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 Investing money wisely is something we'd all like to say that we do all the time. The problem is that we sometimes slipup and find ourselves investing money, well... not so wisely. Essentially, we want to maximize the chances of success and minimize the failures. Every investor makes mistakes, but the successful ones make more good decisions than bad ones.
The Difference Between Saving and Investing
The first thing that every investor should know is that there is a difference between investing money and saving money. Saving money is something that everyone should do for a rainy day. Saving money is also a way of ensuring that you don't have to liquidate, or sell, an investment at an inopportune time.
If you're going to invest your money wisely, then you don't want to sell stocks or liquidate your holdings in a company because you need the money to pay the mortgage. You want to be able to develop an investment strategy, put together a financial plan, and stick to that plan regardless of economic swings.
When to Start Investing
The rule of thumb that most people have heard is that you need to have four to six months of your salary put aside for an emergency, such as losing your job. There are two things wrong with this rule of thumb. The first is that you don't need four to six months of your salary saved; it should be more like four to six months of essential expenses to pay for costs like your mortgage or car loan.
The second flaw with this rule of thumb has to do with the number of month's worth of expenses you need to have ready. If you're entitled to separation pay, then you might want to lower that number. If you think it might take you nine months to find a job, then you might want to have more money set aside.
Once you've calculated your monthly expenses, and you've passed that desired savings threshold, then you're ready to start investing.
Investing Money in Stocks and Bonds
Before you start investing money with a stock broker, you need to do some research. The first step you need to take is to think about your financial objectives. Do you want to be a millionaire in six months? Is that goal realistic? Do you want to research individual stocks to create your own portfolio, or do you want to invest in mutual funds? What is your goal? If you don't know what your goal is, then it will be hard to figure out how to get there, or if you're there already.
After you've figured out your investment strategy, then you need to find a broker or investment company to help you manage your portfolio. The Internet is a great place to start looking for information, or you could talk to a trusted friend or coworker.
Finding a Stock Broker
Just because you have a personal recommendation in hand, that doesn't mean your job is finished. You 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 are for opening, maintaining, and closing an account. Figure out if you need the help of a full service or a discount brokerage firm.
A full service broker provides execution services, recommendations, and even research support. A discount broker generally helps you to buy and sell your investments, basic execution services, and does not give advice on the securities you should buy or sell. Read the fine print carefully on the contracts you'll be asked to sign. Make sure you know who is in control of your investment.
Investing Money in Real Estate
If you're not interested in investing your money in the stock or bond market, then you might want to take a closer look at real estate. When we talk about real estate, we can think of at least three different ways the average investor can play in this market:
Investing in a Home
Perhaps the easiest way to get your money working for you 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 you figure out exactly how much home you can afford.
One of the benefits of investing money in a new home is that you get to enjoy the asset too.
Investing in Rental Properties
The second way you can invest money in the real estate market is by purchasing rental properties. You hear and see the success stories all the time on television, but you need to separate fact from fiction. While investing in real estate might yield you some 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 you can invest in real estate is through real estate mutual funds or real estate investment trusts (REITs). A real estate investment trust, or REIT, is a trust that 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 investment 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 real estate investment trusts 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.
If you're looking for more information on this particular topic, we've covered this subject more thoroughly in our article on investing in real estate.
Investing Money Wisely
Investing wisely implies using your brain and researching your investments. If one of your financial objectives is to invest in mutual funds, then you have a little bit of research to do. If you've decided that you're going to build your own portfolio of stocks and bonds, then you have a lot of research ahead of you.
If you think investing money is easy, then let us be the first to dispel that myth. The great investors that you read about don't have the Midas touch, they have done their homework. The stock market is a very efficient market. That means there are very few bargains going unnoticed. But there are also some foolish investors that throw their hard earned money away.
If you don't know how to research stocks, then take a close look at the method we've described in our four part series starting with Stock Research Part I. You might not agree with everything described in that series, but it should give you an idea of how to get started investing your money wisely.
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