Ok, so impulse investing works kinda like impulse shopping (well, it is shopping, right?). I've stayed on track, tackling about 150 pages of Charles Schwab's New Guide to Financial Independence (2004), and I decided to jump in. Well, here's the plan. When I get a small financial windfall in about three weeks, all that money will be routed directly to my new investment account that I created yesterday through USAA.
Reading this last book has been even more empowering, and based on all these voices demanding action, I'm taking it. Schwab's advice has been a good balance to Orman and Astre (and, interestingly, it's Orman who provides the back-jacket blurb that praises New Guide). Of course, the section "getting started" suggests that there is no better time than now. And Schwab is right. Investments must be done as soon as possible to take advantage of compound interest, the earnings monster that turns a yearly investment of $4,000 into a cool million in about 40 years. When the interest rolls into the principle, and that keeps building, the pot grows, and grows, and grows. That's why I have to start now. And I figured out a way that I can do that without taking too much risk. It's always smart to ease oneself into the shallow end of the pool. I can dive deep later.
Because I belong to USAA, and they have my retirement accounts, I took Schwab's advice (p. 47) and did the prework to investing: creating an emergency fund, ordering 30-year term life insurance for my family, maxing both my work 401(k) and a Roth IRA, and, finally, investing with a lump sum ($3,000) and adding to that $200 monthly, which will be automatically deducted from my checking account. This is Schwab's "pay yourself first" goal, and I know that by signing up to do automatic investing plans (AIPs), I can actually have my money working for me long-term, without having to actively write a check.
The next step was setting up the investment accounts at USAA. I would suggest that anybody who has access to free certified financial advisors take advantage of the service. USAA, for example, has a 1-800 hotline whose agents helped me reallocate my IRAs (to make them more aggressive), set up the term life insurance, and plan for my investments, all in one phone call.
I'm starting with two mutual funds (a collection of stocks, bonds, and sometimes cash assets that allows for diversification across industries, sizes of companies, etc.) that can either be managed by a group of people (more potential but more risk) or set on auto-pilot thorough pacing by the "indexes" like the S&P 500. My two funds will be managed. I also realized that I am not going to be a day-trader; this knowledge that I am gaining does not make me comfortable enough to by individual stocks. To do that, I'd have to also set up a brokerage account. I might in the future, but the great thing is that I'll be investing now regardless of whether I work with individual stocks or bundles. Schwab calls me the "Validator" investor type (p. 66), and that's somebody who's interested in the market but who also wants advice from experts to manage the minutia of my portfolio. Of course, this portfolio will consist of at least 80% stocks (I hope for 83%), 12% bonds, and about 5% in cash assets. I have the profile of a moderately aggressive investor, and this should work because I don't need the money next year, and since I can sit on the investments, the volatility of the market (the big up and down swings) won't affect me if I hold throughout the storms.
Schwab also notes that the stock market has grown, on average, approximately 10% a year; that's a lot of return for our money. My hope is that in a few years, as the compounding grows this money far beyond the principle payments, that I can do something good with it. I see now how important investing is, but it's not the first step in money management. It's really at the tail end of getting out of bad debt, purchasing security (home, insurance), and recognizing that we all must plan for our futures because, at this rate, the government certainly isn't going to have solvent Social Security forever.
References Cited
Schwab, C. (2004). New Guide to Financial Independence. New York: Three Rivers Press.
Reading this last book has been even more empowering, and based on all these voices demanding action, I'm taking it. Schwab's advice has been a good balance to Orman and Astre (and, interestingly, it's Orman who provides the back-jacket blurb that praises New Guide). Of course, the section "getting started" suggests that there is no better time than now. And Schwab is right. Investments must be done as soon as possible to take advantage of compound interest, the earnings monster that turns a yearly investment of $4,000 into a cool million in about 40 years. When the interest rolls into the principle, and that keeps building, the pot grows, and grows, and grows. That's why I have to start now. And I figured out a way that I can do that without taking too much risk. It's always smart to ease oneself into the shallow end of the pool. I can dive deep later.
Because I belong to USAA, and they have my retirement accounts, I took Schwab's advice (p. 47) and did the prework to investing: creating an emergency fund, ordering 30-year term life insurance for my family, maxing both my work 401(k) and a Roth IRA, and, finally, investing with a lump sum ($3,000) and adding to that $200 monthly, which will be automatically deducted from my checking account. This is Schwab's "pay yourself first" goal, and I know that by signing up to do automatic investing plans (AIPs), I can actually have my money working for me long-term, without having to actively write a check.
The next step was setting up the investment accounts at USAA. I would suggest that anybody who has access to free certified financial advisors take advantage of the service. USAA, for example, has a 1-800 hotline whose agents helped me reallocate my IRAs (to make them more aggressive), set up the term life insurance, and plan for my investments, all in one phone call.
I'm starting with two mutual funds (a collection of stocks, bonds, and sometimes cash assets that allows for diversification across industries, sizes of companies, etc.) that can either be managed by a group of people (more potential but more risk) or set on auto-pilot thorough pacing by the "indexes" like the S&P 500. My two funds will be managed. I also realized that I am not going to be a day-trader; this knowledge that I am gaining does not make me comfortable enough to by individual stocks. To do that, I'd have to also set up a brokerage account. I might in the future, but the great thing is that I'll be investing now regardless of whether I work with individual stocks or bundles. Schwab calls me the "Validator" investor type (p. 66), and that's somebody who's interested in the market but who also wants advice from experts to manage the minutia of my portfolio. Of course, this portfolio will consist of at least 80% stocks (I hope for 83%), 12% bonds, and about 5% in cash assets. I have the profile of a moderately aggressive investor, and this should work because I don't need the money next year, and since I can sit on the investments, the volatility of the market (the big up and down swings) won't affect me if I hold throughout the storms.
Schwab also notes that the stock market has grown, on average, approximately 10% a year; that's a lot of return for our money. My hope is that in a few years, as the compounding grows this money far beyond the principle payments, that I can do something good with it. I see now how important investing is, but it's not the first step in money management. It's really at the tail end of getting out of bad debt, purchasing security (home, insurance), and recognizing that we all must plan for our futures because, at this rate, the government certainly isn't going to have solvent Social Security forever.
References Cited
Schwab, C. (2004). New Guide to Financial Independence. New York: Three Rivers Press.
2 comments:
Sounds like you're on your way. Good for you! You've got your plan, a starting point, and the vision of a closing. Are you going to keep this up after class?
Hm...I don't know if I'm going to keep writing about finance after class, but I should. The forcable writing has really made me stick to this goal, so possibly?!
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