Monday, January 12, 2015

Investing Basics: Saving - The Absolute First Step to Investing

It's a new year and I'm back on the blogging bandwagon.  I'm starting the year off with a summary of some investing basics that I've so far neglected to cover in great detail, here on the blog.

One of the unsung heroes of the investment world is the principal, that is, the money that you invest in order to make more money.

"Grow, my precious"
An investor without money is like a car without wheels: expending a lot of energy, but not accomplishing much.   

Just a nice relaxing Saturday afternoon drive to nowhere.
Saving and investing goes hand in hand; investments require money in order to produce returns.  Simply stated, you can't invest money unless you have money to invest.

"Grow... but also turn into money."
Now in the interest of starting with the basics, I will answer the question:

How do you save money for investment?


The first step is to earn money, preferably on a regular basis.  You need an income.  

Please don't glare at me.

I'll glare at me for you.
I'm not saying that to be glib.  I think some people have a vision of investing like it's a thing that you do once.  You get a big chunk of money and plant an investment seed and then you wait 20 years and then you harvest a big giant investment tree.

It's not like that at all.  Investment isn't something you do once, it's something you do again and again in little increments.

Your initial sum doesn't have to be big.  Instead of a money tree, you'll be planting a money forest.

Your retirement!


Quick: don't think of a clown in a super hero costume doing the chicken dance.  

Yeah, that.  Don't think about it.  Put it out of your head.

Now don't think about it again.  

Na na na na na na na.  Bawk bawk bawk bawk.

Now continue to not think about a clown in a super hero costume doing the chicken dance for the next twenty years.

"I will haunt your dreams."

The hard way to try to not think about the weird clown is to stare at his photo whilst simultaneously trying not to think about what's in it.  

"I am NOT thinking about a..."

"Augh!  Why?!?"

An easier way to avoid thinking about something is to distract yourself with other things.

Pictured: A distracting thing.

Saving money is kind of like that.

Where does investment money come from?  Investment money comes from your savings.  Where do savings come from?  Savings come from your income, money that you earn but don't spend.  If you can say "No", you can save money. 

To save money, you have to not spend money.  You have to not spend money over and over again.

No.  Not affordable.


That's better.

The hard way to not spend money is to shop routinely, while trying to maintain a strict shopping budget.  

"No."  Sigh...

The easier way to save money is to limit your exposure to opportunities to spend money.

Not tempted to spend money.
Of course, that's just my opinion.  There are zillions of ways to not not spend your money.
So now you're a pro at saving money.  How do you turn savings money into investment money?  Read on.


Your savings is composed of the money that you earn but don't spend.  If you are a person who has a bank account with a positive balance, you are a person with savings.

Even if you are a person with savings, you are not necessarily a person with investments.  To make your savings turn into investments, you have to move them from your regular account--the one that you use to pay your bills and to take out cash--and send it to a dedicated investment account.


No, I'm not talking about a brokerage account or anything fancy.  I'm talking about a second bank account, preferably one that's at a different bank than your normal account.

It's easy to do almost everything online these days, and bank accounts are one of those things that it's easy to do.  Heck, you can pick which bank you want to open an account at online.  Here!  And here!  And here and here and here.

Apart from a power outage, there is no reason that anyone can't open a bank account whenever they feel like it.

...and then feels like mailing copies of two pieces of identification to that bank that prove their identity.

Why not leave it in the regular account?  

Apples: not just a fruit, also a useful symbol for temptation.

Most people who keep a positive balance in their bank account have a psychological limit to how much money they need to keep in that account.  Even with the best intentions, no one saves money above that set amount.

For example, let's say that you're walking through a mall and you come across an object of interest.  I'm imagining a lovely pair of riding boots, but you can think of something else.  This object will make you into the coolest, most interesting, most amazing person in the entire universe, at least for the next six months.

"So cool... so interesting... so amazing..."

