not matter how you choose to invest your money, only that you do invest your money so that it can earns you additional money.
Investing is not gambling. Be conservative and invest wisely in quality companies and in the highest grade investments available.
Perform diligent research and analysis before committing your hard- earned capital. And only when there is a reasonable expectation for profits. Building wealth will provide for your family, increase your personal freedom and security and allow you to have the retirement lifestyle of your choice.
The responsibility of planning for retirement is your right and responsibility. Plan ahead to ensure financial stability during your golden years.
The power of ‘Compound Interest’
The wonder of compounding transforms your working money into a state-of-the-art, highly powerful income-generating machine. Compounding is the process of generating earnings on an asset’s reinvested earnings year over year throughout your working life. Compounding requires that you re-invest your earnings over a long period of time. The longer you invest, the more you accelerate your income potential.
For example if you invested $250.00 per month over the period of 45 years of your working life with a 10 percent annual return compounded, you would accumulate $2,354,486.23. This is the power of ‘Compound Interest.’ This increase in the amount made each year is seen as real compounding in action: interest earning interest on interest and so on. This will continue as long as you keep reinvesting all earned interest.
While you invest, keep in mind that compounding amplifies the growth of your invested capital. Just like investing maximizes your savings potential, compounding maximizes the earning potential of your investments – because it is time and reinvesting that makes compounding work.
Success depends on ensuring that your investment strategy fits your personal characteristics.
Even though all investors are trying to make money, each one comes from a diverse background and has different needs. It follows that specific investing vehicles and methods are suitable for certain types of investors. There are many factors that determine which path is optimal for an investor.
Determine investment objectives
Investors should consider a few factors when looking for the right place to invest their money. Safety of capital, current income and capital appreciation are factors that influence an investment decision. A lot will also depend on a person’s age, position in life and personal financial circumstances.
As a general rule, the shorter your time horizon, the more conservative you should be. If you are investing primarily for retirement and you are still in your 20s, you have plenty of time to develop your wealth and so you can afford to be more aggressive. When you begin early, you have the power of compounding on your side to generate exponential wealth.
If you are about to retire in a few years, it is very important that you safeguard or increase your savings. You will soon be accessing your investments and don’t want to expose your wealth to too much risk or volatility.
Know how much volatility you can accept in your investments. You are taking on too much risk if you can’t sleep at night worrying about your investments.
Another factor that will determine your investing path is your ability to research investments. Learn how to read financial statements to determine solid investment opportunities.
Your Risk Tolerance
Good investors have the capacity to manage moderate risk.
Determine your risk tolerance and invest accordingly. One investment strategy is to buy small companies that are poised to grow at extremely high rates. Investing in the newest cutting-edge technology and biotech firms that have huge potential.
Invest in firms that have a solid track record and in good established companies that are selling at “cheap” prices. The ideal investment is a mature company that pays out a large dividend, which has high-quality management that will continue to deliver excellent returns to shareholders year after year.
These are many different investing strategies to choose from, and they can all be successful. There are plenty of stable companies out there, just as there are always entrepreneurs creating new companies that attract keen investors. Different investment theories can compliment your investment goals. Each investment strategy has its merits and may have aspects that are suitable for certain investors. Then you can decide which theories fit with your investment personality.
Types of Investments
There are many ways to invest your money. To decide which investment vehicles are suitable for you, you need to understand their characteristics and why they may be suitable for a particular investing objective.
Grouped under the general category called fixed income securities, the term bond is commonly used to refer to debt securities. When you purchase a bond, you are lending out your money to a company or government. In return, they agree to give you interest on your money and eventually pay you back the amount you lent out on the maturity date.
The main attraction of bonds is their relative safety. If you are buying bonds from a stable government, your investment is virtually guaranteed. The safety and stability, however, come at a cost. Because there is little risk, there is less potential profits in relation to company stocks.
When you purchase stocks, you become a part owner of the business. This entitles you to vote at the shareholders’ meeting and allows you to receive shares of profits that the company allocates to its owners. These profits are dividend payouts.
While bonds provide a steady stream of income, stocks are more volatile. Stocks fluctuate in value on a daily basis. When you buy a stock, you aren’t guaranteed anything. Many stocks don’t even pay dividends, in which case, the only way that you can make money is if the stock increases in value.
Compared to bonds, stocks provide relatively high potential returns. Of course, there is a price for this potential: you must assume greater risk for potential losses.
Mutual funds is a collection of stocks and bonds. When you buy a mutual fund, you are pooling your money with a number of other investors, which enables you to pay a professional manager to select specific securities for you. Mutual funds are all designed with a specific strategy in mind, and their distinct focus can be nearly anything: large cap stocks, small cap stocks, bonds from governments, bonds from companies, stocks and bonds, stocks in certain industries, stocks in foreign countries, etc.
The primary advantage of a mutual fund is that you can invest your money without the time or the experience that are often needed to choose a sound investment.
