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This post is the first of two.? It is meant as a mini investing primer for someone with no investing knowledge. ?Wait before you close the window. ?This is even for Mothers and families with very little to save. ?It?s for anyone who wants to save money for a new car, a downpayment on a house, or that dream boat. ?It is designed to give you some easy, practical and actionable steps to improve your finances in a short amount of time.? It will also give you an understanding of a few basic financial tools that we will show you how to use.? This is designed for someone who wants to put a large part of their finances on ?auto-pilot? using solid rules. ?These rules can help you achieve a range of goals
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First though, as we alluded to, we have to take a few minutes to dispel several myths and define a few basic terms.
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Investing does not have to be complicated.? You can do it.? People often use complex sounding terms, especially pundits on TV and that can be intimidating.? If your parents weren?t good with money or never taught you anything about it, you might naturally shy away from these topics.? There are 100 other excuses out there.? Adopt a positive attitude and know that you can be a great financial success without being anywhere close to an expert.
Don?t be scared of stocks.? The US Stock Market is still your best wealth building vehicle.? US Stocks are still your best bet in the long term.? The drop that the market experienced in 2008-2009 does not change this.? Look at market down turns as a chance to buy stocks on sale; it?s an opportunity.? Other investment vehicles will not give you a great enough return to build significant real wealth over the long term.? Do not let large sums of money sit in the bank out of fear (except for an emergency fund of 3 to 6 months expenses or perhaps 12 months, if you are paid on commission or are a small business owner).? If you have large sums in the bank because you don?t know what to do with it, stay tuned.? Turn off financial news shows.? They will not produce anything positive.
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Now, I want to define just a few basic terms and concepts that we will be using.
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Mutual funds are a collection of many different stocks managed by professionals.? So, by investing in mutual funds, you are really investing in all the individual stocks that the mutual fund buys.? But, you don?t have to pick the stocks.? That is done for you.? You just make a single transaction, buying the mutual fund.? The goal of a mutual fund is to make money for its investors by wisely selecting individual stocks.
An index fund is a special kind of mutual fund designed to mirror the return of the general stock market.? You will often hear the return of the whole market represented by the Dow Jones, S&P 500 or Nasdaq.? So, if you invest in a mutual fund that is designed to follow the S&P 500, you are really investing in all of the stocks in the S&P 500, without having to manage all of that yourself.
A 401(k) is a special retirement account created by your employer.? A 401(k) can hold different types of investments, like stocks, bonds or mutual funds.? Think of the 401(k) as a special holding container for retirement savings that protects investments from taxes.? Another important thing to know is that your employer will generally give you some type of matching funds, meaning that as you save in this account, your employer will also save in this account for you as well.? It is ?free money,? in a sense.
An IRA or Individual Retirement Account functions much like the 401(k), except that you, as an individual, set it up separate from the retirement account that your employer set up.? It is another special holding container for retirement investments that provides tax protection.? Those investments could be stocks, bonds or mutual funds.
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Now that we are armed with some understanding and some common vocabulary, we can put this into action next week.? It will be very simple and powerful, I assure you.? We will help you participate in the stock market?s 11% per year average rate of return, regardless of how much you have to invest each month.? It will help you secure your retirement, ease money worries and gain control over your future.? Remember no matter how little you know, you are absolutely capable of investing.
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