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Financial
planning Savings and investment
vehicles
Common
errors Scams and frauds
Investing
is just one aspect of personal finance. People often seem to have the
itch to try their hand at investing before they get the rest of their
act together. This is a big mistake. For this reason, it's a good idea
for "new investors" to hit the library and read some overall
guides to personal finance. Personal finance issues include making a budget,
sticking to a budget, saving money towards major purchases or retirement,
managing debt appropriately, insuring your property, etc. Appropriate
books that focus on personal finance include the following :
Financial
planning
" What if I would
like to invest but I do not have any money ? "
Financial planning may help many people to overcome the lack of ability
to save for investment. With proper planning perhaps you will be able
to establish goals and save money to meet these goals.
To begin the
financial planning process, you need specific financial goals. By specific
goals, I mean to establish a date to meet the goal and a savings plan
that meets your goals.
Next you need
to track your expenses and income until you can develop a yearly statement
(cash/flow statement). To see where you are currently, list the value
of all your assets and what you owe. Subtract your debts from your assets
and you have your current net worth (balance sheet).
Once you have established
your income and expenses you can develop a budget. Your aim in establishing
a budget is to attempt to increase your income and/or reduce your expenditures
so that you have savings to meet your initial goals. If on the first try
you are short of funds, do not despair.
Try looking at your
taxes to see if they can be reduced. Consult a tax attorney if necessary.
Analyze your debt to see if it can be consolidated into a lower interest
rate loan. Perhaps a home equity loan might fit the bill. Next review
your consumption patterns. Are your financial goals worth driving an older
automobile; are you shopping for the best prices; and what current expenses
that you have are unnecessary?
By getting your finances
in order, you will gain funds to save and invest toward your goals. If
you do not have sufficient funds to meet your goals, modify them. Look
for opportunities in the future to reestablish these goals.
Savings
and investment vehicles
When you just need
to park your money someplace for a short time, it's better to consider
short-term savings vehicles:
- Savings account:
Often the first banking product people use, savings accounts earn a
small amount in interest (anywhere from 1.0% to 4.0%, often less)
- Money market
funds: Money market funds are a specialized type of mutual fund
that invests in extremely short-term bonds. Unlike most mutual funds,
shares in a money market fund are designed to be worth $1 at all times.
Money market funds usually pay better interest rates than a conventional
savings account, but below what you could get in certificates of deposit.
- Certificate
of deposit (CD): This is a specialized deposit you make at a bank
or other financial institution. The interest rate on CDs is usually
about the same as that of short- or intermediate-term bonds, depending
on the duration of the CD. Interest is paid at regular intervals until
the CD matures, at which point you get the money you originally deposited
plus the accumulated interest payments. CDs offered by banks are usually
insured.
A much higher return
on your money is given by the long-term investing vehicles :
- Bonds:
They're known as "fixed-income" securities because the amount
of income the bond generates each year is "fixed," or set,
when the bond is sold. From an investor's point of view, bonds are very
similar to CDs, except that they are issued by the government or by
corporations instead of banks.
- Stocks:
Stocks are a way for individuals to own parts of businesses. A share
of stock represents a proportional share of ownership in a company.
As the value of the company changes, the value of the share in that
company rises and falls.
- Mutual
funds: Mutual funds are a way for investors to pool their money
to buy stocks, bonds, or anything else the fund manager decides is worthwhile.
Instead of managing your money yourself, you turn over the responsibility
of managing that money to a "professional."
Common
errors in investing
You can save a lot
of money, time and anger if you learn from the mistakes that individual
investors use to do :
- Believing that
you can time the market (i.e. pick market highs and lows).
- Building a portfolio
without an investment objective.
- Buying too many
mutual funds.
- Buying the hottest
{stock, mutual fund} from last year.
- Not researching
a one-product stock before you buy.
- Taking profits
too early from your investment.
- Not cutting your
losses.
How to avoid
investment frauds
Before thinking about
an investment plan, you should know how to protect yourself from "magic
opportunities". You
can find many tips about protection in these pages :
Other resources for
information to help you make wise investment decisions include:
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