These are the two basic securities: equity and debt or better known as stocks and bonds. While many investments fall into one of these two categories, there are numerous alternative vehicles, which represent the most complicated types of securities and investing strategies. You don’t need to worry about alternative investments at the start of your investing career. They are generally high-risk/high-reward securities that are much more speculative than stocks and bonds. There is the opportunity for big profits, but they require some specialized knowledge. Experts and professionals generally agree that new investors should focus on building a solid financial base first before considering speculative investments. Alternative investments include: Options, Futures, FOREX, Gold, Real Estate, Etc.
Diversification of your portfolio
A portfolio is a combination of different investment assets designed to achieve an investor’s goal. A part of your portfolio can include any asset you own – from real items such as art and real estate, to equities, fixed income investments and cash and cash equivalents.
An easy way to think of a portfolio is to imagine a pie chart, whose portions each represent a type of vehicle to which you have allocated a certain portion of your whole investment. The asset mix and strategy you choose will determine the risk and expected return of your portfolio.
Basic Types of Portfolios
Aggressive investment strategies are those that aim for the highest possible profits – are most appropriate for investors who, for the sake of this potential high return, have a high risk tolerance and a long time horizon. Aggressive portfolios generally have a higher investment in equities.
The conservative investment strategies, which put safety at a high priority, are most appropriate for investors who are risk averse and have a shorter time horizon. Conservative portfolios will generally consist mainly of cash and cash equivalents, or high-quality fixed-income instruments.
The types of allocations that is suitable strategy for a conservative and a moderately aggressive portfolio:
Cash and the money market refer to any short-term or fixed-income investment. Money in a savings account and a certificate of deposit (CD) pays a relative rate of interest.
The main goal of a conservative portfolio strategy is to maintain the real value of the portfolio, or to protect the value of the portfolio against inflation. A conservative portfolio would yield a high amount of current income from bonds and would also yield long-term capital growth potential from investment in high quality equities.
A moderately aggressive portfolio is meant for individuals with a longer time horizon and an average risk tolerance. Investors who find these types of portfolios attractive are seeking to balance the amount of risk and profits potential.
A moderately aggressive portfolio would consist of approximately 50-55% equities, 35-40% bonds, 5-10% cash and equivalents.
You can further break down the above asset classes into subclasses, which also have different risks and potential returns. For example, an investor might divide the equity portion between large cap , small cap and international firms. The bond portion might be allocated between those that are short-term and long-term, government versus corporate debt, and so forth. More advanced investors might also have some of the alternative assets such as options and futures in the mix. The possibilities for asset allocations are limitless.
Portfolios should be fully diversified to maximize your earnings potential while at the same time providing safety of capital . Different securities perform differently at any point in time, so with a mix of asset types, your entire portfolio does not suffer the impact of a decline of any one security. When your stocks go down, you may still have the stability of the bonds in Your portfolio.
There have been all sorts of academic studies and formulas that demonstrate why diversification is important, but it’s really just the simple practice of “not putting all your eggs in one basket.” If you spread your investments across various types of assets and markets, you’ll reduce the risk of catastrophic financial losses.
Investing is about putting your money to work for you.
Reinvesting your earnings allows you to take advantage of compounding.
Each investor is different in his or her objectives and risk tolerance.
There is more than one strategy that can be used to invest successfully.
Each investment vehicle has its own unique characteristics.
Diversifying investments in a portfolio helps to manage risk.
Together, all these points make up a foundation of knowledge with which any investor can be comfortable. However, these concepts mean nothing unless you can put them into practice. It’s great to know that compounding accelerates your investment earnings, but the real question is how do you take advantage of compounding and actually make money?
There are two basic styles of investment: passive and active investing. Each of these styles results comes from a different approach to the market. The goal of active management is to select securities that will perform better than the overall market. When a mutual fund manager analyzes a company’s financial statements to determine if the stock is suitable for the fund, he or she is actively managing the portfolio.
A passive investor on the other hand has no desire to try to beat the market. Instead, relying on the stock market’s history of increasing over the long term, the passive investor, believing that trying to beat the market is too much work or even futile, will simply purchase a security such as an index fund, which mirrors a benchmark used to track the performance of a market.
What is an index fund (ETF)?
Buying into an index fund is passive investing, you do not have to select individual stocks. You get instant diversification as ETF fund invests in a basket of different kinds of stocks without you having to invest huge sums of money. Most index funds can be set up with an investment of $1,000 or less.
Most importantly, the fees are far less than the cost of the average mutual fund. These lower fees are another advantage of passive investing. Because the fund does not have to pay a fund manager to pick stocks, an index fund is often cheaper than any other mutual fund.
Do not stop with your initial purchase. Make use of an automatic payment plan with which you can invests 10% of your paycheck every month. Investing a fixed amount every single month makes use of a strategy called, ‘dollar cost averaging’. By putting in, $100 each month (rather than a large amount once a year), you buys less shares when the prices of the units of the fund are higher, and more shares when prices are lower. In the end, the purchase prices average out. The best thing about dollar cost averaging, though, is that it gets you into the habit of saving every single month. Just about any fund company or bank will let you invest like this with an automatic payment plan.
