Why You Should Invest Investing has become increasingly important over the years, as the future of social security benefits becomes unknown. People want to insure their futures, and they know that if they are depending on Social Security benefits, and in some cases retirement plans, that they may be in for a rude awakening when they no longer have the ability to earn a steady income. Investing is the answer to the unknowns of the future. You may have been saving money in a low interest savings account over the years. Now, you want to see that money grow at a faster pace. Perhaps you've inherited money or realized some other type of windfall, and you need a way to make that money grow. Again, investing is the answer. Investing is also a way of attaining the things that you want, such as a new home, a college education for your children, or expensive 'toys.' Of course, your financial goals will determine what type of investing you do. If you want or need to make a lot of money fast, you would be more interested in higher risk investing, which will give you a larger return in a shorter amount of time. If you are saving for something in the far off future, such as retirement, you would want to make safer investments that grow over a longer period of time. The overall purpose in investing is to create wealth and security, over a period of time. It is important to remember that you will not always be able to earn an income: you will eventually want to retire. You also cannot count on the social security system to do what you expect it to do. As we have seen with Enron, you also cannot necessarily depend on your company's retirement plan either. So, again, investing is the key to insuring your own financial future, but you must make smart investments! Investing Basics -- What Are Your Investment Goals When it comes to investing, many first time investors want to jump right in with both feet. Unfortunately, very few of those investors are successful. Investing in anything requires some degree of skill. It is important to remember that few investments are a sure thing -- there is the risk of losing your money! Before you jump right in, it is better to not only find out more about investing and how it all works, but also to determine what your goals are. What do you hope to achieve with your investments? Will you be funding a college education? Buying a home? Retiring? Before you invest a single penny, really think about what you hope to achieve with that investment. Knowing what your goal is will help you make smarter investment decisions along the way! Too often, people invest money with dreams of becoming rich overnight. This is possible -- but it is also rare. It is usually a very bad idea to start investing with hopes of becoming rich overnight. It is safer to invest your money in such a way that it will grow slowly over time, and be used for retirement or a child's education. However, if your investment goal is to get rich quick, you should learn as much about high-yield, short term investing as you possibly can before you invest. You should strongly consider talking to a financial planner before making any investments. Your financial planner can help you determine what type of investing you must do to reach the financial goals that you have set. He or she can give you realistic information as to what kind of returns you can expect and how long it will take to reach your specific goals. Again, remember that investing requires more than calling a broker and telling them that you want to buy stocks or bonds. It takes a certain amount of research and knowledge about the market if you hope to invest successfully. Different Types of Investments Overall, there are three different kinds of investments. These include stocks, bonds, and cash. Sounds simple, right? Well, unfortunately, it gets very complicated from there. You see, each type of investment has numerous types of investments that fall under it. There is quite a bit to learn about each different investment type. The stock market can be a big scary place for those who know little or nothing about investing. Fortunately, the amount of information that you need to learn has a direct relation to the type of investor that you are. There are also three types of investors: conservative, moderate, and aggressive. The different types of investments also cater to the two levels of risk tolerance: high risk and low risk. Conservative investors often invest in cash. This means that they put their money in interest bearing savings accounts, money market accounts, mutual funds, US Treasury bills, and Certificates of Deposit. These are very safe investments that grow over a long period of time. These are also low risk investments. Moderate investors often invest in cash and bonds, and may dabble in the stock market. Moderate investing may be low or moderate risks. Moderate investors often also invest in real estate, providing that it is low risk real estate. Aggressive investors commonly do most of their investing in the stock market, which is higher risk. They also tend to invest in business ventures as well as higher risk real estate. For instance, if an aggressive investor puts his or her money into an older apartment building, then invests more money renovating the property, they are running a risk. They expect to be able to rent the apartments out for more money than the apartments are currently worth -- or to sell the entire property for a profit on their initial investments. In some cases, this works out just fine, and in other cases, it doesn't. It's a risk. Before you start investing, it is very important that you learn about the different types of investments, and what those investments can do for you. Understand the risks involved, and pay attention to past trends as well. History does indeed repeat itself, and investors know this first hand! Determine Your Risk Tolerance Each individual has a risk tolerance that should not be ignored. Any good stock broker or financial planner knows this, and