Although many people invest money, the most successful investors often have a plan. In order to build wealth and meet your financial goals you need to have to clarify your investment strategy and decisions. Use the 5 steps below to map out an investing plan.
Step 1: Write down what you are investing for. Most people invest money with the hopes to make a profit. While this makes logical sense, you need to get more specific. In order to set up an investment plan you must first clarify why you are seeking to make more money. Are you trying to build wealth and retire early? Is your goal to increase your net worth or pay down your student loans? Do you want to stack money to buy home or finance your kid’s college education? Whether you have one goal or many different ones, the first step to crafting an investing plan is to write down your financial goals. What are the various reasons you plan to invest money?
Step 2: Determine how much money you plan to invest. Now that you have a list of the reasons you are investing, figure out how much money you want to allot to your goals. This should not be the first random number that comes to mind or a goal you plan to achieve some time in the distant future. This should be a concrete and realistic number, something you can start doing with your next paycheck. Take a look at your monthly spending and your monthly income. Pinpoint areas where you can cut back and write down a total amount you can use to invest each month or each year. Once you have the total amount you plan to invest, figure out which portion of that total you want to use for each of your investing goals. Perhaps you have $400 to invest each month and decide to use 75% of it to build wealth and 25% to save for a down payment on your future home. Or, maybe you carve out a special 10% of the total amount to start investing money for your kid’s education? The amount you invest is up to you, but come up with a number.
Step 3: Create a timeline for when you need the money (and the profits). Once you make your investing goals and figure out how much money you can use, the next step is to create a timeline for when you need your money and the profits. How soon you need to use the money affects what types of investments you can make. If you know you will need money to buy a home in a couple years then you will likely make much different investments and take much less risk than if you are investing money for your kids college over the next 10 years or planning to build wealth over the next 20 years. What is the timeline for each of your investing goals?
Step 4: Figure out the investments you want to make. If you know what your investment goals are, how much you can invest, and when you need the money the next step in your investment plan is to figure out what type of investments you want to make. You can choose to invest in bonds, stocks, cryptocurrency, real estate, fine art, startup businesses, etc. The choice is yours. However, it’s wise to remember that different types of investments have different levels of risk and different degrees of profit. For example, buying an individual stock or investing in a startup may have the potential to make a lot of money but those types of investments can also come with a high level of risk since there is a chance you could lose all of your money if the company tanks or the stock goes down in value. Investing in bonds gives you a guaranteed return on your money but that return may be so small that it barely keeps up with inflation and doesn’t allow you to meet your investment goals by your designated timeline. Other people choose to invest in real estate in an effort to increase their cash flow and decrease their taxes but take on a great deal of debt (in the form of a mortgage to do so). Most people who are new to the world of investing purchase index mutual funds (large funds that are full of hundreds, if not thousands of different stocks, from many companies in a variety of industries). They invest in these index mutual funds to increase diversification and minimize risk while still leaving room for a decent profit. The choice of investment is yours.
Step 5: Pick the right investment account. The last step of your investing plan is to invest money through the correct account. Many young professionals like to use apps like Robinhood to invest for simplicity and convenience’s sake. However, there may be other types of accounts that could provide more benefits. For example, if you are building wealth for your future and trying to invest for retirement, then using your employer-sponsored 401K or 403b may be a good option. If you want to open an investment account that is not tied to your employer and still desire the ability to take your contributions out of the account at any time, then opening a Roth IRA may be the right option. The type of account you invest in (whether it’s a 401K, Roth IRA, or taxable brokerage account like the Robinhood app or a traditional brokerage firm like Vanguard) depends heavily on your investment goals, timeline and risk tolerance.
My point? Everyone should have a goal to invest money on a consistent basis. If you haven’t already, use the 5 steps above to craft and investment plan that meets your needs and allows you to reach your goals.
4 Reasons You Should Choose Financial Independence
Financial independence (F.I.) is when you have accumulated so much wealth or resources that you are no longer dependent on your job for money. While some people may feel like financial independence is an unrealistic pipe dream, I’d argue that its possible for many of us and definitely something we should all strive for. Here’s why we should all care about and choose F.I.:
1. It can decrease [financial] stress in your life. Although money can’t “buy happiness” a certain baseline level of resources can certainly decrease stress. Many Americans live paycheck-to-paycheck and barely have enough money to cover all of their monthly expenses. Others of us may be a bit more financially stable but still wonder how we will repay all of our student loan debt, afford rising health care expenses, or fully fund our retirement. These worries can cause stress and decrease the quality of our lives. Saving money from our main jobs, investing in appreciating assets, and establishing multiple streams of income can help ease this worry. It allows us to become less dependent on each paycheck and establish the financial independence that decreases these financial stressors.
2. It gives you more control over your life. Another perk of being financially independent is the ability to have more freedom in your life. When money is not the main objective, you can be more selective with the jobs you take and the work you do. You no longer have to feel burdened by the need to work a decent-paying job that you don’t like. You now have the freedom to select work that fulfills you, regardless of how much it pays. You can also have more control over your daily schedule and more autonomy with your work commitments. When you are able to work a job that you actually enjoy, one that fulfills you and allows you to contribute to society in a meaningful way, you also create more happiness that can have a lasting effect. Establishing financial independence can help make this a reality.
3. It lets you have more meaningful experiences with the people you love. One of the benefits of having your finances in order with a fully funded retirement account and little dependency on your next paycheck, is being able to enjoy your wealth. Although buying possessions and having more “stuff” can bring us temporary pleasure, lasting happiness often comes from spending quality time and having meaningful experiences with the people we love. Think about how happy you could be if you could travel to anywhere in the world with the people closest to you. Or, if you could do the thing you like most around the people you love most. Having the ability to spend more time with your children, go to work each day doing what you enjoy, visit your family and friends frequently, relax often, or travel the world can result in more sustainable levels of happiness and increase the overall joy we have in our lives.
4. It gives you the chance to have a bigger impact in the world. Although you don’t need money to make a difference, having money allows you to make a bigger impact and do so in a way that doesn’t jeopardize your own well-being. When you no longer have to make the choice between helping your family members and paying your own bills, its much easier to help others. When you no longer have to choose between financing your children’s education and contributing to charity, it much easier to give. When your financial matters are taken care of and you are less dependent on your paycheck, it becomes a lot easier to contribute to others and oftentimes you can give to even more causes, organizations, and people than before. Having the ability to improve lives and outcomes can drastically increase your own life satisfaction and create an inner peace and happiness that lasts longer than you can imagine.