Get Your Financial House in Order

 

Investing is a wealth building strategy you should think about sooner rather than later. Since it involves taking risk with your money, tying up your money, or both, it’s probably not the first financial move you should make. To get off on the right foot and invest wisely, get your financial house in order by first considering these items.

Emergency fund: Build up savings to secure yourself against the unexpected. Don’t let a crisis put you in debt or force you to sell investments on short notice. Shoot for savings of three to six months’ worth of basic living expenses, though you could begin investing before having your emergency reserves fully funded.

Insurance: Catastrophes are bad. Catastrophes without appropriate insurance are even worse. Before directing any money toward investments, it’s usually smart to make sure you have insurance for your property, your health, and your life.

Debt reduction: A big reason often cited for investing money is to try to earn higher returns on it. However, if you have debt with high interest rates, it may make more sense to use your money to pay that down first.

Goal setting: What are you going to use your invested money for? How much will you need, and when? The “when” is particularly important because you need to make sure your time frame is long enough for investing to make sense. There is no guarantee that investments will gain value over any particular time but the longer you can stay invested, the better.

Risk assessment: Be sure you understand and are comfortable with the level of investment risk you are taking. Backing out later because you got nervous rarely works out well. Be prepared to follow your strategy and stay invested.

If you’ve got these points squared away, you’re probably in a decent position to begin investing for your long-term goals.

 

Understand the Potential Benefits of Investing

 

Investors are often willing to tie their money up, put it at risk, or both, because they believe doing so will give them a chance of earning more than if they simply kept the money safe.

But what if you don’t want to take on risk or tie up your money? You might be asking yourself, “Do I have to invest?” It’s a fair question, and the simple answer is, "no."

Just understand the potential benefits of investing you’ll be giving up:

Outpacing inflation: Long-term goals can be seriously impacted by the big “I” — meaning it will take more money to achieve them years in the future than it takes today. Investing offers the potential to keep up with — and even outpace — inflation.

Potential returns: Savings alone may not earn enough to get you to your biggest goals, especially when you factor in that darned inflation. Taking on more risk offers the potential for a much higher rate of return. The more you earn, the more you’ll have in the end!

Need to set aside less: The more you earn on your money, the less of it you’ll have to set aside to achieve your goals. Having to set aside less money means having more of it to use for other purposes.

 

Say "No" to Investment Gurus and Hype

 

The market is always in motion. Every day, events around the world create upturns and downturns, and countless opportunities for pundits and “experts” of all kinds to fill the Internet with financial headlines, buzz and chatter.

That’s fine. Let them talk about the short term all they want. You’re invested for the long haul. When your eyes are on long-term wins, you don’t have to hang on every headline. You think for yourself.

Ditto, with gurus closer to home. While it can be a good idea to get investment help, paying for advice doesn’t guarantee good results. If someone promises they can deliver superior returns, it might be a good idea to go elsewhere — immediately.

Avoid gurus, ignore hype, and stick to your strategy, but don’t ignore your portfolio. Be sure to check your performance and maintain diversification.

 

Invest Wisely: Find Your Mix

 

Smart investors don’t put all their investment eggs in one basket. Instead, they put money into a mix of different baskets when trying to — wait for it — hatch some profits.

When your chances of success or failure are spread across investment categories, you’ve got a diversified investment portfolio, and that’s usually what you want. There are many ways to diversify. Here are some of the more common approaches:

• Using both bond-based and stock-based investments
• Mixing in long-term and short-term bonds
• Considering stocks of large companies, mid-sized companies and small companies
• Trying some homegrown stocks and some international stocks

The key to diversifying is finding a mix of investments that has historically provided the returns you need, at a level of risk you are comfortable with. Want to be conservative? Put more into less risky investments. Feeling aggressive? Put more into higher-risk categories. You can also shift your mix as your goals, time frames, or risk tolerance change. Furthermore, you can also have different allocations for different goals.

Whatever you do, keep that portfolio diversified, keep your eyes on the big picture, and stay invested.

 

Invest Wisely: Make Investing Your New Normal

 

When we say investing, do you picture a bunch of old guys in top hats smoking cigars at the country club? OK, just stop. Investing is actually something to get real about, right now.

Why? Because compound interest is a thing. When you’re young, you have years and years and years to let it work its magic. Investing a little now could be huge later.

Time travel with us for a second. Imagine you started 30 years ago investing just $250 each month. Based on past market performance*, today you’d have:

• $164,452 if you stuck to cash investments
• $334,906 if you used bond investments
• $762,383 in stock value if you went with stock investments

See all that compounding?! It may be tough to begin, but the more time you have to invest the better your outcomes can be. Make it a priority and just get started.

(*Based on 1994-2014 average annual category performance as follows: Cash — 3.68% based on 30-Day Treasury Bills, Bonds — 7.44% based on Barclay's US Aggregate Bond Index, Stocks — 11.34% based on S&P 500 index. Past performance is no guarantee of future results.)

Investing Tip

One good step is to participate in your employer-provided retirement plan or even a spousal IRA if you're not working. Your spouse can also participate in the TSP. If you follow these tips — you’re investing!