they should make the effort to help you determine what your risk tolerance is. Then, they should work with you to find investments that do not exceed your risk tolerance. Determining one's risk tolerance involves several different things. First, you need to know how much money you have to invest, and what your investment and financial goals are. For instance, if you plan to retire in ten years, and you've not saved a single penny towards that end, you need to have a high risk tolerance -- because you will need to do some aggressive -- risky -- investing in order to reach your financial goal. On the other side of the coin, if you are in your early twenties and you want to start investing for your retirement, your risk tolerance will be low. You can afford to watch your money grow slowly over time. Realize of course, that your need for a high risk tolerance or your need for a low risk tolerance really has no bearing on how you feel about risk. Again, there is a lot in determining your tolerance. For instance, if you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, what would you do? Would you sell out or would you let your money ride? If you have a low tolerance for risk, you would want to sell out: if you have a high tolerance, you would let your money ride and see what happens. This is not based on what your financial goals are. This tolerance is based on how you feel about your money! Again, a good financial planner or stock broker should help you determine the level of risk that you are comfortable with, and help you choose your investments accordingly. Your risk tolerance should be based on what your financial goals are and how you feel about the possibility of losing your money. It's all tied in together. What Is Your Investment Style? Knowing what your risk tolerance and investment style are will help you choose investments more wisely. While there are many different types of investments that one can make, there are really only three specific investment styles -- and those three styles tie in with your risk tolerance. The three investment styles are conservative, moderate, and aggressive. Naturally, if you find that you have a low tolerance for risk, your investment style will most likely be conservative or moderate at best. If you have a high tolerance for risk, you will most likely be a moderate or aggressive investor. At the same time, your financial goals will also determine what style of investing you use. If you are saving for retirement in your early twenties, you should use a conservative or moderate style of investing -- but if you are trying to get together the funds to buy a home in the next year or two, you would want to use an aggressive style. Conservative investors want to maintain their initial investment. In other words, if they invest $5000 they want to be sure that they will get their initial $5000 back. This type of investor usually invests in common stocks and bonds and short term money market accounts. An interest earning savings account is very common for conservative investors. A moderate investor usually invests much like a conservative investor, but will use a portion of their investment funds for higher risk investments. Many moderate investors invest 50% of their investment funds in safe or conservative investments, and invest the remainder in riskier investments. An aggressive investor is willing to take risks that other investors won't take. They invest higher amounts of money in riskier ventures in the hopes of achieving larger returns -- either over time or in a short amount of time. Aggressive investors often have all or most of their investment funds tied up in the stock market. Again, determining what style of investing you will use will be determined by your financial goals and your risk tolerance. No matter what type of investing you do, however, you should carefully research that investment. Never invest without having all of the facts! How to Know When to Sell Your Stocks While quite a bit of time and research goes into selecting stocks, it is often hard to know when to pull out -- especially for first time investors. The good news is that if you have chosen your stocks carefully, you won't need to pull out for a very long time, such as when you are ready to retire. But there are specific instances when you will need to sell your stocks before you have reached your financial goals. You may think that the time to sell is when the stock value is about to drop -- and you may even be advised by your broker to do this. But this isn't necessarily the right course of action. Stocks go up and down all the time, depending on the economy: and of course the economy depends on the stock market as well. This is why it is so hard to determine whether you should sell your stock or not. Stocks go down, but they also tend to go back up. You have to do more research, and you have to keep up with the stability of the companies that you invest in. Changes in corporations have a profound impact on the value of the stock. For instance, a new CEO can affect the value of stock. A plummet in the industry can affect a stock. Many things -- all combined -- affect the value of stock. But there are really only three good reasons to sell a stock. The first reason is having reached your financial goals. Once you've reached retirement, you may wish to sell your stocks and put your money in safer financial vehicles, such as a savings account. This is a common practice for those who have invested for the purpose of financing their retirement. The second reason to sell a stock is if there are major changes in the business you are investing in that cause, or will cause, the value of the stock to drop, with little or no possibility of the value rising again. Ideally, you would sell your stock in this situation before the value starts to drop. If the value of the stock spikes, this is the third reason you may want to sell. If your stock is valued at $100 per share today, but drastically rises to $200 per share next week, it is a