7 Investment Rules to Make Money
Many people shy away from investing money because they think it’s too complicated or too risky. The truth is that not investing for the future is one of the riskiest financial moves you can make.
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What Is Investing?
People have invested money for thousands of years, in many different ways. In a nutshell, investing is putting your money to work so it generates income, asset appreciation, or both—even while you sleep.
For most people, earning an hourly wage or an annual salary isn’t enough to have a secure future without investing some portion of it. Even if you’re a really good saver, and sock away piles of money in a bank savings account instead of investing, inflation is a party pooper.
Inflation is the general increase in prices for goods and services. As prices go up, every dollar you have buys a smaller percentage of a good or service.
For example, if the annual inflation rate is 3%, an item that cost $1 last year now costs $1.03. You can use an inflation calculator to see that something that cost $1 in 1994 now costs $1.61 in 2014, for a cumulative inflation rate over 2 decades of 61%.
Your after-tax savings must earn as much as the annual inflation rate--which typically ranges between 2% and 3%--just to maintain its purchasing power. To get ahead and build wealth, you’ve got to earn much more than the inflation rate. As you probably know, even the best bank savings or money market deposit accounts barely earn over 1% right now.
To get ahead and build wealth, you’ve got to earn much more than the inflation rate.
Additionally, employer pensions are rare these days, and you simply can’t count on the government to give you enough future benefits for a comfortable retirement. That’s why investing for the long-term isn’t a luxury—it’s a financial necessity, for everyone.
When you have investments that are growing and increasing your net worth, they give you a sense of security and freedom. Having a strong financial safety net also allows you to survive unexpected hardships, and to thrive and take your life in any direction that you want to go.
Follow these 7 investing rules and you’ll be set up to grow your money safely--and have a happy financial future:
Investing Rule 1: "Saving is a Prerequisite to Investing"
"Unless you have wealthy, benevolent relatives, living within your means and saving money are prerequisites to investing and building wealth.”--Tyson
In other words, your first financial priority is to have a healthy emergency fund that can keep you safe, no matter what. If you aren’t setting aside savings, ask yourself why. Maybe you need to cut back on frivolous spending, create a realistic spending plan, or get a second source of income.
Investing Rule 2: “Be Realistic About Expected Returns"
"Over the long term, 9% to 10% per year is about right for ownership investments (such as stocks and real estate). If you run a small business, you can earn higher returns and even become a multimillionaire, but years of hard work and insight are required.”--Tyson
For example, let’s say you begin investing $500 a month when you’re 30 years old. If you earn an average return of 9%, you’ll have nearly $1.5 million by your 65th birthday. At that same 9% return, you could invest $250 a month from age 25 to 65 and amass over $1.1 million to spend in retirement.
Investing Rule 3: “Diversify"
"Diversification is a powerful investment concept that helps you to reduce the risk of holding more aggressive investments. Diversifying simply means that you should hold a variety of investments that don’t move in tandem in different market environments. For example, if you invest in stocks, invest worldwide, not just in the U.S. market. You can further diversify by investing in real estate.”--Tyson
The easiest way to diversify your investments is to own one or more low-cost mutual funds. They’re managed by professionals who hold collections of assets—such as stocks, bonds, and cash—which gives you instant diversification.
Investing Rule 4: “Ignore the Minutiae"
"Don’t feel mystified by or feel the need to follow the short-term gyrations of the financial markets. Ultimately, the prices of stocks, bonds, and other financial instruments are determined by supply and demand, which are influenced by thousands of external issues and millions of investors’ expectations and fears."--Tyson
What happens to the financial markets in the short-term only matters if you need to sell out or liquidate your investments in the short-term. That’s why you should never invest money that you might need to spend within the next 5 years. Instead, make solid investments that will grow over the long-term, and never get rattled when you see volatility in the stock market.
Investing Rule 5: “Keep an Eye on Taxes"
"Take advantage of tax-deductible retirement accounts and understand the impact of your tax bracket when investing outside of tax-sheltered retirement accounts.”--Tyson
Investing through a retirement account, such as an IRA or workplace 401(k), comes loaded with advantages. Traditional accounts allow you to defer taxation until retirement. Roth options require tax on contributions, but allow tax-free withdrawals in retirement.
Additionally, many employers offer additional retirement matching funds, which is free money that no eligible participant should turn down.
Investing Rule 6: “You Are What You Read and Listen To"
"Don’t pollute your mind with bad investing strategies and philosophies. The quality of what you read and listen to is far more important than the quantity.”--Tyson
Few people achieve instant financial success. For most of us, building wealth is a slow journey that involves putting small amounts of money aside on a regular basis.
Investing Rule 7: “Your Personal Life and Health Are the Highest-Return, Lowest-Risk Investments"
They’re far more important than the size of your financial portfolio.”--Tyson
I couldn’t agree more. If you have money, but can’t enjoy it because you've allowed your health or personal relationships to deteriorate, then it won’t bring you much happiness. So consider health your first wealth and protect it fiercely by reducing stress and getting plenty of exercise and sleep.
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