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.
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?
STEP ONE: EARN MONEY
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.
Retirement! |
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! |
STEP TWO: SAVE MONEY
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. |
NO. |
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. |
So now you're a pro at saving money. How do you turn savings
money into investment money? Read on.
STEP THREE: COMMIT YOUR SAVINGS TO INVESTMENT
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.
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.
Investments. |
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. |
STEP FOUR: INVEST AGAIN AND AGAIN
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.
"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.
Investing! |
STEP FIVE: INVEST MORE
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.
Exactly. |
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.
CONCLUSION
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.
***
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!