great time to sell -- especially if the outlook is that the value will drop back down to $100 per share soon. You would sell when the stock was worth $200 per share. As a beginner, you definitely want to consult with a broker or a financial advisor before buying or selling stocks. They will work with you to help you make the right decisions to reach your financial goals. Investing Mistakes to Avoid Along the way, you may make a few investing mistakes, however there are big mistakes that you absolutely must avoid if you are to be a successful investor. For instance, the biggest investing mistake that you could ever make is to not invest at all, or to put off investing until later. Make your money work for you -- even if all you can spare is $20 a week to invest! While not investing at all or putting off investing until later are big mistakes, investing before you are in the financial position to do so is another big mistake. Get your current financial situation in order first, and then start investing. Get your credit cleaned up, pay off high interest loans and credit cards, and put at least three months of living expenses in savings. Once this is done, you are ready to start letting your money work for you. Don't invest to get rich quick. That is the riskiest type of investing that there is, and you will more than likely lose. If it was easy, everyone would be doing it! Instead, invest for the long term, and have the patience to weather the storms and allow your money to grow. Only invest for the short term when you know you will need the money in a short amount of time, and then stick with safe investments, such as certificates of deposit. Don't put all of your eggs into one basket. Scatter it around various types of investments for the best returns. Also, don't move your money around too much. Let it ride. Pick your investments carefully, invest your money, and allow it to grow -- don't panic if the stock drops a few dollars. If the stock is a stable stock, it will go back up. A common mistake that a lot of people make is thinking that their investments in collectibles will really pay off. Again, if this were true, everyone would do it. Don't count on your Coke collection or your book collection to pay for your retirement years! Count on investments made with cold hard cash instead. Choosing a Broker Depending on the type of investing that you plan to do, you may need to hire a broker to handle your investments for you. Brokers work for brokerage houses and have the ability to buy and sell stock on the stock exchange. You may wonder if you really need a broker. The answer is yes. If you intend to buy or sell stocks on the stock exchange, you must have a broker. Stockbrokers are required to pass two different tests in order to obtain their license. These tests are very difficult, and most brokers have a background in business or finance, with a Bachelors or Masters Degree. It is very important to understand the difference between a broker and a stock market analyst. An analyst literally analyzes the stock market, and predicts what it will or will not do, or how specific stocks will perform. A stock broker is only there to follow your instructions to either buy or sell stock: not to analyze stocks. Brokers earn their money from commissions on sales in most cases. When you instruct your broker to buy or sell a stock, they earn a set percentage of the transaction. Many brokers charge a flat 'per transaction' fee. There are two types of brokers: Full service brokers and discount brokers. Full service brokers can usually offer more types of investments, may provide you with investment advice, and is usually paid in commissions. Discount brokers typically do not offer any advice and do no research -- they just do as you ask them to do, without all of the bells and whistles. So, the biggest decision you must make when it come to brokers is whether you want a full service broker or a discount broker. If you are new to investing, you may need to go with a full service broker to ensure that you are making wise investments. They can offer you the skill that you lack at this point. However, if you are already knowledgeable about the stock market, all you really need is a discount broker to make your trades for you. About Online Trading The invention of the Internet has brought about many changes in the way that we conduct our lives and our personal business. We can pay our bills online, shop online, bank online, and even date online! We can even buy and sell stocks online. Traders love having the ability to look at their accounts whenever they want to, and brokers like having the ability to take orders over the Internet, as opposed to the telephone. Most brokers and brokerage houses now offer online trading to their clients. Another great thing about trading online is that fees and commissions are often lower. While online trading is great, there are some drawbacks. If you are new to investing, having the ability to actually speak with a broker can be quite beneficial. If you aren't stock market savvy, online trading may be a dangerous thing for you. If this is the case, make sure that you learn as much as you can about trading stocks before you start trading online. You should also be aware that you don't have a computer with Internet access attached to you. You won't always have the ability to get online to make a trade. You need to be sure that you can call and speak with a broker if this is the case, using the online broker. This is true whether you are an advanced trader or a beginner. It is also a good idea to go with an online brokerage company that has been around for a while. You won't find one that has been in business for fifty years of course, but you can find a company that has been in business that long and now offers online trading. Again, online trading is a beautiful thing -- but it isn't for everyone. Think carefully before you decide to do your trading online, and make sure that you really know what you are doing! Different Types of