- Last Updated: Monday, 29 March 2021
Investing money wisely is something everyone would like to do 100% of the time. Unfortunately, everyone makes mistakes, but the successful investors make more good decisions than bad ones.
Saving and Investing
The first thing that everyone should know is the difference between investing and saving money. Saving money is something that should be done for a rainy day. It's also one way of ensuring an investment doesn't have to be liquidated, or sold, at an inopportune time.
The best investors don't need to sell stocks or liquidate their holdings in a company because they need the money to pay their mortgage. They develop a strategy, put together a financial plan, and stick to that plan regardless of economic swings.
Best Time to Start Investing
The rule of thumb that most people have heard is to set aside four to six months' worth of their salary in case of a financial emergency, such as the loss of a job. There are two things wrong with this rule of thumb. The first is that families don't need four to six months of salary saved; it should be closer to four to six months of essential expenses such as a mortgage payment or car loan.
The second flaw with this rule of thumb has to do with the number of months' worth of expenses needed. Individuals entitled to separation pay can likely lower that number. If a person believes it will take nine months to find a job, they should have more money set aside.
Once an individual has gone through the exercise of calculating their monthly expenses, and they've passed that desired savings threshold, they're ready to start investing.
Stocks and Bonds
Before investing money with a stock broker, it's a good idea to do some research. The first step is to think about financial objectives. Is the goal to be a millionaire in six months? Is that goal realistic? Is there enough free time to research individual stocks, or would it be better to rely on a professional managing a mutual fund? Without a goal, it's hard to figure out what to do next.
Once a strategy has been developed, it's time to find a broker or financial institution to help manage the portfolio. The Internet is a great place to start this search; there are numerous well-known brokerage houses ready to help individuals that are new to investing.
Finding a Stock Broker
Investors can find out about the disciplinary history of any brokerage house or broker by calling 1-800-289-9999, which is a toll-free number run by the National Association of Securities Dealers, Inc. (NASD).
Even if the broker or investment advisor has a clean record, keep in mind how this person makes money: sales commissions and fees. Find out what the fees charged are for opening, maintaining, and closing an account. Figure out if the help of a full service or a discount brokerage firm is required.
A full service broker provides execution services, recommendations, and even research support. A discount broker generally helps to buy and sell investments, basic execution services, and does not give advice on the securities to buy or sell. Read the fine print carefully on all contracts, it's important to know who is in control of the investment.
Individuals that are not interested in investing their money in stocks or bonds may want to take a closer look at real estate. There are at least three different ways the average investor can play in this market:
Investing in a Home
Perhaps the easiest way to put money to work in the real estate market is to buy a new home. In today's electronic world, the process of buying and closing on a home is fairly straightforward. This website also has plenty of mortgage calculators to help figure out exactly how much home someone can afford.
One of the benefits of investing money in a new home is the individual gets to enjoy the asset too.
The second way to invest money in the real estate market is by purchasing rental properties. Success stories are seen and heard on the television all the time, but it's important to separate fact from fiction. While investing in real estate might yield high returns, it's also a lot of work. Even more nerve racking is the latest trend of flipping homes.
Real Estate Mutual Funds and REITs
The third way to invest in real estate is through real estate mutual funds or real estate investment trusts. A real estate investment trust, or REIT, is set up for the sole purpose of investing in real estate. These trusts are typically run by a board of directors, which provides oversight into the purchase of properties.
Real estate mutual funds are another way of investing money in the real estate market, while relying on professional management services. These mutual funds typically invest in REITs and real estate companies. The latter category would include large builders or owners / operators of real estate properties such as Hovnanian Enterprises and Toll Brothers.
We've covered this subject more thoroughly in our article: Investing in Real Estate.
Investing Money Wisely
Investing wisely implies using one's brain and researching all options. If the financial objective is to invest in mutual funds, then the research is minimal. Individuals that want to build a portfolio of stocks and bonds will have a lot of research to conduct before buying these securities.
Investing money the right way isn't easy. Successful individuals don't have the Midas touch; they have spent hours conducting research. The stock market is very efficient, which means there are very few bargains going unnoticed. But there are some foolish people that throw their hard earned money away.
We've outlined a four-part series that starts with Stock Research Part I. People might not agree with everything described in that series, but it provides a good framework, or approach, to investing money wisely.
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