How to: Investing basics
Planning, budgeting
In this How to series, I will walk you through the basics of investing. As the series progresses, a more detailed and in-depth understanding will be developed so that anyone can start on the path to becoming a conscious investor with the funds they need.
In the first part of the series, we looked at conscious planning, the importance of saving, and the benefits of saving, i.e., investing.
In the second part, I will summarise and give you some valuable tips on creating a financial fund that you can later use for investment.
Set life goals
The first and most important thing is to know why you're doing it and what you want to achieve in the long term. You can do this in small steps by defining it for yourself. What does financial freedom mean to you? Everyone wants it, but you have to be specific about it. Figure out how much money you need and set a deadline for when you want to have it. The more specific you are, the better your chances of achieving it.
Here's what you need to do:
- Calculate how much money you need for the lifestyle you want
- Figure out how much money you need in your bank account to make it happen
- Set a deadline for when you want to save that amount
Also, count backward from your deadline to your current age, and set financial goals between the two dates at regular intervals. Write everything down on a goal sheet and put it at the front of your financial binder.
Live below your means
Living frugally is all about having the right mindset that helps you live a good life with less. And it's not as tough as you might imagine. Many wealthy folks were able to achieve financial success because they learned to live within their means. It's about knowing the difference between what you need and what you want.
Take care of your health
Taking care of your health isn't rocket science. Just visit your doctor and dentist regularly and follow their advice on any health issues you face. Simple lifestyle changes like exercising more, eating a healthier diet, drinking less alcohol, and quitting smoking can prevent or improve many medical problems.
Ignoring your health, however, can have negative consequences on your wallet. Obesity and other dietary illnesses can increase your insurance premiums, and poor health might force you to retire early with a lower monthly income for the rest of your life.
Budgeting
Creating a budget is essential to get your finances sorted out and reach your financial goals. Your budget will depend on your personal financial situation and goals, but here are the general steps for creating one:
First, set realistic financial goals and remember that you can always make adjustments later.
Next, add up all the money you make from various sources.
Track your expenses for a month, noting down everything you spend, whether you pay with cash or a credit card, to determine your actual expenses.
Calculate your mandatory expenses, ideally up to 50% of your income, including debts. These are the expenses that you must pay each month. Subtract them from your total income.
Make a spending plan. The money you have left is what you can spend on discretionary expenses, which should ideally be up to 30%. Based on your goals and what you learned from tracking your spending, assign every dollar a job. The remaining 20% is for savings and investment purposes.
Tip: set this last 20% first, automatically, so you tick the most important thing first.
Valid budget planner link: easy & FREE to use
Focus your spending (50-30-20 Rule)
The idea is to split your cash into three spending groups: 50% on stuff you need, 30% on things you want, and 20% on saving up. But you might need to change the percentages if you don't make much money or live in an expensive area.
The first group, your needs, is for the stuff you have to pay for and things you need to survive, like rent, car payments, groceries, healthcare, debt payments, and utilities. Half of your money should be enough for all that. If you're spending more than half, you gotta stop spending so much on wants or try to downsize.
The next group, your wants, is for the stuff that isn't necessary. You don't need it, but you want it. For example, you could work out at home instead of going to the gym, cook instead of eating out, or watch sports on TV instead of going to the game. This group also includes choices like getting a fancier steak instead of a cheaper burger and buying a Mercedes instead of a Honda.
Finally, you should save 20% of your cash for emergencies or investing. It would help if you saved up at least three months' money in case something unexpected happens. After that, you can focus on reaching your life goals.
Don’t hesitate. Start now
It is evident that it is better to start saving at an early age, but it is never too late to start—even if you are already close to your retirement years—because every penny saved helps to cover your expenses.
As RBC's analysis has shown, it is more important to save regularly and be in the market in some way all the time than to look for the best moment or excuses why not now. Just do it!
I'm lucky because my father told me when I was 15 years old that when you start working, you should save 10% of your salary and invest it. However, many people are not so lucky, so the importance of this cannot be stressed enough: taking care of yourself and your family is achievable, but it takes planning and awareness.