Man, do I hear this a lot. If you aren’t a numbers person, or just don’t give a hoot about finances, well, I have some very tough news for you: You’re going to have to care, because your livelihood depends on it.
You see, we live in a world that has an economy. Economies work by the exchanging of goods and services for other goods and services. Those goods and services cost money to make or offer. Time is money… yada yada All basic stuff, right? Economics 101. The problem is, this bores most people. Most people want to sing and dance and climb mountains and play guitar and ride motorcycles… at least that’s what I want to do. I used to only think about money when I needed it the most. Now that I have a nice cushy job, I don’t worry about my income source. I’m very fortunate to have this job, however, I realize my job may not last forever, so I need to continue to keep my skill set up to date. I also realize that every hour I am working at my job, I’m trading my life energy for monetary compensation. This is outlined in a book called ‘Your Money or Your Life” Like most financial bloggers and finance people in general, they will tell you that this book changed their lives. You’ll need to go buy a used copy or better yet, borrow that book from your local library or through Amazon’s book lending service, or even Open Library.
So now that you understand the very basic concept of trading your time (and skillz) for money, you need to figure out how to use that money. Will you buy a $4 Starbucks orange mocca cappuccino every day, and a meal at a fast food restaurant cause you didn’t want to brown bag it at work, or spend $50 a weekend at the pub? It adds up. If you aren’t consciously adding it up yourself, you’ll quickly find that your debit card is on fire with all the swipes. Ouch. You worked hard to earn that money! Does it add that much more value and opportunity to your life when you buy all these consumables? Think hard about that, and what sacrifices you can make each day with your spending habits. You’ll be surprised at how it adds up. You will be smiling ear to ear when you see how big your bank account is. You won’t stress over money and beams of light will coming shooting from your smile. Now that you’ve saved so much money, what the heck are you going to do next with this hard earned cash? What I’m about to tell you, may change your life.
Investing. Each dollar bill that comes into your life is either spent, saved, or invested. If you spend the money, you will need to work to gain more money. If you save the money, you will have to work less, because you can live off the saved money. If you invest the money, you will never have to work again (if you don’t want to), because that money is now making money for you. That’s it. That’s what investing is. Your money, makes money for you. You maybe saying “You’ve caught my attention Mr. Penny Wiser, and I just got a little excited about investing. Now how to I start investing?”
There is good investing, and there is bad investing. Most people will agree with me that good investing is contributing to low-fee index funds in your 401k, 403b, SEP-IRA, Simple IRA, target retirement plans in your RothIRA, and low-fee index funds in taxable accounts. If I’ve already lost you, you should google/wikipedia each of these items. These are all retirement plans. If you are not saving for retirement and think retirement will just happen magically, you will be in for a rude awakening and may risk having to eat cat food when you are older. Ok, I exaggerate a little when I say you’ll eat cat food, but what I really mean is, you don’t want to work until you are 65-70. Bad investing is incredibly easy to do, and it includes buying funds in your retirement plan that have high fees (also known as expense ratios), picking individual stocks, letting financial advisers gamble with your money, buying too many stocks and not enough bonds, the list goes on. When it comes to making money on investments, if it sounds too good to be true, it probably is. If some financial adviser is telling you they can guarantee a return of 10%+ every year on your investments guaranteed, they are lying to you and are no better than used car salesmen who try to milk you for what you are worth. You should be averaging a return of 7% annually on your investments every year (which includes 3% inflation) over the long-term. Some years your investments will return -10%, some years they will return +20%. These should average out to 7% if you purchase index funds that mirror average market returns. The key to good investing is buying and holding the shares. Do not panic when the market crashes, just don’t go peeking into your investments. Let time and the economy heal itself. If you don’t have a retirement plan at your work (401k, 403b), then you should call Vanguard yesterday and open a free account for a RothIRA. For the year 2013 and 2014 you can contribute a max of $5500 to your RothIRA. Make it a goal to try to max this out each year. If you are only earning $20k a year and find this impossible, just remember, the money you invest now will pay you more money later. Think of it as creating your own employer that you will be able to get money for free from in the future. Remember, you have to start somewhere, regardless of how small the amount is. Invest early and invest often. Don’t get frustrated and compare yourself to your peers if they share how much money they are making or investing.
I hope this simple post got you a little excited about investing. I know I get excited knowing that the money I invest is making money for me while I sleep. All without me having to do anything. If you have any questions or need any advice, please feel free to chime in the comment section.