A few days ago I began a series that will try to outline the basics of investing. I want to be clear that my goal is not to try to pen a guide to “beating the street” or getting rich quick (I’m fairly certain this is not even possible at this point). Instead, I just want to give people a way to try to read about investing in layman’s terms so that it takes away that scariness factor. To many people investing sounds like gambling with large amounts of money. All most folks are sure of is that they know someone who has lost a lot of money in the stock market, and the “experts” on TV change their mind daily and can’t agree on anything. Once people understand the basic idea of investing for the future I hope it won’t be so scary and that they will be able to make good, long-term choices for their personal situation.
Last week we began our series on investing by talking about setting goals for yourself. After you have painted yourself the rosy picture that you want to achieve in the short-term, mid-term, and long-term, you should be chalk full of motivation. This is key, because the next step in investing is probably the most difficult and least appealing. You can’t make money investing unless you have money, and to have money, you have to save money.
We hear it over and over and over again, “Save your money, plan for your retirement, scrimp and save now so you can be rich later.” The truth is that it is very difficult to practice what people call delayed gratification. This is the concept that you will forgo some of the luxuries you currently enjoy, and save money in order to enjoy even more satisfaction down the road. It sounds great in theory, but for many working-class people it is much more difficult to put into practice. For my generation, (tentatively labelled “Generation Y”) delayed gratification appears to be a completely foreign concept. We have grown up being given a ton of luxuries (many of which we don’t even realize are luxuries) and often pay for these luxuries with credit. This is actually the exact opposite of delayed gratification, and terrible for long-term financial planning. The reason behind that statement is that when you borrow money to buy now, instead of saving to buy later, you are making compound interest work against you rather than for you. If you are constantly taking out various types of credit (loans, line of credit, credit cards etc.) then the interest you pay each month will always be eating away at your income. Often this happens much faster than people realize, and suddenly they are drowning in high rates of consumer debt on products they didn’t need. In my opinion the key to delayed gratification is always keeping your goals in mind and remembering that they are more important than whatever it is that you impulsively want right now. It just becomes a habit and/or instinct after a little while.
Saving Money With Budgeting
In addition to delayed gratification there is just the basic concept of not spending the money at all. This is why budgeting becomes so important. When you create a budget and actually look at where your spending money you can make an informed decision about if you want to continue spending it that way. Maybe you want to switch to public transit, or concentrate on lowering your heating bill. It could be that you will decide that your long-term financial goal is more important than the brand new car you want to buy and so will decide to buy a used one instead. For some people it is actually as simple as making their coffee instead of buying it everyday. In my experience there is no “magic bullet” when it comes to spending less. Each person has their own set of priorities and certain products or services that might be necessities for some are non-important luxuries for others. As long as you make the conscious decision that what you spend your money on is important enough to you to push back your financial goals then go ahead and do it, at least now your making an informed decision. One example I wrote about before is that sometimes I am very lazy when it comes to making a lunch in the morning. I am fine with indulging this laziness once or twice a week, but no more than that. I know the full cost of this luxury and have decided I am ok with that, while I have decided I can easily do without many others.
Of course the other option in the savings formula if you don’t want to spend less, is simply to earn more. This is a whole other article topic, but basically an alternative to gain investment money is to earn extra cash in addition to whatever you’re currently making. This can mean getting a part-time job, doing odd jobs for friends, monetizing a hobby you have, or making money in some other creative way.
The 10% Solution
Those of you that read My University Money regularly will know that I am huge fan of the common sense wisdom found in the book “The Wealthy Barber” by David Chilton. Chilton’s whole strategy towards personal finance revolves around the idea of, “Paying yourself first.” He specifically recommends saving 10% of your gross income (even before taxes are taken off). If you pay this amount into a savings account, you don’t even have to look at any of those “sexy” investment options, you will still be relatively well prepared for a comfortable retirement. This idea is so simple, yet so effective. It really makes me wonder why this isn’t drilled into our heads everyday in high school. I will probably write about the magical 10% figure more in-depth another time, but for now, just take my word that it is an excellent savings goal for a young person.
Next: Asset Classes
It takes money to make money. No matter what anyone else tells you, this is true. If you have set your goals, decided they are worth working towards, created a basic budget to track your spending, and have begun saving money, then you are well on your way. Next week we’ll get to the more exciting part where your money begins to work for you!