Bonds Investing in bonds is very safe, and the returns are usually very good. There are four basic types of bonds available and they are sold through the Government, through corporations, state and local governments, and foreign governments. The greatest thing about bonds is that you will get your initial investment back. This makes bonds the perfect investment vehicle for those who are new to investing, or for those who have a low risk tolerance. The United States Government sells Treasury Bonds through the Treasury Department. You can purchase Treasury Bonds with maturity dates ranging from three months to thirty years. Treasury bonds include Treasury Notes (T-Notes), Treasury Bills (T-Bills), and Treasury Bonds. All Treasury bonds are backed by the United States Government, and tax is only charged on the interest that the bonds earn. Corporate bonds are sold through public securities markets. A corporate bond is essentially a company selling its debt. Corporate bonds usually have high interest rates, but they are a bit risky. If the company goes belly-up, the bond is worthless. State and local Governments also sell bonds. Unlike bonds issued by the federal government, these bonds usually have higher interest rates. This is because State and Local Governments can indeed go bankrupt -- unlike the federal government. State and Local Government bonds are free from income taxes -- even on the interest. State and local taxes may also be waived. Tax-free Municipal Bonds are common State and Local Government Bonds. Purchasing foreign bonds is actually very difficult, and is often done as part of a mutual fund. It is often very risky to invest in foreign countries. The safest type of bond to buy is one that is issued by the US Government. The interest may be a bit lower, but again, there is little or no risk involved. For best results, when a bond reaches maturity, reinvest it into another bond. Determining Where You Will Invest There are several different types of investments, and there are many factors in determining where you should invest your funds. Of course, determining where you will invest begins with researching the various available types of investments, determining your risk tolerance, and determining your investment style -- along with your financial goals. If you were going to purchase a new car, you would do quite a bit of research before making a final decision and a purchase. You would never consider purchasing a car that you had not fully looked over and taken for a test drive. Investing works much the same way. You will of course learn as much about the investment as possible, and you would want to see how past investors have done as well. It's common sense! Learning about the stock market and investments takes a lot of time: but it is time well spent. There are numerous books and websites on the topic, and you can even take college level courses on the topic -- which is what stock brokers do. With access to the Internet, you can actually play the stock market -- with fake money -- to get a feel for how it works. You can make pretend investments, and see how they do. Do a search with any search engine for 'Stock Market Games' or 'Stock Market Simulations.' This is a great way to start learning about investing in the stock market. Other types of investments -- outside of the stock market -- do not have simulators. You must learn about those types of investments the hard way -- by reading. As a potential investor, you should read anything you can get your hands on about investing: but start with the beginning investment books and websites first. Otherwise, you will quickly find that you are lost. Finally, speak with a financial planner. Tell them your goals, and ask them for their suggestions -- this is what they do! A good financial planner can easily help you determine where to invest your funds, and help you set up a plan to reach all of your financial goals. Many will even teach you about investing along the way -- make sure you pay attention to what they are telling you! How Much Money Should You Invest? Many first time investors think that they should invest all of their savings. This isn't necessarily true. To determine how much money you should invest, you must first determine how much you actually can afford to invest, and what your financial goals are. First, let's take a look at how much money you can currently afford to invest. Do you have savings that you can use? If so, great! However, you don't want to cut yourself short when you tie your money up in an investment. What were your savings originally for? It is important to keep three to six months of living expenses in a readily accessible savings account -- don't invest that money! Don't invest any money that you may need to lay your hands on in a hurry in the future. So, begin by determining how much of your savings should remain in your savings account, and how much can be used for investments. Unless you have funds from another source, such as an inheritance that you've recently received, this will probably be all that you currently have to invest. Next, determine how much you can add to your investments in the future. If you are employed, you will continue to receive an income, and you can plan to use a portion of that income to build your investment portfolio over time. Speak with a qualified financial planner to set up a budget and determine how much of your future income you will be able to invest. With the help of a financial planner, you can be sure that you are not investing more than you should -- or less than you should in order to reach your investment goals. For many types of investments, a certain initial investment amount will be required. Hopefully, you've done your research, and you have found an investment that will prove to be sound. If this is the case, you probably already know what the required initial investment is. If the money that you have available for investments does not meet the required initial investment, you may have to look at other investments. Never borrow money to invest, and never use money that you have not set aside for investing!
