For many of us investing tends to be a black box. We are forced to think about investing when we start our first job (usually out of university), and we have the option of contributing to an employer matching plan. Or you have some money saved up, and you would like to put it in some place other than your savings account.
I know many people are very risk averse, and prefer to keep their money in their savings accounts. Remember over time the purchasing power of your money is decreasing due to inflation. Average inflation over the last 50 years is approximately 3.9% per year. I would only recommend keeping your money in a savings account if you can earn returns higher than the average inflation of 3.9%. Personally I dont know many savings accounts that provide returns higher than 3.9%.
“So, what do I do?” You ask…
I am going to take you through a series of postings to get you either started or to provide you with better understanding of investing.
Before you start investing your money into different products, you need to understand what is it that you are saving for, and when you need to withdraw the money. In other words, what is the goal of the investment?
I know this planning to actually purchase something sucks in comparison to just paying for it with your credit card and thinking I’ll deal with it later. It is something we must do to avoid financial hardships and dependence on others over the long term 🙂 ! Might as well pretend we enjoy doing it.
Here are some sample goals that you may be saving for (Depending on the stage of your live):
1. Buying a house
2. Buying a car
4. Emergency Savings
Please write down your goal. You should write down what is it that you want to do, in what time frame, and how much you believe it will cost you, or how much you want to be spending on it at that point.
For example: “I need to save up 25% down payment on a $300,000.00 home , that I plan to buy in 3 years. This would equal $75 000.”
When you start to build your portfolio, this exercise will help you understand where you should be investing your money, what type of investment and what you should be doing to reach your goal.
One of the common complaints I hear about creating a goal is that, “I do not have money for investing.” Writing down your goals does not cost you money, write them down anyways. You can always revise them, but at least putting them on paper will help you understand what is it that you would like to be doing.