Managing your Life
I want to take step back and talk about the very basics. Investing is one means to wealth preservation but savings and spending is yet another. Whatever your circumstance I can think of several cardinal steps in order of priority that must be part of your personal financial plan.
1. Have 6 to 12 months of reserves.
Earning money is a hard thing, and many times, not completely under our control. You could lose your job, have uncovered catastrophic expenses, etc. and to manage these LIFE events, keep at least 6 months equivalent of expenses in liquid asssets (cash). This is personal insurance, your lifeline. Hopefully this will allow you to ride out the storm which happens to all of us at least once in life.
2. Protect/grow your primary income (i.e. job)
Go ask a bank for a loan and to them, nothing, not even assets, are as important as steady dependable income. For example, lets say you earn $100,000 working a normal job. Don’t sell this short! If you lose this income and want to “replace” it by trading or investing, how will you do so? Do you have one million dollars and can you earn a GUARANTEED 10% on that money? That’s precisely what that “crappy” job is worth. So its worth quite a bit, and you need to protect it by 1) ensuring that you are doing your best at work, 2) enhancing/growing skills which will be valuable to your employer or other employers and 3) making sure you are networking at your own company and outside. Imagine if you get a 10% raise by working extra smart and/or hard at your job, that’s like an automatic and SUSTAINABLE 10% return on your money. And for the most part it doesnt involve you being lucky in the market. Banks don’t care about assets becuase they know assets can be spent, but INCOME can be depended upon to continue forward in time to service debt. Banks used to be samrt in this regard until the Fed turned the world upside down in the last decade by allowing no income/stated income liar loans. Don’t worry, they wont do that again!
3. Manage your Expenses
Pretty important for it allows to keep more of that hard earned income. Again, think about your job or business and think about how much effort that takes. If you spend more of that than you need to, you are wasting that effort and hardship. So check all your expnses, your cable bills, phone bills, your leisure/entertainment and see where you can cut a little here and there. Get quotes often on home and auto insurance, make sure you’re getting the best rates. If you would like my help on this send me an email! at asethura@hotmail.com.
4. Find out what you want to Lose
And this, determines how much you should invest. Invest only what you can afford to lose. And then make sure you don’t lose it. Many people keep forgetting Buffet’s first two rules of investing — 1) Don’t lose money and 2) Don’t forget Rule #1. Please see my article on investing losses . When you invest be smart and try not “push” your returns too high. Rather aim for a sustainable moderate rate of return. This can be anywhere from 5% to 8 or 9 %. With money market rates so low (.1%!!!) therse days even a 3% return is great! Don’t be greedy –while you will never become filthy rich by just investing/trading in stocks, you CAN become poor. The house (the market) usually wins. In the movie Casino, De Niro says “The rule is to keep them playing and keep them coming back; eventually we will get it all!” How true. The market is mostly a vortex that tries to sucker the most people in for the most money. Use this understanding to your benefit and play careful, get out of the vortex before it sucks you in. You CAN make money in the market, just don’t go in with the aim of sustaning a compounded 15-20% return, it just won’t happen.
