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Saving and investing begins with those forms that meet specific needs such as providing an emergency fund. But the really exciting part of investing comes when our goal is to produce income for more discretionary purposes. That’s when you begin investing for fun as well as investing for profit.
In the long run, few things are as important as investing. But in order to have money to invest you must first have an income, presumably from a job. It is possible to earn even more from your own business. Once you have some money to work with, however, investment offers the highest returns.
Even more critical than its potential for greater returns, having enough money to retire when you need to or achieving financial freedom at any age requires investment or passive income of some kind. By definition. Neither a job nor a business can ordinarily meet this need.
Even if you had no living expenses to provide for, investing is required in order to maintain the purchasing power of what you have. While recently inflation has been small it is still real and likely to increase. For your savings and assets to avoid losing their current real value you need to increase them through investment.
There are many ways to invest. Too many, in my view. I say that because there are so many that are questionable under almost any circumstances.
This wide variety of opportunities and their changing nature makes it hard to make specific recommendations. Instead, it is better to give some general guidelines and then refer to specific types of investments for further study.
The most important investment rule is this. Never make an investment of any kind that you do not understand and know is a good idea.
Even within the real estate investment field I once heard Donald Trump say it was not a good time to invest. Then just moments later he commended another investor who said he was still investing in a particular real estate niche, commending him for taking advanatage of a good opportunity. He willingly admitted that he did not understand that specific area well enough to invest in it, even though he is a real estate pro. Stick to what you know.
The second most important rule of investing is to beware of financial advisors of any stripe—even me! Ask yourself what their bias is. Are they really insurance salespeople? Are they selling mutual funds (the ones that make them the most profit)? Or are they committed to financial education, people like Dave Ramsey, Suze Orman, or Howard Clark?
The third most important rule is the old one you have heard before but a lot of people, having heard it, ignore it anyway: if it sounds too good to be true, it probably is. If you have followed the news lately (Bernie Madoff) you know that some very intelligent people have lost their shirts by ignoring this principle.
Because your money is needed for various uses at different times, you cannot just learn and use one investment form for all your investment needs. This means in practice that you should not try to earn the highest return on all your money. Sometimes other considerations are more important.
For example, your Murphy Money (emergency money) needs to be readily available, perhaps in a bank money market account. These accounts do not pay as much as other investments, but they are better suited for this specific need.
In addition, rates of return for various kinds of investment change over time, sometimes a very short time. Everyone knows this is true with the stock market but it is also true elsewhere.
At my local bank today CD’s pay little, but I have several I locked in at rates above 5% just a few years ago. At this time I am not buying CD’s. But I might later for some purposes when CD rates go up again.
While there are more types of investments than we can even list in this article, there are several that everyone needs to know and understand. Most investors will use them to some extent. Here are some of the articles I have written to explain the most important.
A lot of people think of investing as serious, difficult business rather than something fun (one reason people put it off!) even when they recognize its great potential. But the truth is that making money through investing can be fun.
Even when the amounts are small, it does soon become fun. As soon as your emergency fund has any significant amount in it, that monthly bank account statement showing $5.00 or $10.00 dollars in interest is a positive stroke. It feels like free money
Then there is the fun of winning. As your investments begin to pay off there is a unique joy and satisfaction in your achievement. Just as there is satisfaction from the achievements of your labor, there is equal satisfaction in using self-discipline and brain power to set aside and invest successfully.
It is also fun to see yourself winning in the money game while others around you are losing out to the unethical bank, insurance, and financial service scams. When you start thinking like an investor you deal with all these people in a different way. Instead of paying them for dubious benefits you begin to think about how much they can pay you for your investment and avoid all charges possible.
But while investing is like a game, it is also serious business with a profit motive. That’s why you must avoid the temptation of stupid stuff like day trading! Successful investing can be fun but it is not gaming!
There are probably thousands of ways a person can/could invest. You should not do it the way I do. Or like anyone else.
The key is for you to learn one way to invest, then another, until you find something you can do productively. Then improve your skills at it until you are really good. Keep your eyes and ears open.
Most of our time on this site is devoted to the purposes of different parts of our investments such as emergency fund or retirement fund. None of these are associated with any one type of investment. You can include almost any kind of investment in each of them.
Investing really becomes exciting when you anticipate the long term productivity of your retirement fund (look again at the Rule of 72). Getting this long term view is a key to experiencing the fun and success of investing, so it is vital to keep your eye on your goals.
When saving and investing become productive for you, you will also find it more fun. Learning to enjoy this aspect of your financial life is as important as anything you do. Plan to become a successful investor and plan to have fun doing it.
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