Putting the Concepts to Work
And that’s about all there is to investing. It’s pretty simple. And despite the ease of setting up an ETF strategy it gives investors access to some sophisticated the principles for investing money. Investing in an ETF from the S&P 500 automatically makes you part owner of the 500 biggest companies in the U.S.
You can reinvest all the money that gets paid out in dividends, which allows you to see the benefits of compounding over time. Even more so if you sets this fund up in a retirement plan that allows your investment to accumulate without being taxed.
It’s easy! This fits preference to avoid the work of picking stocks. Those who do want to develop an eye for stocks, however, can begin with an index fund and then eventually work their way into more active strategies over time.
A strategy like this can be molded to meet any investor’s objectives and asset allocation. If you have a time horizon of more than 20 years and are comfortable being completely in equities or an investor not comfortable with being just in stocks, it’s easy enough to buy a bond index fund. It would still offer the low costs of indexing, and allow you to customize your asset allocation.
There are many other alternative investments also available. Explore them carefully to learn more about them. There are many tutorial and online courses available to give you a layman’s knowledge about their profit potential and risk assessment.
For the average investor, the best route includes saving regularly, keeping investment expenses down and being in the market for the long term. Whatever you do, keep these investment principles in mind and never educating yourself about market-changing dynamics.
Most parents want to teach their children responsibility – how to become self sufficient and succeed in life. As parents, we pass on the experiences our parents passed on to us; the antiquated notion that “responsibility” is getting a good job, saving a money, purchasing a home and investing wisely. Hopefully the principles will help you teach your children to avoid the traps that have stolen financial success from so many people.
Your biggest obstacle to attaining wealth is often found right at home: It’s yourself and your spouse. Too often, people live their lives in a manner that is not conducive to creating real wealth and then get frustrated at “the system” if they are not successful.
One of the most important financial decisions you will ever make is getting married. True, love is not rational, but you’re going to have an enormously difficult go in life if the person you expect to be there holding your hand is constantly frustrating your dreams, ambitions, and goals. You choice of someone at a similar niveau as yourself makes for better working towards the same agenda. If you are seeking an early retirement, he or she is there helping earn extra income and spending frugally to put more money away towards your goal
A house divided against itself cannot stand. A good marriage can radically accelerate your wealth building prospects. In fact self-made millionaires are far more likely than the general population to be, and stay, married to the same spouse for life.
Debt is a bad habit that you must break
Debt is a form of bondage; a disease that enslaves the borrower. It is a testament to the power money has over peoples’ lives. Imagine your life without owing anyone anything; your car, your house and your education tuition. What a pleasant thought. When you desire it badly enough, you will make eliminating your debts your number one priority.
Understanding the power of money
The sooner you understand that the power money has over you is derived from your relationship with it, the faster you will become free from its mastery over you . Instead you will develop skills to put money to work for you.
The best commodity is your ideas
With the advent of the modern internet and other technological advances, you are not limited to earning a living by your physical labor alone. The only limit you have on yourself now is your imagination. Your ideas are the most valuable talents you possess. If you do not own a business or investments, then you market your labor to a company in exchange for a paycheck. Change your product by continuously upgrading your educational skills. The gap between the rich and poor does indeed grow larger with each passing year, but not because of inequalities or any other such injustices. Instead, it is because the rich understand money and how to use it. Capital is literally a seed; learn how to cultivate it to produce the best results.
Getting the best financial results requires you to focus on the two most important principles: savings and investing.
Keep at least three months of living expenses in a savings account. That’s just a starting point. If you’re self-employed, work on commission, or work in an unstable industry or position, double or even triple that baseline. Many financial planners believe it’s a good idea to have six to nine months of your normal expenses stashed away.
Multiply your living costs by 25. That’s what you need to retire. If you will need $20,000 a year for retirement, you need to have $500,000 in savings.
Save a minimum of 10 percent of your salary. Start as young as possible, when the power of compounding returns is the greatest. That’s how you’ll reach the $1 million mark – through compounding interest over the span of a life time.
Take advantage of the your 401k Company matching pension plan to maximize your tax-free savings potential.
Open a college savings account for your children. It’s never too early to begin saving for education.
Make the maximum contribution to a Roth IRA. You will avoid future taxes on your contributions, including capital gains tax.
Spend no more than 28 to 33 percent of your income on your home. That should include all your home-related expenses, like insurance, property taxes, home repairs and maintenance.
Refinance your home – if you can save at least 1 percent from your mortgage rate.
Avoid any investment you do not understand. It’s better to stick to tried-and-true, get-rich-slowly methods than to gamble your future on something you’re not familiar with.
Avoid high-fee funds: The highest fee you should pay is 1 percent, but aim for the lowest-fee quality funds you can find. Vanguard, Fidelity and Schwab, among others, are known for their low-fee index funds and commission-free ETFs.
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