Where does your money go? Investment advice to start the new year off right
1) Save 10-20% of your income every year
Investing is just a more efficient form of saving. To be a successful investor and make money, you HAVE to save. Let’s face it, if you have debt and are paying 20% interest rates, you are better off paying the debt off because it is a guaranteed 20% investment.
2) Determine when you need your money
When you have money on hand, determine if you need that money in the next six months, one to two years, or next five years. Don’t just leave money in your checking or savings account for when you might need it; you can be throwing away a lot of free money! If you need the money in a couple of months, see if your bank has a money market account or a short-term Certificate of Deposit that you can keep your money in. This certainly beats the interest rate on most savings accounts and any checking account. Check out this website to see which banks are offering the highest CD rates: http://www.bankrate.com/
If you don’t need the money for at least a couple of years, look to see if you can invest that money in some kind of index fund or mutual fund in the stock market.
3) Small indulgences add up
Don’t let your daily coffee, weekly pizza and movie, and weekend relaxation drain your savings account. While all these purchases individually seem small, together they add up in a huge way. Pay $3 for a cup of coffee per day at the local coffee house and you’re out over $500 on the year. The weekly movie will be similar, and the cost of refreshments for your weekend party can be another $800. I am not saying don’t splurge once in a while or spend on things you need, but be conscience of what you are spending and what you can afford; small purchases do add up!
4) Pay off your credit cards
Credit cards can be great. They let you buy large purchases such as gas and books without having to carry large amounts of cash around, and many times, you can earn money back in rewards from your credit card company on things such as gas, books, and movie tickets. But these rewards are only worth it if you make your payments on time. Otherwise, you can end up paying over 20% interest on the money you owe. Only use credit cards when you have the actual cash on hand! If you have credit card debt, pay them off before you do anything else or make any kind of investment. Paying off credit card debt is a guaranteed 20% investment, which cannot be duplicated in any investment.
5) Use compound interest to your advantage
Compounding and compound interest can turn very modest amounts of money into extremely large sums just through the power of time. Let’s assume you earned $4,000 working this summer. You can spend it on clothes or a new iPod but if you saved that $4,000 and invested it, you could have a lot of money by the time you retired. If you start at the age of 22 when you graduate and you add $4,000 every year thereafter and earn a 10% return every year (the S&P 500 has returned roughly 10.6% since 1929), you can have $648,000 by the time you are 50. If you started when you were a freshman instead of after you graduated, you could have $970,000 by the time you were 50. You made over $300,000 just by starting 3 years sooner!
6) Buy dollar bills for less than one dollar
This piece of advice focuses on how hard it is to time any market. Whether you want to invest in stocks, real estate, or anything else, it is extremely difficult to determine the exact price of an asset. Even if you use the most sophisticated pricing techniques such as a discounted cash flow analysis, you want to have a margin of safety to protect yourself. It’s easy to say, for example, wait for a stock to sell at your price before you buy it, but when can you buy quality assets at a discount? The answer to this question is why it is so important to take advantage of tough, volatile markets when fear is rampant. Only when there is fear in the stock market or the housing market, like there is today, will you be able to buy your shopping lists of stocks at prices that are attractive to you. Fortunes are made in recessions; you just don’t know it yet!
7) The best investing advice you will get:
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”– Warren Buffett
“Opportunity often comes disguised in the form of misfortune, or temporary defeat.” — Napoleon Hill
“The four most expensive words in the English language are, ‘This time it’s different.'” — Sir John Templeton
“The moment a person forms a theory, his imagination sees in every object only the traits which favor that theory.” — Thomas Jefferson
~ Monte Malhotra, Student Investment Expert, Campus Calm