This object costs $750.  You remember checking your bank account recently; it has a nice, fat $20,000 in it.  

Do you buy the thing?  Think about it.  I mean, it's only like 4% of your bank account.  It will make you into the coolest, most interesting, most amazing person in the entire universe for six whole months!  It's totally worth it!  You can totally save back up to that amount again later.

Oh yeah.

You probably buy the thing.  

What about if you only had $2000 in that account?  Would your thought process change?

It is far better to take away the temptation, to put your savings money into a protected place that is far away from anything you'd ever consider spending.  As you transfer the money, you make yourself a solemn vow not to spend that money for any reason except investments, ever.

That precious, protected, separately kept money, that is your investment.

If you keep it in a bank account, you don't even have to watch it all the time.


You've spent less money than you earned and you've put some of your savings aside in an investment account.  Now what?

AFTER that.

Now you do it again.

And again.

And again.

In fact, you do it each and every time that you get paid.  Forever.

Sounds daunting?  It isn't.

It takes five minutes to set up automatic money transfers through your online bank.  Don't know how?  Those banks that I told you about in the first section even have helpful tips on how to do this.  Here!  And here!  And here and here and here!

Don't like the internet?  Your banker can set them up too, either in person or over the phone.  Don't like people?  There's probably a way to do them through the instant teller.

Don't like people, the telephone or the internet?
You have options, is what I'm saying.  Automatic options.

Set up the transfer for the day after your pay shows up in your account. 

Once you're done, sit back, relax, and forget about it.



If you've never experienced the wonder that is automatic transfers, then you won't believe me when I say that you will come to forget how much money you are transferring.  You will also forget what it was like to live with spending all of the money that you used to have to spend.  In a few months, you will have magnificently adjusted to your new reality.

"Was I supposed to be upset about something?  I can't remember now..."

 That's when it's time to figure out how you can add more money to your investments.

That's ridiculous!  You might reasonably say.  I am already saving all the money that I can possibly save before my family is reduced to eating bugs for dinner and wearing grocery bags for clothes!

I'll glare at me for you.
You might be right.  But are you sure?

The first question to ask yourself is: have you recently gotten a pay raise of some kind?  If you have, you're golden. You can easily save all of that money without feeling any kind of a pinch.  I mean, you can't miss what you never had before.

The money is falling right into an investment account.

Is the answer no?  Not to worry.  You can try a different approach, slowly training yourself to become a super saver.

Open another savings account.  This account is a half savings, half investment account.  Immediately set up an automatic transfer to that account.  You're a pro at this now.

It's possible that you'll start feeling the burn immediately.  It's possible that an emergency comes up.  That's OK.  Rather than pulling anything out of your investment account (which is sacred and untouchable for anything other than investing), you would pull it out of the halfway account, still leaving some, still saving every week, until you get used to your new reality.

"Was I supposed to be upset about something?  I can't remember now..."
At that point, switch those automatic transfers to your investment account and pat yourself on the back for being awesome at investing.


Saving money isn't scary.  It isn't even particularly hard.  Let's review the steps:

1. Get money.
2. Don't spend much of it.
3. Put some of it aside in a special investment bank account.
4. Add a little more every time you get paid.
5. Every so often, increase how much you invest per pay.

I'm always looking for ways that I can increase how much money I can save towards investments.  As you get more money in your investments, you'll find that there are more and more ways to invest and it becomes much more enjoyable to do the investing.

Note:  My sincere apologies for my two months of radio silence: next time I embark on a giant non-blog related creative endeavor I'll make sure that I give you some warning so that you don't waste any time checking for updates.

For example, if I were going to embark on a journey to learn modern interpretive dance, I would let you know to wait about a month until I broke both of my legs.

This new year, my resolution is to take a slightly different approach in writing here.  I'm going to focus a bit less on my life and give a bit more information about investment.  

But stay tuned for my new side blog: "Let's talk about the minutiae of Liz' life"
Until next time, happy investing!

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