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Beginner
Investing
You need to begin by
performing an assessment of your personal finances. If you wish
to invest in stocks, bonds, mutual funds or even real estate, you
need capital to invest. Construct a net worth statement which will
list your assets(cash, private property, savings,etc) as well as
your debts (loans, credit cards, mortgage,etc). Look closely at
your debt position and determine if you can afford to invest yet.
List the debt and the interest rates of each debt position. It is
much better to pay off high interest debt (12% or higher) that it
is to invest the same money and earn 10% per year. If you need help
with this net worth statement, simply go to Microsofts' site and
download a free evaluation copy of Money. It explains step by step
how to create this statement.
Next, determine the level of risk you want to take with your investments
as well as the percentage of return (earnings or interest) you would
be satisfied with. This is very critical to making smart investment
decisions. Are you a high or low risk taker ? Would you be satisfied
with 6-8% per year or do you want 25% or more? This is a personal
decision that no one can make for you. If you want high risk, consider
equities(stocks), and if you want minimal risk, look at government
backed Treasury Bills.
How
much?
How much can you afford to invest? A regular savings and investment
plan is the key to your success. Get in the habit of saving a certain
percentage of every paycheck, and write out an investment check
just like you would in paying a bill. Consider this amount in your
monthly budget. Speaking of budgets, Money will also let you create
a budget that will show you how to plan your monthly investments
and income. Learn to live within your means. Some of the wealthiest
men in the world learned this lesson early in life. They are happy
to drive a car that is ten years old and live in a house that is
modest, yet fully paid for. They live well below their means and
would readily admit it was one of the keys to acquiring wealth and
being able to enjoy other things in life (travel, giving to others,
etc.).
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Beginner Investing
The idea behind investing is that money is put to use in such a
way that it is likely to turn into more money. This could happen
because someone is willing to pay interest to use the money or because
the value of whatever security the money was used to buy increases
during the period of ownership. Destinations for invested money
include savings accounts, stocks, bonds, mutual funds and numerous
other investment options.
It is important to note that because money can be invested, the
value of a given amount of money changes over time. The longer
that a given amount of money is under your control, the longer you have
to invest it and make more money from it. For this reason, it is
almost always preferable to have money sooner rather than later.
The name given to this concept is the “time value of money”;
that is, the idea that a dollar now is worth more than a dollar
in the future, because a dollar now can accrue value through interest
or other appreciation until the time at which the dollar in the
future would be received. At the same time, there is a penalty associated
with not investing the money that you already have. Because prices
tend to rise over time, the value of money gradually decreases.
This effect is called inflation. Money that is not invested or that
is accruing value at a slower rate than the rate of inflation is
becoming worth less and less as time passes. Therefore, investing
is not only an< opportunity to make more money, but it is the only
way to protect the money that you already have. Another spectacular
benefit associated with many investments is compounding. Money
that
is earning interest grows at a constant rate, paying the same amount
of interest at the end of each time period. However, if that interest
is added to the principal that began earning money originally,
there
is more money earning interest. In this way, interest causes money
to increase in value
exponentially over time. As more and more money earns interest,
more and more interest is earned. This scenario is constantly playing
out in bank accounts, CD’s, and any other investment that
offers compound interest. The more frequently the interest compounds,
the bigger the payoff because, on average, more money is earning
interest at any given time.
At this point, it is important to distinguish between investing
and gambling. Earning interest and taking advantage of compounding
may not produce the immediate jackpot that comes with winning the
lottery, but the risk of ending up with nothing is often far worse
than
waiting for a safe investment to pay off. Pouring a great deal
of money into one stock is very similar to gambling. It could pay
off,
but if it doesn’t the potential losses are great. Safe and
diverse investments may slow the pace of returns, but they also
prevent the bottom from falling out and leaving you with nothing.
Investing requires patience. Gamblers want immediate returns. Investing
allows you to use your intellect to make good decisions. Gambling
relies on luck. Investing returns in the market are verifiable
in
the range of 12-15% (NYSE average). Gambling losses are verifiable,
since the house always wins in the long run.
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