The Importance of Diversification "Don't put all of your eggs in one basket!" You've probably heard that over and over again throughout your life: and when it comes to investing, it is very true. Diversification is the key to successful investing. All successful investors build portfolios that are widely diversified, and you should too! Diversifying your investments might include purchasing various stocks in many different industries. It may include purchasing bonds, investing in money market accounts, or even in some real property. The key is to invest in several different areas -- not just one. Over time, research has shown that investors who have diversified portfolios usually see more consistent and stable returns on their investments than those who just invest in one thing. By investing in several different markets, you will actually be at less risk also. For instance, if you have invested all of your money in one stock, and that stock takes a significant plunge, you will most likely find that you have lost all of your money. On the other hand, if you have invested in ten different stocks, and nine are doing well while one plunges, you are still in reasonably good shape. A good diversification will usually include stocks, bonds, real property, and cash. It may take time to diversify your portfolio. Depending on how much you have to initially invest, you may have to start with one type of investment, and invest in other areas as time goes by. This is okay, but if you can divide your initial investment funds among various types of investments, you will find that you have a lower risk of losing your money, and over time, you will see better returns. Experts also suggest that you spread your investment money evenly among your investments. In other words, if you start with $100,000 to invest, invest $25,000 in stocks, $25,000 in real property, $25,000 in bonds, and put $25,000 in an interest bearing savings account. Investing for Retirement Retirement may be a long way off for you -- or it might be right around the corner. No matter how near or far it is, you've absolutely got to start saving for it now. However, saving for retirement isn't what it used to be with the increase in cost of living and the instability of social security. You have to invest for your retirement, as opposed to saving for it! Let's start by taking a look at the retirement plan offered by your company. Once upon a time, these plans were quite sound. However, after the Enron upset and all that followed, people aren't as secure in their company retirement plans anymore. If you choose not to invest in your company's retirement plan, you do have other options. First, you can invest in stocks, bonds, mutual funds, certificates of deposit, and money market accounts. You do not have to state to anybody that the returns on these investments are to be used for retirement. Just simply let your money grow overtime, and when certain investments reach their maturity, reinvest them and continue to let your money grow. You can also open an Individual Retirement Account (IRA). IRA's are quite popular because the money is not taxed until you withdraw the funds. You may also be able to deduct your IRA contributions from the taxes that you owe. An IRA can be opened at most banks. A ROTH IRA is a newer type of retirement account. With a Roth, you pay taxes on the money that you are investing in your account, but when you cash out, no federal taxes are owed. Roth IRA's can also be opened at a financial institution. Another popular type of retirement account is the 401(k). 401(k's) are typically offered through employers, but you may be able to open a 401(k) on your own. You should speak with a financial planner or accountant to help you with this. The Keogh plan is another type of IRA that is suitable for self employed people. Self-employed small business owners may also be interested in Simplified Employee Pension Plans (SEP). This is another type of Keogh plan that people typically find easier to administer than a regular Keogh plan. Whichever retirement investment you choose, just make sure you choose one! Again, do not depend on social security, company retirement plans, or even an inheritance that may or may not come through! Take care of your financial future by investing in it today. Investment Strategy Because investing is not a sure thing in most cases, it is much like a game -- you don't know the outcome until the game has been played and a winner has been declared. Anytime you play almost any type of game, you have a strategy. Investing isn't any different -- you need an investment strategy. An investment strategy is basically a plan for investing your money in various types of investments that will help you meet your financial goals in a specific amount of time. Each type of investment contains individual investments that you must choose from. A clothing store sells clothes -- but those clothes consist of shirts, pants, dresses, skirts, undergarments, etc. The stock market is a type of investment, but it contains different types of stocks, which all contain different companies that you can invest in. If you haven't done your research, it can quickly become very confusing -- simply because there are so many different types of investments and individual investments to choose from. This is where your strategy, combined with your risk tolerance and investment style all come into play. If you are new to investments, work closely with a financial planner before making any investments. They will help you develop an investment strategy that will not only fall within the bounds of your risk tolerance and your investment style, but will also help you achieve your financial goals. Never invest money without having a goal and a strategy for reaching that goal! This is essential. Nobody hands their money over to anyone without knowing what that money is being used for and when they