Basic Finance Lessons

PAY YOURSELF FIRST

The idea of paying yourself first is one of the most misunderstood concepts in personal finance. Essentially, to pay yourself first means that you allocate a specific portion of your income to your investment portfolio. For most individuals, this often comes in the form of having a certain percentage (such as 10%) of your paycheck automatically deducted and contributed toward one or several retirement funds. Paying yourself first makes living below your means much simpler and helps you consistently contribute to your investment portfolio over time. It is much easier to pay yourself first than to accept the full amount of net pay and then try to save the same percentage of money and invest it later. Do your future a favor and pay yourself first.

LONG TERM

Long term is quite an ambiguous term, so let us clearly state that we define this to be a minimum of ten years. If you are not investing for the long term then disregard all that you read within the investment section of this website. Taking chances with short term active investing will leave you at the mercy of business cycles, emotional sentiment, and many other factors. While the market clearly experiences ups and downs over the years, it has proven to be quite rewarding over the long term, especially when investments extend a few decades. We believe in the long term success of the global economy, and especially the economy of the United States. 

DIVERSIFICATION

Put into plain English, do not put all of your eggs into one basket. Failure to diversify could jeopardize your entire standard of living, just ask former shareholders of Enron, Lehman Brothers, etc. Efficient diversification aims to minimize the risk unique to specific investments while still maximizing returns. Do not make the mistake of thinking diversification refers to the stock market only. True diversification requires you to analyze how investments from various asset classes in multiple countries will impact your portfolio. It is important to contemplate the advantages and disadvantages of all asset classes including real estate, commodities, precious metals, stocks, bonds, etc.

LOVE COMPOUND INTEREST

Without a doubt, time is the greatest variable in the investing game. The reason time is so important is because it is directly correlated to compound interest. Compound interest is simply interest building on interest. Why is it that earning 7% annually on $66,780.38 invested today will be worth $1,000,000 in 40 years? Compound interest! Therefore we say, invest as much as you can as early as you can. If you are investing for the long term, time and compound interest will prove to be your two best friends.

DO YOUR HOMEWORK

You have worked so hard to earn your money, why would you ever want to be lazy when deciding how to invest it? As simple as it sounds, people simply do not allocate enough time to understanding their investments. The fact is people generally spend more time and effort researching car purchases and vacations than they do researching investment alternatives like stocks, professionals, and firms. Perhaps you snuck through grade school without doing your homework, but the habit will come back to haunt you when it comes to personal finance. The world of finance is extremely confusing so swallow your pride and get professional help to increase your understanding. What you don’t know can hurt you!

EMBRACE TAX HAVENS

Whether you are aware of them or not, there are many incentives for Americans to save their money. Tax shelters allow you to legally decrease or avoid taxation and a variety of investment vehicles serve as a tax shelters in order to promote saving and investing. Some of the most common forms are a 401(k), Individual Retirement Account (IRA), 529 College Plans, etc. Embracing one or multiple forms of these tax shelters can have a dramatic impact on your total return on investment.

WORSHIP WARREN BUFFETT

It is an severe injustice for any investment resource not to include a dedication to Warren Buffett. Commonly referred to as the “Oracle of Omaha,” Warren Buffett is hands down the greatest investor of all time. To study Warren Buffett is perhaps one of the most worthwhile of all investments, for he is truly a god among men. Not only has he earned every penny of his over $60 billion of net worth in the face of pessimism and ever-changing markets, but he has also pledged to give it all to charity upon his death.  If you remember only one quote from the legend himself, let it be this: “Be fearful when others are greedy, and greedy when others are fearful.”