The topic too many people want to leap to before they have a stable financial foundation.
80% of Millionaires claim they gained their millionaire status by investing small amounts consistently over time. However, before pouring your money into investments, you should have a budget; be debt free (except maybe your mortgage) and have an emergency fund set aside as a safety net. Even then, I suggest you proceed with some caution.
I am not a Financial Advisor – and I do not give specific investment advice. In this note, I will define some terms and concepts you should probably understand before leaping into the world of investing.
Risk in investing usually refers to the possibility or likelihood of losing some or all of the money you invest. Risk varies depending on the type of investment as well as other factors.
Diversification. I’m not talking about social justice “diversity”, but rather the spreading around of your investment money into more than a few investments. Diversification is a great way to reduce risk. While every investment has some risk, it is unlikely that a large number of investments will all lose money at the same time – particularly if they are specifically selected based on their differences.
Funds. For a long time, this term referred to Mutual Funds. Now you can add Exchange Traded Funds (ETF), Index Funds and others to the list. What funds generally have in common is the ability for someone to invest in many things with a small amount of money. Prior to Funds being common, an investor would have to have a large amount of money to purchase 100 or more holdings. However, with a fund, you and thousands of other investors put their money together and buy many investments (with the help of a fund manager or administrator). You then own a very tiny amount of a very large number of different things. Instant diversification. The fund concept can apply to several types of investments, but stocks and bonds are very common holdings of funds.
Leverage – a fancy word for debt. You have probably heard real estate gurus talking about getting rich using other people’s money through leverage. It’s true, you can make a lot more money by leveraging debt to buy more expensive or larger numbers of investments (such as rental homes). What nobody mentions is that you are increasing your risk when you do this. If you are without a renter for a period, you will still have to pay the bank for the mortgage. If you cannot, your property can be taken away– leaving you with nothing. Real estate is a fine investment; but borrowing too much money without enough cash to cover repairs, or periods without a renter can cause you to lose big. Have a solid strategy to mitigate that risk if you choose debt to finance your investments.
401k – refers to a paragraph in the IRS tax code. That paragraph gives you the ability to create an investment account through your employer and put money into it for retirement without paying taxes on it. Usually, a 401k has one or more funds available to invest in. A 401k is an excellent way to begin investing a little bit every month.
This document is by no means enough information for you to embark on investing. I hope it was enough to spark your interest to learn more, or enough to make you think you should get some assistance.
I managed my own investments for years. I started by reading a lot of publications. One of those publications is now an online resource – Morningstar.com.
An alternative is for you to get the help of a Financial Advisor, someone licensed to help you select the appropriate investments for your goals and tolerance for risk. If it is time for you to find a financial advisor, you might like to read this note as well: https://www.threepointscoaching.com/post/find-a-financial-advisor
Get your budget in place, your debts under control, and put away some savings for a rainy day. Then it will be time to start contributions to your 401k at work, or go find a financial advisor to help.
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