will get it back! If you don't have a goal, a plan, or a strategy, that is essentially what you are doing! Always start with a goal and a strategy for reaching that goal! Getting Your Feet Wet -- Begin Investing If you are anxious to get your investments started, you can get started right away without having a lot of knowledge about the stock market. Start by being a conservative investor with a low risk tolerance. This will give you a way to making your money grow while you learn more about investing. Start with an interest bearing savings account. You may already have one. If you don't, you should. A savings account can be opened at the same bank that you do your checking at -- or at any other bank. A savings account should pay 2 -- 4% on the money that you have in the account. It's not a lot of money -- unless you have a million dollars in that account -- but it is a start, and it is money making money. Next, invest in money market funds. This can often be done through your bank. These funds have higher interest payouts than typical savings accounts, but they work much the same way. These are short term investments, so your money won't be tied up for a long period of time -- but again, it is money making money. Certificates of Deposit are also sound investments with no risk. The interest rates on CD's are typically higher than those of savings accounts or Money Market Funds. You can select the duration of your investment, and interest is paid regularly until the CD reaches maturity. CD's can be purchased at your bank, and your bank will insure them against loss. When the CD reaches maturity, you receive your original investment, plus the interest that the CD has earned. If you are just starting out, one or all of these three types of investments is the best starting point. Again, this will allow your money to start making money for you while you learn more about investing in other places. Different Types of Stock The different types of stock are what confuse most first time investors. That confusion causes people to turn away from the stock market altogether, or to make unwise investments. If you are going to play the stock market, you must know what types of stock are available and what it all means! Common Stock is a term that you will hear quite often. Anyone can purchase common stock, regardless of age, income, age, or financial standing. Common stock is essentially part ownership in the business you are investing in. As the company grows and earns money, the value of your stock rises. On the other hand, if the company does poorly or goes bankrupt, the value of your stock falls. Common stock holders do not participate in the day to day operations of a business, but they do have the power to elect the board of directors. Along with common stock, there are also different classes of stock. The different classes of stock in one company are often called Class A and Class B. The first class, class A, essentially gives the stock owner more votes per share of stock than the owners of class B stock. The ability to create different classes of stock in a corporation has existed since 1987. Many investors avoid stock that has more than one class, and stocks that have more than one class are not called common stock. The most upscale type of stock is of course Preferred Stock. Preferred stock isn't exactly a stock. It is a mix of a stock and a bond. The owner's of preferred stock can lay claim to the assets of the company in the case of bankruptcy, and preferred stock holders get the proceeds of the profits from a company before the common stock owners. If you think that you may prefer this preferred stock, be aware that the company typically has the right to buy the stock back from the stock owner and stop paying dividends. Understanding Bonds There are certain things you must understand about bonds before you start investing in them. Not understanding these things may cause you to purchase the wrong bonds, at the wrong maturity date. The three most important things that must be considered when purchasing a bond include the par value, the maturity date, and the coupon rate. The par value of a bond refers to the amount of money you will receive when the bond reaches its maturity date. In other words, you will receive your initial investment back when the bond reaches maturity. The maturity date is of course the date that the bond will reach its full value. On this date, you will receive your initial investment, plus the interest that your money has earned. Corporate and State and Local Government bonds can be 'called' before they reach their maturity, at which time the corporation or issuing Government will return your initial investment, along with the interest that it has earned thus far. Federal bonds cannot be 'called.' The coupon rate is the interest that you will receive when the bond reaches maturity. This number is written as a percentage, and you must use other information to find out what the interest will be. A bond that has a par value of $2000, with a coupon rate of 5% would earn $100 per year until it reaches maturity. Because bonds are not issued by banks, many people don't understand how to go about buying one. There are two ways this can be done. You can use a broker or brokerage firm to make the purchase for you or you can go directly to the Government. If you use a brokerage, you will more than likely be charged a commission fee. If you want to use a broker, shop around for the lowest commissions! Purchasing directly through the Government isn't nearly as hard as it once was. There is a program called Treasury Direct which will allow you to purchase bonds and all of your bonds will be held in one account, that you will have easy access to. This will allow you to avoid using a broker or brokerage firm. Why Should I Make a Budget? You say you know where your money goes and you don't need it all written down to keep up with it? I issue you this challenge. Keep track of every penny you spend for one month and I do mean every