Whether you have $20 or $200,000 to invest, the objective is
the same: to make your money grow. The means, however, vary dramatically based
on your money investing style.
If you have a loan or credit card
debt with a high interest rate (over 10%) there's no point in investing your
hard-earned cash. Whatever interest you earn through investing (usually less
than 10%) won't make much of a difference because you'll be spending a greater
amount paying interest on your debt. For example, let's say Sam has saved
$4,000 for investing, but he also has $4,000 in credit card debt at a 14%
interest rate. He could invest the $4,000 and if he gets a 12% ROI (return on
investment--and this is being very optimistic) in a year he'll have made $480
in interest. But the credit card company will have charged him $560 in
interest. He's $80 in the hole, and he still has that $4,000 principal to pay
off. Why bother? Pay off the high interest debt first so that you can actually
keep any money you make by investing. Otherwise, the only investors making
money are the ones who loaned it to you at a high interest rate.
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If you don't have one already, it's
a good idea to focus your efforts on setting aside 3-6 months of living
expenses just in case. This is not money that should be invested; it should be
kept readily accessible and safe from swings in the market. You can split your
extra money every month, sending part of it to your emergency fund and part of
it to your investing fund. Whatever you do, don't tie up all of your extra
money in investments unless you have a financial safety net in place; anything
can go wrong (a job loss, an injury, an illness) and failing to prepare for
that possibility is irresponsible.
While you're paying down high
interest debt and building your emergency fund, you should think about why
you're investing. How much money do you want to have, and in what period of
time? Different investors have different goals, such as: holding onto money so
that it's just above inflation, having a specific amount of money for a down
payment in 10 year, Building a nest egg for retirement in 20 years, and Building
a nest egg for retirement in 20 years.
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The bigger the chunk of money you
have available for investing, the more choices you have. Most people diversify
by investing in more than one place, but the way they split their investments
depends on their goals and the amount of risk they're willing to accept.
·
Savings accounts
·
Money market accounts (MMAs)
·
Certificates of deposit (CDs)
·
Bonds
·
Stocks
·
Real estate property
·
Mutual funds
·
Real Estate Investment Trusts (REITs) -
·
Gold and silver
Save money to invest. If you don't
already have money set aside for investing, you'll need to build up your
investment fund. By now, you should know how much money you'll need to reach
your goals, given the risks you've chosen to undertake.
Whatever you choose to invest in,
try to buy it when it's "on sale" -- that is, buy when no one else is
buying. For example, in real estate, you'll want to purchase property when it's
a buyer's market, which is when there are a high proportion of properties for
sale versus potential buyers. When people are desperate to sell, you have
greater room for negotiation, especially if you can see how the investment will
pay off when others don't (or perhaps they do, but can't afford to act on it at
the time).
With more volatile investment
vehicles, you may be tempted to bail. It's easy to get spooked when you see the
value of your investments plummet. If you did your research, however, you
probably knew what you were getting into, and you decided early on how you were
going to approach the swings in the market place. When the stocks you hold
plummet in price, update your research to find out what is happening to the
fundamentals. If you have confidence in the stock, hold, or, better yet, buy
more at the better price. But if you no longer have the confidence in the stock
and the fundamentals have changed permanently, sell. Keep in mind, however,
that when you're selling your investments out of fear, so is everyone else and
your exit is someone else's opportunity to buy low.
If and when the market bounces
back, sell your investments, especially the cyclical stocks. Roll the profits
over into another investment with better valuations (buying low, of course) and
try to do so under a tax shelter that allows you to re-invest the full amount
of your profits (rather than having it taxed first). In the U.S., examples
would be 1031 exchanges (in real estate) and Roth IRAs.
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