Once you have your personal finance house in order another area of finance, personal investing, looms as a challenge. How do you finance major goals like retirement? Personal investing is the answer, so here are some investing tips to help you avoid disaster.
Get your personal finance foundation on firm ground before rushing into personal investing in a big way. Poor credit and money management can force you into bankruptcy even if you have considerable assets. Scenario: You pay $1,000,000 for a house putting next to nothing down in 2006. The only real money you’ve saved has been in your 401k at work, which is 100% invested in stock funds and company stock. A few years later you lose your job as your employer falls upon bad times, the stock market falls like a rock, and your house is worth $700,000 if you’re lucky. Sound familiar?
If you can’t pay your bills you are technically insolvent. In the above case you go broke and end up with a lousy credit rating at the same time. The truth is that millions of Americans have invested in real estate they couldn’t afford and stocks investments they didn’t understand; and many paid dearly for their financial mistakes. Concentrate on personal finance first: your insurance needs, credit management, and a cash reserve to cover financial emergencies should be your first concern. The truth is that as long as you can stay current on your bills and you have an excellent credit rating, you’re still alive financially. Any weakness in the above personal finance areas makes you vulnerable to financial disaster.
Personal investing is the area of finance that puzzles many people, even some who are well off financially. After all, most folks work for a living and have no financial education, especially in the investment and investing arena. Stocks and bonds are not that difficult to understand, but without any financial education or background, they may as well be a foreign language. The best investment tip I can give an inexperienced or new investor is to start investing with mutual funds. These funds were designed for the investing public. They offer diversification and professional management at a reasonable cost. You can invest large or smaller amounts and have access to your money on any business day.
Now for some mutual fund investing tips. Different funds have different financial objectives, risks, and cost structures. Get your feet wet with the safest funds, money market funds. They pay interest in the form of dividends, their share price does not fluctuate, and the cost of investing is usually low. If you need some or all of your money back there is little chance of taking a loss. Once you have some money accumulated there start small in stock funds if you are younger, and bond funds if you are closer to or in retirement. Bond funds pay higher income in the form of dividends with moderate investment risk, while stock funds feature higher profit potential along with higher risk.
Mutual funds do the investment management for you. Your job is to pick the fund(s) that have the same financial objective(s) you do. The best funds in terms of the cost of investing are called no-load funds. They have no sales charges or commissions, and your total cost to invest can be less than 1% a year. If you’re ready to get into personal investing, look no further than mutual funds… the new investor’s best friend in my opinion.