penny. You will be shocked at what the itty-bitty expenses add up to. Take the total you spent on just one unnecessary item for the month, multiply it by 12 for months in a year and multiply the result by 5 to represent 5 years. That is how much you could have saved AND drawn interest on in just five years. That, my friend, is the very reason all of us need a budget. If we can get control of the small expenses that really don't matter to the overall scheme of our lives, we can enjoy financial success. The little things really do count. Cutting what you spend on lunch from five dollars a day to three dollars a day on every work day in a five day work week saves $10 a week: $40 a month: $480 a year: $2400 in five years: .plus interest. See what I mean: it really IS the little things and you still eat lunch everyday AND that was only one place to save money in your daily living without doing without one thing you really need. There are a lot of places to cut expenses if you look for them. Set some specific long term and short term goals. There are no wrong answers here. If it's important to you, then it's important period. If you want to be able to make a down payment on a house, start a college fund for your kids, buy a sports car, take a vacation to Aruba: anything: then that is your goal and your reason to get a handle on your financial situation now. The Budget -- The Ultimate Financial Management Tool A carpenter uses a set of house plans to build a house. If he didn't the bathroom might get overlooked altogether. Rocket Scientists would never begin construction on a new booster rocket without a detailed set of design specifications. Yet most of us go blindly out into the world without an inkling of an idea about finances and without any plan at all. Not very smart of us, is it? A money plan is called a budget and it is crucial to get us to our desired financial goals. Without a plan we will drift without direction and end up marooned on a distant financial reef. If you have a spouse or a significant other, you should make this budget together. Sit down and figure out what your joint financial goals are: long term and short term. Then plan your route to get to those goals. Every journey begins with one step and the first step to attaining your goals is to make a realistic budget that both of you can live with. A budget should never be a financial starvation diet. That won't work for the long haul. Make reasonable allocations for food, clothing, shelter, utilities and insurance and set aside a reasonable amount for entertainment and the occasional luxury item. Savings should always come first before any spending. Even a small amount saved will help you reach your long term and short term financial goals. You can find many budget forms on the internet. Just use any search engine you choose and type in "free budget forms". You'll get lots of hits. Print one out and work on it with your spouse or significant other. Both of you will need to be happy with the final result and feel like it's something you can stick to. Spend Wisely to Save Money Have you ever noticed that the things you buy every week at the grocery and hardware stores go up a few cents between shopping trips? Not by much: just by a little each week but they continue to creep up and up. All it takes for the price to jump up by a lot is a little hiccup in the world wide market, note the price of gasoline as it relates to world affairs. There is a way that we can keep these price increases from impacting our personal finances so much and that is by buying in quantity and finding the best possible prices for the things we use and will continue to use everyday: things that will keep just as well on the shelves in our homes as it does on the shelves at the grocery store or hardware store. For instance, dog food and cat food costs about 10% less when bought by the case than it does when bought at the single can price and if you wait for close out prices you save a lot more than that. Set aside some space in your home and make a list of things that you use regularly which will not spoil. Any grain or grain products will need to be stored in airtight containers that rats can't get into so keep that in mind. Then set out to find the best prices you can get on quantity purchases of such things as bathroom items and dry and canned food. You will be surprised at how much you can save by buying a twenty pound bag of rice as opposed to a one pound bag but don't forget that it must be kept in a rat proof container. You can buy some clothing items such as men's socks and underwear because those styles don't change, avoid buying children's and women's clothing, those styles change and sizes change too drastically. Try to acquire and keep a two year supply of these items and you can save hundreds of dollars. Rebates -- Reward or Rip Off? Rebates have become increasingly popular in the last few years on a lot of items and certainly on electronic items and computers. Rebates of $20, $50 or $100 are not uncommon. I've even seen items advertised as "free after rebate". Do these rebates come under the heading of "too good to be true"? Some of them do and there are "catches" to watch out for but if you are careful, rebates can help you get some really good deals. The way a rebate works is that you pay the listed price for an item then mail in a form and the bar code to the manufacturer and they send you a refund thus reducing the price of what you paid for the item except with a time delay of several weeks. Rule #1. Rebates from reputable companies are usually just fine. You can be pretty sure you will get the promised rebate from Best Buy, Amazon or Dell but you should probably not count on getting one from a company you've never heard of. If you really want the product and are OK with paying the price listed then buy it but don't count on actually getting the refund. Rule #2. Check rebate expiration dates. Many times products will stay on the shelf of a retailer after the date for sending in the rebate offer has expired so check that date carefully. Rule #3. Be sure you have all the forms required to file for the rebate before you leave the store. Rebates will almost always require a form to be filled out, a receipt for the purchase and a bar code. Rule #4. Back up your rebate claim. Make copies of everything you send in to get your rebate including the bar code. Stuff gets lost in the mail all the time and if the rebate is for $50 it's worth the trouble to back up your claim. Avoiding Impulse Spending Answer these questions truthfully: 1.) Does your spouse or partner complain that you spend too much money? 