How to Invest Wisely

May 30, 2011 — Leave a comment

To own your life, you must control your money.  The best way to do this is to nurture your money tree. However, controlling your money won’t get you all the way there. You must Invest Wisely.

Investing in the stock market has received a bad rap for a good reason. The first decade of the 21st century has been rough on investors.  There have been multiple recessions and market crashes so many people don’t trust it anymore.

BUT… investing in the stock market is still the best way to make good returns. I’ve invested since 2004 and even with the 2008 Great Recession, I’ve still been able to amass a good amount.

How do you invest wisely?

1. Put your investment contributions on auto drive

2. Where to put your money

3. Investing Tips

4. How long to become a millionaire


1. Put your investment contributions on auto drive

Don’t leave it up to yourself to decide when to invest… because it won’t happen!  If at all possible, start investing now and don’t allow yourself to stop.  Even small contributions build up over time.

How to put your investments on auto drive:

A. Payroll Deductions

Use a payroll deduction to pull a set amount from each paycheck and enter into an investments account.

The most common way to use this is to invest in a company sponsored retirement vehicle such as the 401(k).

The best part about a payroll deduction is the money is removed before you ever see it, so you learn to live without it.

B. Bank Account Deductions

Use bank account deductions to pull money from your checking account and put into an investment account.

You can setup automatic withdrawals to feed into your Roth IRA, IRA, or regular stock account.

This is the same as the pay yourself first concept which basically means you pay yourself through a savings or investment account before you start paying your bills.

2. Where to put your money

Investing can be overwhelming, but the most complicated part is probably trying to figure out how to start.  There are quite a few options depending on your employment situation.

Review the tiered approach below to determine where you should start.  The items on the left are typically the best options.

Investing Tiers

Retirement accounts are nothing more than ‘vehicles’ where you put investments. The Tier 1 and Tier 2 accounts are all considered retirement accounts.  The Tier 1 accounts will only be offered through your employer.  If you work for a corporation, the most likely option is a 401k or Roth 401k.  If you work for the government, you’ll probably have a 403b.

You can work with your HR department to determine how to get started.  If you don’t have access to a Tier 1 account, you’ll typically want to open a Tier 2 account through any normal brokers that you typically hear about on tv or the internet.

Once you open the account, you can fill them with many different investments, such as stocks, mutual funds, and bonds. For example, when you an open a Roth IRA, the first thing you’ll need to do is fund the account.  After you put money in, you’ll need to decide what investments to purchase.

The type of investments you purchase is up to you.  Stocks are considered the riskiest because you aren’t diversified (all of your money is in one basket).  Mutual funds are a collection of individual stocks that are ‘bucketed’ together.  You buy a share of a mutual fund and get a piece of the many different stocks included.

If you’re not willing to put time into researching companies, your best bet is to probably go with mutual funds or exchanged traded funds (ETFs).  ETFs are similar to mutual funds but can be purchased and traded like stocks.  You can buy an ETF that mimics the major averages (DOW, NASDAQ, etc) or other investment types (gold, high tech companies, etc).

To get more information on investment accounts, check out the overview I’ve created.

Download the investment accounts overview.

3. Investing tips

Below are 7 quick tips to help you start investing wisely.

A.  Don’t check the market or your stock prices daily, hourly, or minutely. This is one of the fastest paths to insanity.

B.  Only buy stocks of companies you understand.

C.  Buy for the long term. Warren Buffett says buy stocks like you’re actually buying the company.

D.  Don’t try to hit a homerun with penny stocks or options, it rarely turns out well.

E.  Don’t day trade.

F.  Don’t trade futures and options

G.  Diversification is for your own protection. Ever heard of Enron?

How to diversify:

Don’t put all of your money in one stock or one fund. I diversify by buying Vanguard index funds or investing in ETFs.


4. How long to become a millionaire

It’s possible for almost anyone to become a millionaire.  All it takes is regular contributions + TIME.  For millions to come overnight, you better have a great invention, a great idea, or a great vertical jump.

Determine how long it will take to save one million by following your monthly savings and meeting your expected interest rate.

How long until you have a million dollars


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