Tag: Saving

Three Steps to Take Before Starting Investing

As most people know, investing is a smart thing to do. While you go out to work for the day, you’re happy knowing that over time, your money is working for you too.

Especially with uncertainty over the future of state pensions, investing is a subject that is becoming more important for financial security and freedom going into retirement ages. According to Andrew Craig in his book How to Own the World, anyone under the age of 50 should assume that the government will be in so much debt by the time you retire, that they will no longer be able to offer you a state pension.

But before you jump in with two feet, what are a few things you should make sure of before you start your investment journey?

Pay Off Any Non-Student/Mortgage Loan Debt

There’s no point investing until you have paid off any debt that isn’t from your student loan or mortgage. The reason being is that some types of debt such as credit card debt have high rates of interest. This means that even if you are making a solid 10% return on your investments, you will be paying 20%+ interest rates on your debt – basically placing yourself on the wrong side of compound interest.

Build An Emergency Fund

The last thing you want to do is have to sell your investments because you lost your job or an unexpected expense came up, so before you start investing make sure you have a comfortable amount of cash in a savings account as a security blanket. Selling off your investments can increase your investment fees, but it also encourages you create a habit of doing it in the future too, which can lower your investment returns for years to come. Six months to a year’s worth of expenses should be ample in an emergency fund.

Create An Investment Plan

It’s not wise to just wing it when it comes to investing. Figure out which investment vehicles you want to put your hard-earned money into, and decide what your psychological risk tolerance is. The key is to create a plan and have the discipline to stick to it. Decide the frequency and the amount you will be investing, and how diversified you want to be – whether to buy stocks, bonds, commodities, real estate, precious metals or even cryptocurrency. A lot of new investors will dabble in certain investments, and withdraw their money as soon as any losses appear. The investor that has a solid plan will be able to ride out any market uncertainties because they have already rehearsed beforehand what they would do in that situation.

The Psychology of Money: Morgan Housel’s Finance Tips

Morgan Housel recently wrote The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness. No matter how we think about it, managing our own money and trying to build wealth is a game of emotions. Here’s a summary of the main points:

Go out of your way to find humility when things are going right, and forgiveness/compassion when they go wrong. The journey of building wealth is based on risk and luck. Remind yourself that the journey of investing is filled with ups and downs and to be ready for that emotionally.

Less ego, more wealth. Building wealth is simply spending less than you earn. Richness is buying cars, houses and boats. Wealth is what you don’t see – it’s money saved/invested instead of spent. The hardest financial skill is to get the goalposts to stop moving – life isn’t any fun without any sense of “enough”.

Manage your money in a way that helps you sleep at night. If you’re finding that you can’t sleep at night because you’re risking too much investing, you need to rethink your strategy. You may know it’s the “right” strategy, but if you can’t manage it emotionally, you may need to accept a lower risk and lower return by holding a higher percentage of your net worth in cash, or choosing lower risk strategies.

If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon. Time is the most powerful force for growing your wealth. Be patient, and be in it for the long game like Ronald Read and Warren Buffett. In other words, just shut up and wait!

Become okay with a lot of things going wrong. You can be wrong half the time and still make a fortune. Having money in the market means you have to accept that on some days you may lose money, even as much as 30% or more of what you have invested. But if you can use the barbell strategy and invest in some assets with huge upside potential, you can still afford to be wrong most of the time while building wealth.

Use money to gain control over your time. Money means freedom. Being able to do what you want, when you want, with who you want is one thing that having money can bring.

Be nicer and less flashy. You may think people will like and respect you more based on your possessions, but in reality being more compassionate and kind works better. Make sure that when you’re buying possessions it’s for the right reasons – spending money to show people how much money you have is the fastest way to have less money.

Save. Just save. You don’t need a specific reason to save. Saving for something like a car or a down-payment for a house is good, but save as a default strategy too. Who knows what expenses can crop up as a surprise, wouldn’t it make more sense to be financially ready when they crop up?

Define the cost of success and be ready to pay it. The cost of success in investing is the uncertainty, the doubt, and the fear of losing some of your money. But if you want to play the game you need to see those things as a fee for participating. If you’re not willing to pay it, you may be better off just holding everything in cash and settling for a 0% return.

Worship room for error. You never want to be in a position where you could lose all your money, or losses in the market affecting the lifestyle that you live. If you lose a little you can still recover. If you lose it all, you have no money left, and you’ve been ejected from the game with no bankroll to buy back in. Avoid ruin at all costs.

Avoid the extreme ends of financial decisions. The more extreme your financial decisions, the more likely you may regret them if your goals and desires change at a later date. Good investing is less about making good decisions than it is about consistently not screwing up. You can afford not to be the best investor in the world, but you can’t afford to be a bad one.

You should like risk because it pays off over time. But you should be afraid of too much risk that would ruin your chances of winning the overall game.

Define the game you’re playing. Remember that everyone has their own unique financial goals based on the lifestyle and life goals they have. You don’t even necessarily have to compare yourself to overall market returns either. Just choose a strategy that you’d be happy with, without looking at other people and what they’re doing.

Respect the mess. There’s no single right answer in building wealth. Just find out what works for you.

Want to read more on investing? Read about Benjamin Graham’s value investing philosophy.