A basic financial truth is that the key to building lasting wealth is to invest money properly. Herein lies the problem, though. Most people err on either side of this statement. First of all, most people do not save and invest. Studies have repeatedly shown that a large percentage of Americans, especially the middle-class, live paycheck to paycheck without any substantial savings. Second of all, those who do invest oftentimes do not invest properly. In this article, we will break down the basic of investing and discuss where a person should start. The renowned Chinese philosopher Lao Tzu said that a journey of a thousand miles begins with the first step. This proverb holds a place of significant truth in investing.
The first step an investor should take is one that is not exciting. And this is why many people have a hard time investing on a regular basis. Investing will not make you a millionaire over night. It very well may over time, but not overnight. The first step is two-fold: successful investing is based on the combination of saving and eliminating debt. A new investor should immediately build an emergency savings fund of at least $1,000 in order to cover unexpected day-to-day expenses such as an unexpected trip to the doctor or veterinarian, car troubles, home appliance troubles, etc.
This emergency savings fund will act as a buffer to protect you from having to use a credit card to finance these expenses because credit card use is oftentimes the number one enemy of successful long-term investing. Long-term investing has no power if a person is accumulating debt at a high rate. Think about it. If your investments are earning you 15% per year, but your debt is accumulating at 25% (the rate of most credit cards), then you are not making any progress. Thus, an emergency savings fund is essential.
Once the emergency savings fund is built, a new investor should focus on paying off high interest debts. College loans and mortgages do not apply. High interest debts would include credit cards, retail outlet cards, credit lines, etc. These debts hinder you severely and they must be eliminated as quickly as possible.
Once the emergency savings fund is established and debts are paid off, now an investor can begin turn toward intentionally building an investment portfolio. However, one of the first steps in building an investment portfolio should include investing in very liquid and safe investments such as U.S. Treasury Bills. A wise investor will usually have at least 3 months of living expenses saved up in liquid investments such as T-Bills in case of major unforeseen expenses such as the loss of a job or large medical bills.
Once a solid base of conservative emergency funds has been established in the form of savings and liquid investments such as T-Bills, then a new investor is ready to get to work building an equity portfolio. At this stage it is best to meet with a Certified Financial Planner in order to get professional advice because several factors including income, age, earnings potential, etc will combine to determine which investment path is best for you.
However, a few basic investment truths will apply. First, make sure you are taking complete advantage of your employer’s retirement benefits. If they are matching a portion of your contributions, make sure you are maxing that out because it is free money. Second, make sure you are broadly diversified. If the last two years have taught the investing public anything, it is that retirement accounts can take huge hits very fast. The safest way to protect oneself is to stay away from high risk investments such as a forex account and to diversify broadly.
