If you've accumulated some extra cash, you'd be smart to get it out of the bank and invest it. But if you're going to take your money plans to the next level, resist the urge rush into putting that money to work. If you act precipitously, you could get sucked up into an investment that earns sub-par returns for many years -- or worse, one that loses you a big part of your nest egg.
Here are three steps you can take to reduce the chances of those calamities happening.
1. Take Time to Educate Yourself
You might get wind of a fantastic stock opportunity or hear about a company that has discovered the cure to cancer. It doesn't matter. Cool your jets. For every genuine "once in a lifetime" opportunity, there are 10,000 duds and scams. It's hard to tell the difference, and almost impossible to do so if you don't understand the basics.
Take your time. Learn how stock, bonds and mutual funds work. Block out 30 minutes a day and study for three or four weeks before you make a move. You won't become an expert that fast, but you'll have the tools you will need to make informed decisions. It's a small price to pay for improving your investment performance over a lifetime.
2. Make Sure Each Investment Fits Your Plan
Once you see understand how investments work, it's time to create your financial plan. Once you do that, you can evaluate each prospective investment on how it helps or hinders your goals. This will make it far easier to make good investment decisions and avoid the temptation of jumping on "hot deals" that come your way. You probably don't need a fancy or expensive financial plan. All you need to do is:
Identify your short-term, mid-term and long-term goals.
Calculate how much each of these goals will cost you.
Do some reverse-engineering to determine how much money you need to set aside over what period to fund each goal. Then, set up an automatic-investment plan and watch the magic happen.
A little brainstorming will help you come up with good goals. And you can use any number of online calculators to do the math.
As an alternative, you can hire a professional to run your plan. Sometimes this is a smart move. But if you go this route, make sure the adviser doesn't just sell you a financial plan just to sell his brand of financial schlock investments.
3. Safeguard Your Money From Yourself
Once you've created and implemented your plan, you have to make sure you stay on the path. Understand that the biggest risk to your financial success is you –- yes, you. Fortunately, there are several things you can do to make sure you don't sabotage your own success.
Set up an emergency fund. Just make sure you have the proper amount set aside. The old rule of thumb of having six months expenses set aside is antiquated. You may need a lot less -- or a lot more. This depends on your particular situation, earning stability and financial condition.
Protect your family for an emergency. I'm talking about having an appropriate amount of life insurance so they aren't thrown under the bus if you are. Fortunately, term life insurance is very inexpensive and is a great fit for most people who want to protect their families against a catastrophe.
Track and budget your spending. This prevents "surprises" that can sink your plan. I strongly suggest that you think of your monthly investments as an expense rather than a discretionary item. Saving for your future is not a luxury. It is a mandate. And the best way to make sure you fulfill that obligation is to automate monthly investments so the money is put to work before you have a chance to spend it.
It's not difficult to put this foundation in place before you invest. Get yourself a basic understanding of how investments work and which investments are most appropriate for your specific goals. Then create your plan and fund it every month with automatic investments. For an added measure of safety, make sure to handle the roadblocks that keep many people from reaching their financial destinations. Have an adequate emergency fund set up and get yourself some inexpensive life insurance if you need it.
You don't have to do any of this perfectly. You'll learn as you go. There is nothing wrong with that. But you do need to get started. What's stopping you?
The 7 Biggest Financial Mistakes 40-Somethings Make
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If you've been making mortgage payments for a while now, it may have become just another task you do automatically each month. But it's time to start thinking about your end game. When will your house officially be paid in full, and how will that date intersect with your other plans? Do you need to adjust anything to make your "mortgage freedom" date align with the rest of your life? For example: Do you want to have your house paid off by the time your kids leave for college? If so, start scrutinizing the timing, so you can figure out if you need to make extra payments.
The average student graduating in 2014 emerged with $29,000 in student loan debt. There's no predicting what that number will be once your children are ready to don a cap and gown. But you don't want your kids to be saddled with tens of thousands in debt as they begin their adult lives (or potentially live in your basement well into their 30s because of that debt).
While your children should absolutely apply for every scholarship they can, you can't count on them getting what they'll need. So. there's no time like the present to start seriously building up their college funds. If you're not quite sure about the best ways for you to do that (529 plans are great, but they're not the only good choise), a fee-only financial adviser can walk you through your options.
Are you putting aside enough for retirement? Aim to replace 70 percent to 85 percent of your current income, or save 25 times your current annual expenses. Once you have that final number in mind, use an online retirement calculator or sit down with a financial adviser to come up with a plan for how much you'll need to save each year to reach it. If you haven't already done this, don't delay another day. Future You will thank you.
Credit card debt is a shackle that can prevent you from reaching every other monetary goal on your list. One of the first things you need to do to get your financial house in order is to eliminate all consumer debt -- the sooner, the better. Otherwise, you're losing money each month that could be put to better use elsewhere.
Make debt payoff a top priority. Try an aggressive method like the "debt snowball," where you throw every extra dime you can at your smallest balance until you've decimated that bill. Then move to the next one on the list and continue amassing "victories" until you're done with every debt. Where can you find the money to accelerate your debt payoff? Reduce your expenses or take a temporary second job, if necessary. The sooner you free yourself from debt, the better.
Your current vehicle won't last forever, no matter how diligent you are at taking care of it. When it comes time to buy a new car, will you have saved enough to make the purchase in cash? As you get older, you should be systematically reducing the number of financial obligations you're saddled with -- not adding on new ones. Car loans take from three to seven years to pay off. (The current average length is around 5½ years.) Even if your current car lasts you well into your 50s, financing a new one could mean that you'll be facing loan payments into your retirement years. Instead, plan ahead so you can pay cash.
If you're married, have children or support your parents financially, you should have term life insurance. Tragedies can happen at any time, and term insurance can help you create a Plan B for the benefit of those who rely on you. If you're healthy, you can get term life insurance coverage with a $500,000 benefit for roughly $29 a month. That's a small price to pay to know your family will be cared for if anything happens to you. The longer you wait to get that coverage, the higher your price will be.
Just like life insurance, disability insurance is a wise investment. (And, just like life insurance, the longer you wait to get it, the higher your monthly payments will be.) Should you fall ill or get injured and be unable to work for a period of time, disability insurance can pay out 50 percent to 70 percent of your income. Hopefully, you'll never need to use it -- but you never want to be in a spot where you do need it and you don't have it.