My last post on the A-Z of good personal finance finished off on the letter L. Here now is the rest of my personal finance saving and investing philosophy “letters”. I have also embedded links back to posts that relate or provide more detail on the letter’s topic. Feel free to suggest your perspective on where you agree or disagree with me. And have you got an A-Z list?
L – Long term investing. You need to have this view if you want to really build your net worth. Short term investing or trading rarely works for those who don’t do it as a full time profession. The most tax effective long term investments are your retirement accounts – 401K, IRA, Roth IRA, especially if you get an extra boost via an employer match. As an example of successful long term investing, look no further than America’s richest man and best investor – Warren Buffet, whose value based buy and hold approach shows the power of long term investing.
M – Mutual funds or Exchange traded funds (ETFs). As my investment portfolio grows and my job gets busier it is hard to spend the time tracking all the individual stocks in my portfolio. Given I have investments in non-American markets as well, I feel I do not have the time to effectively review and diversify my portfolio on a regular basis. This is where Mutual Funds and ETF’s can come in useful. They allow diversification and provide investments across a wide variety of sectors. The key thing is to choose funds that meet your investment needs for the lowest possible cost. Vanguard or Fidelity are my preferred fund managers because they have the lowest costs in the business.
N – No fees. Where ever you can, avoid fees. Whether it is on your high interest savings account or credit card, make it a point to avoid paying account, annual or late fees. Similarly with investments, try and find the lowest fee option, because over the long term, this can eat away at your returns and you pay them whether your investments go up or down.
O – Options. Dangerous but highly profitable it done right. Also a good risk management tool. My trading experience to date has been mixed and I would say that unless you are an experienced investor, avoid it. If you do want to get into options trading, check out Chicago Board Options Exchange tutorials (it is on my to do list!)
P – Planning. If you fail to plan, you plan to fail. Meandering through life without targets or goals can leave you going in aimless or multiple directions. So set short term and long term goals, with rewards when you reach them.
Q – Quitting is sometimes okay. This may be contradictory to “best life practices”, but I am using this in context of investing. If you hold on to a stock or investment that has continued to go down, despite it being one that you really believe in and have hope in, then the best thing could be to just quit the investment. Rather than lose more money, cut your losses and walk away. Selling a losing stock is often the hardest thing to do, but is also the hallmark of a disciplined investor. At the end of the day $3000 of your net capital losses are tax deductible (under US tax law), with other capital losses able to be offset against capital gains. So perhaps your real loss may not be that bad after all.
R – Research. This is the key to good investing. Before making an investment, read what others have to say about the investment you are thinking off, but always do your own research. If you don’t understand what you are investing in, then it is probably not the right investment for you.
S – Spend less than you earn. The only way to make money in the longer term is to spend less than you earn (saving effectively) and to then invest those savings in order for them to work for you (investing wisely). I wrote in detail about this recently, with the key being to keep a budget in order to understand your spending patterns and then to cut back on unnecessary discretionary items.
T – Taxes. As the saying goes, there are 2 things you can’t avoid – death and taxes. Still, you must always aim to legally pay the least amount of taxes. This means factoring in the tax implications into your earnings, investments and savings. You should also do your budgeting on a post-tax basis, because that is the real money you get in hand. Finally, if your taxes are simple, use Turbo tax or a similar package to do your taxes. Otherwise get a good accountant and you will save much more money in taxes than you pay in accounting fees.
U – Understand what you are buying, investing or signing off on. Otherwise it could cost you money, mental headaches and future legal problems. Read the fine print and know what you are getting into, and you will have less cause for surprises down the line. This is one of the reasons so many people got into adjustable rate mortgages that came in at low teaser rates, but reset to much higher rates later on, which they would have only read about in the small print.
V – Value. Whether is trying to find value in a good deal or an investment, you must ask yourself the question – “Where is the value in this thing for me?”. If you cannot figure the current or future value of something to you, then it is probably not a good idea to buy, invest or have it. Conversely, always try and get the most value from what you have and reuse where you can.
W – Wake up half an hour earlier or sleep half an hour later. Use that time to improve yourself and learn something new. Read a blog or a personal finance article. Or keep your social and professional networks by sending an email to friends, family or old work colleagues.
Y – Yes to help. We can’t be the expert in everything and since time is one of our most precious resources, use it wisely on things that you enjoy and are proficient at. For example, get a cleaner for your home. Those 3-4 hours you spend cleaning can now be used for more productive things or just quality time with your family. Spending $50 – $70 on a cleaner every couple of weeks is worth it for me. It is an individual decision as to how much your time is worth, but remember to use it as effectively as possible because you have less of it as each day goes by.
Z – Zero Balance when it comes to over due credit card debt. Pay on time or don’t get a credit card. Also, if you want to play the credit card zero balance game, then do so at your own risk. Despite what you think, credit card companies are well aware of this game and want you to play it as they know a number of people will forget to cancel one card because they don’t have the discipline. Be safe and smart by always paying off your credit balance on time, otherwise you will become the credit card companies best investment.