2.) Are you surprised each month when your credit card bill arrives at how much more you charged than you thought you had? 3.) Do you have more shoes and clothes in your closet than you could ever possibly wear? 4.) Do you own every new gadget before it has time to collect dust on a retailer's shelf? 5.) Do you buy things you didn't know you wanted until you saw them on display in a store? If you answered "yes" to any two of the above questions, you are an impulse spender and indulge yourself in retail therapy. This is not a good thing. It will prevent you from saving for the important things like a house, a new car, a vacation or retirement. You must set some financial goals and resist spending money on items that really don't matter in the long run. Impulse spending will not only put a strain on your finances but your relationships, as well. To overcome the problem, the first thing to do is learn to separate your needs from your wants. Advertisers blitz us hawking their products at us 24/7. The trick is to give yourself a cooling-off period before you buy anything that you have not planned for. When you go shopping, make a list and take only enough cash to pay for what you have planned to buy. Leave your credit cards at home. If you see something you think you really need, give yourself two weeks to decide if it is really something you need or something you can easily do without. By following this simple solution, you will mend your financial fences and your relationships. Stabilize Your Current Situation Before You Invest Before you consider investing in any type of market, you should really take a long hard look at your current situation. Investing in the future is a good thing, but clearing up bad -- or potentially bad -- situations in the present is more important. Pull your credit report. You should do this once each year. It is important to know what is on your report, and to clear up any negative items on your credit report as soon as possible. If you've set aside $25,000 to invest, but you have $25,000 worth of bad credit, you are better off cleaning up the credit first! Next, look at what you are paying out each month, and get rid of expenses that are not necessary. For instance, high interest credit cards are not necessary. Pay them off and get rid of them. If you have high interest outstanding loans, pay them off as well. If nothing else, exchange the high interest credit card for one with lower interest and refinance high interest loans with loans that are lower interest. You may have to use some of your investment funds to take care of these matters, but in the long run, you will see that this is the wisest course of action. Get yourself into good financial shape -- and then enhance your financial situation with sound investments. It doesn't make sense to start investing funds if your bank balance is always running low or if you are struggling to pay your monthly bills. Your investment dollars will be better spent to rectify adverse financial issues that affect you each day. While you are in the process of clearing up your present financial situation, make it a point to educate yourself about the various types of investments. This way, when you are in a financially sound situation, you will be armed with the knowledge that you need to make equally sound investments in your future. Long Term Investments for the Future If you are ready to invest money for a future event, such as retirement or a child's college education, you have several options. You do not have to invest in risky stocks or ventures. You can easily invest your money in ways that are very safe, which will show a decent return over a long period of time. First consider bonds. There are various types of bonds that you can purchase. Bond's are similar to Certificates of Deposit. Instead of being issued by banks, however, bonds are issued by the Government. Depending on the type of bonds that you buy, your initial investment may double over a specific period of time. Mutual funds are also relatively safe. Mutual funds exist when a group of investors put their money together to buy stocks, bonds, or other investments. A fund manager typically decides how the money will be invested. All you need to do is find a reputable, qualified broker who handles mutual funds, and he or she will invest your money, along with other client's money. Mutual funds are a bit riskier than bonds. Stocks are another vehicle for long term investments. Shares of stocks are essentially shares of ownership in the company you are investing in. When the company does well financially, the value of your stock rises. However, if a company is doing poorly, your stock value drops. Stocks, of course, are even riskier than Mutual funds. Even though there is a greater amount of risk, you can still purchase stock in sound companies, such as G & E Electric, and sleep at night knowing that your money is relatively safe. The important thing is to do your research before investing your money for long term gain. When purchasing stocks you should choose stocks that are well established. When you look for a mutual fund to invest in, choose a broker that is well established and has a proven track record. If you aren't quite ready to take the risks involved with mutual funds or stocks, at the very least invest in bonds that are guaranteed by the Government.
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