Monday, August 24, 2015

Investing Basics for Novices

Investing provides the funds to aid your financial health.
Money is the foundation of your financial health! Investing provides money / passive funds.
This article is targeted to new, start-up business owners and newby investors. It is in response to a journalist question on the subject. This is NOT an article dedicated to the business owner perspective. For those, you must read my Cash for Impact (www.cash4impact.com) blog or the The Funding Is Out There! (www.thefundingisoutthere.com) blog. 

Use Your 401K!

Invest as much as you can in your 401K. If you are in the 25% tax bracket, your $1,000 contribution will only reduce your net take home pay by $750 because you saved 25% in taxes via your pre-tax 401K contribution. (I often share this tidbit with recent graduates in their first decent-paying job. They are always amazed by this when I do the math for them.)

Buy a house.

If you intend to stay in your city for a while and you make a high income, buy a house. I moved every 2-3 years for the first 10 years of my career but I bought a house in every city I lived in (except when I lived overseas!). There are plenty of first time homebuyer programs out there so you can get by with 5% or lower downpayments. You can sell the house when you move or rent it out. This practice enabled me to build my net worth quickly. In addition, I know other young homeowners who had roommates. Those roommates allowed those homeowners to pay off their houses in 8-10 years, instead of 30. (As an engineer at Honda, three of my fellow engineers, all male, did this after buying their first home at 21-23 years of age. I think young guys room together more often than young women but I may be wrong.)

Utilize the stock market.

If you want to invest in the stock market, invest in index funds until you determine what companies you want to invest in and gain familiarity with “direct” investing. I read Bogle’s book (and 15 other books) on investing in my first two years investing in the stock market. Index funds have MUCH lower fees, few if any hidden fees, and these track the market index. Rarely does a mutual fund manager beat the market index over extended time periods (i.e., 15 years or more).
Before you commit to investing significant funds in individual stocks (no specified dollar amount - whatever is significant to you), set up portfolios on Yahoo finance and track your performance. Do this for 6 months. It’s better to lose fake money while you become more comfortable with investing than to lose real money!

Caveat

Remember, I am NOT an investment advisor. This article is meant solely for instructional purposes , to get you started with investing. You can move as fast or as slow as you are comfortable, but the point is to take some action now. Investing increases your net worth, which provides you with the financial security to help you take the leap into business ownership. Later, as a successful business owner, you will need to pull money out of the business to avoid having all your net worth tied up in the business. This article is one way to start on the road to all this!


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