Being a successful investor starts with a solid foundation: having a financial plan that is structured properly so your goals are attainable and you can stick to it. You must make sure that you understand what your goals are, your timeframe to achieve these goals, and how to make adjustments if for some reason your goals are not coming to fruition and need adjustments.
My Two Cents on Consumer Debt
To be a successful investor, consumer debt is one thing that you should look to completely eliminate before you start investing. Credit cards are one of the biggest sources of consumer debt for a majority of individuals. Unless you are diligent and pay off you balances each and every month, more often than not you can earn a better rate of return on your “investments” by using your money to pay down your credit card balance, thereby lowering the balance subject to high credit card interest rates. Why invest your money in something that can potentially earn you on average 8-10 percent, when you can pay down our balance and earn a guaranteed rate of return equal to whatever your interest rate is? Or what about carrying nice chunk of savings in a saving account that earns a paltry average of 1-2 percent? It doesn’t make “cents!” And one other note on consumer debt: if you notice that you consistently are carrying this type of debt, I highly recommend taking a good, hard look at your spending habits and establish a budget for yourself. You would be surprised at how much money you could potentially save and invest by eliminating unnecessary, excess spending. Even little adjustments and eliminations help!
Establishing Your Financial Goals
Do you find it easier to save your money when you have something specific in mind you would like to use it for? If so, you are not alone! Most individuals plan their financial well being on this very basic principle, and is an excellent starting point to your financial plan. Keep in mind that your needs and goals will evolve and change over time, therefore your financial plan needs to be a flexible one. Some common long term financial goals include saving for retirement, purchasing a home, having a “rainy day” fund, and saving for a child’s college tuition.
Remember: Only you know what goals are the most important to you, and the best way to prioritize them. Prioritization is a must; and by being realistic with your goals and strategy plan, this will ensure financial success. An emergency fund should be high on your list of priorities, especially if you income is less than stable, or if family assistance is hard to come by. For some, financial planning may take place by obtaining one goal at a time, where others may be able to contribute to a few savings goals at the same time. Again, only you know what is best for YOU, and are the best person to decide how you will work to achieve your goals.
Do you know what you are saving?
What is your savings rate? How much of your annual income do you contribution to your financial plan and goals? Is it low, nonexistent, or even negative? This is key to understanding your financial starting point, and helping you determine what steps need to be taken to get you on your way to achieving your goals and becoming financially successful.
After determining what your savings rate is, the next step you need to take is to really examine your income and spending habits. What are your sources of income? For most people, the main and only source of income is from their career or job. There are only a few ways to increase your income: work more hours if additional compensation is provided, take on a second job or look to find a higher earning one. On the other hand, examining your spending habits and reducing your expenditures is the more feasible option. Grab your checkbook, bank statements, credit card statements, receipts and whatever other documentation you have for your expenditures and really take a hard look at where your money is going. Prioritize your expenditures and see if there are any trade-offs or eliminations you can make to help reduce your expenditures, and increase your savings rate.
Are you taking advantage of tax-deferred retirement savings?
Does your employer offer you a retirement plan or savings account that offers tax benefits? Employer based 401(k) and 403(b) retirement plans can help you reach one of your financial goals in addition to lessening one of your spending burdens: taxes. Contributions into these types of retirement plans are generally federal and state tax deductible. In addition, the growth of your investments are tax sheltered and your employer may even help you out and contribute on your behalf! Its free money! Please make sure to consult with your accountant on the potential benefits of tax savings through the use of these plans.
Do you know how much risk you are willing and able to take?
If an investment you owned dropped 20 percent in any one given year, how would that make you feel? Would this keep you up at night, or would you be okay with it, knowing your investment long term in nature? Understanding the risk you are able and willing to take is very important, because investing in funds is, although and excellent way to grow your savings, not guaranteed and is exposed to volatility. Knowing whether you can stomach mild waves or violent swings in your investments is key in determining exactly how you should invest your funds. Asset allocation is also key, and both of these issues need to be thoroughly understood and planned out before you invest.
Just like a home, your financial plan needs a solid foundation. Having one will help you understand where you want to go financially, and help you plan how you are going to get there. Once you have your solid foundation set, you are ready to build your financial plan and be on your way to financial success!