Investing For Non-Investors: Why You Should Invest

This article is part of a series entitled Investing For Non-Investors which is intended to turn non-investors into investors.  Once every few weeks I will update this series with a new article until the series is complete.
View Part 1: Where Do I Start?, Part 2: What is Investing?.

Before enacting a specific investing plan, it is vital to figure out why you want to invest.  Below is an un-ranked list of the primary reasons for investing.

Savings Growth
Investing is an excellent method of earning a higher rate of return on your savings.  Over time this will allow your savings to take advantage of the fact that interest earned over long periods of time allow your money to grow faster.  Also, keep in mind that saving and investing are not the same thing.  For more information about the distinctions between saving and investing read the article Separated at Birth: Investing, Saving, Trading and Gambling.

Tax Benefits
Assuming that you are doing most of your investing in tax advantaged accounts, there are numerous tax benefits.  The most important ones being the fact that 1) investments made with pre-tax income usually minimizes your taxable income and 2) investments made with after-tax income into certain accounts is not subject to income tax if you withdraw the gains after a specific age.  By not having to pay as much in taxes as would normally be required, your invested monies are better able to grow faster.

Diversification of Assets
Investing is a viable means of diversification simply because it allows you to mitigate the risk of losing all of your money from one specific asset category (e.g. savings, real estate, investing, etc.) incurring a loss.  This goes back to the simple idiom “Don’t put all your eggs in one basket”.

Income
By investing in specific assets like government bonds, you are assured of income until the bond reaches maturity.  For example, if you were to buy a 30 year US Treasury bond, you would earn  a yield of around 4% for 30 years and at the end of the 30 years you would get your original principal back.

(Image Source: Flickr user FirstIndy)

Separated at Birth: Investing, Saving, Trading and Gambling

While some people may get investing, saving, trading and gambling confused with each other, there are some distinctions that separate these not too distant cousins.

Most of the confusion revolves around the fact that most people never really consider the objective for participating in each of these activities.

Investing
According to Wordnet, investing is defined as

laying out money or capital in an enterprise with the expectation of profit.

When compared to saving, trading and gambling, investing is distinct because when a person or enterprise invests, there is a reasonable expectation of profit.  Additionally, while more similar to saving and trading all investing activities have an inherent amount of risk.  However, the likelihood of the investor losing all of their money or capital is minimal, because money or capital is allocated to assets which usually have an intrinsic value.

Saving
Saving is the activity of protecting something from loss or danger.  When it comes to finance the “something” that your are protecting from loss is your hard earned money.

In simple terms, saving is delayed spending.  Most often, saving money is done in anticipation of future purchases and/or unforeseen expenses.

Saving is distinct from investing because there is no expectation of profit from your savings.  However, in today’s advanced financial markets, institutions reward individuals for saving by offering the ability to earn interest on their savings while knowing that their funds are insured against loss by the Federal Deposit Insurance Corporation (FDIC).

Saving is far from trading and no where near gambling.

Trading
Trading is defined by Wikipedia as

the buying and selling of financial instruments such as stocks, bonds, and derivatives.

Trading like investing comes with the expectation of profit, however the two are distinct in that traders 1) usually specialize exclusively in financial instruments and 2) have a shorter time horizon for realizing their expected profit.  In a sense a trader can be viewed as a short term investor.

One major distinction between investing and trading is the use of gearing or leverage when purchasing the various financial instruments.  Leverage allows the trader to use other institution’s monies and capital to buy financial instruments and as a result it multiplies the trader’s gains and losses.  Therefore, the trader must use proper risk and money management in order to decrease the probability of losing all trading capital due to the leverage’s multiplying effect.

Trading is closely related to investing, is not very related to saving and is a gamble.  In my personal opinion, trading is a gamble only because of the potential to lose all trading monies if risk and money is not properly managed.  The same amount of risk is not found when investing due to the minimal amount of leverage used on average.  Additionally, the minimal reliance on chance and the uncertainty separate it from gambling.

(Note from the Devil’s Advocate:  Individuals who play poker for a living are gambling, but it is somewhat biased to consider it a gamble if these individuals can consistently withdraw profit over several years.  Also, several professional gambler’s have stricter risk and money management rules than some of the traders and investors I know.)

Gambling
Gambling is the wagering of money or something of material value on an event with an uncertain outcome with the primary intent of winning additional money and/or material goods.

Due to the heavy dependence on chance and uncertain outcomes, gambling cannot be considered a viable means of investing, saving or trading.

Now that we have gone through four topics that have caused many heated discussions over the years, hopefully you are better prepared to discuss these topics at the next outing you attend.  If not, you can always just tell the other person that they know nothing about anything and put your fingers in your ears.

Also, share this with someone you think would like the information and share it ten times with someone you think would hate it.

(Image Source: Flickr user Juju Inspired)

The Hard Working Dollar Weekly Roundup 08/09/09 – 08/15/09

This past week was a pretty slow one as far as posts, news and capital markets go.  My view is that despite the fact that summer is about  a month from being over, people are getting more into the fall mindset.

The following articles were published last week (oldest posts first):

1. 5 Ways To Save Money In This Economy
   Over the last year, lots of people have said that saving money in this economy is difficult, if not impossible. However, there are several small things you can do to make it easier for you to save.
2. Hard Working Deals 08/11/09
   Hard Working Deals: A collection of product and travel deals from around the web.
   Highlights:
   DSW.com – $10 off $49 Purchase or Free Shipping
   Home Depot – Clearance Sale: 20% to 50% off Select Items
   $499 — Ireland: 6 nights in B&Bs & castle with air
3. Cutbacks in the Kitchen
   As times have gotten tougher over the last year Americans have been spending less and less on groceries.
4. Subscribe To This Blog
   By subscribing to this web log dedicated to personal finance, investing, trading and frugality you will be provided with daily and weekly content updates that will help your money work harder.

(Image Source: Flickr user Flow Design Studio)

Subscribe To This Blog

By subscribing to this web log dedicated to personal finance, investing, trading and frugality you will be provided with daily and weekly content updates that will help your money work harder.  Additionally, it will update you with the latest news and information related to business and finance.

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Cutbacks in the Kitchen

As times have gotten tougher over the last year or more, Americans have been spending less and less on groceries.  Below is an infographic that breaks down how people are spending (or not spending) money on food.

Click image to view full size version.

For more budgeting and investment info visit Mint.com

(Image Source: Flickr user Snook Photograph)

5 Ways To Save Money In This Economy

Over the last year, lots of people have said that saving money in this economy is difficult, if not impossible.  However, there are several small things you can do to make it easier for you to save.

#5 – Cut back on new purchases

Minimizing new purchases is often times easier said than done.  Especially, when we as a society have been raised to believe that “newer is better”.  However, the majority of new purchases are unplanned wants versus actual needs.  Therefore, by cutting back on new purchases, you not only save money, but also train yourself to distinguish between what you want and what you need.

#4 – Sell your old stuff

This is quite possibly the easiest way to save money.  That is because we all have clothes we haven’t worn in years or things that we haven’t touched in months sitting around our homes taking up space.  Take a second now to visualize your living room and/or bedroom and make a mental note of all the stuff taking up space that could be sold for a few dollars.  Now think about how good it would feel to see the money from these items sitting in a savings account earning more money or being used for a future vacation.  Also, keep in mind that by selling your old stuff, you not only receive money, but also make more room available in your living space.

#3 – Plan meals and outings

While planning meals and outings may sound like a difficult task, it is not as complicated as it seems.  It won’t be necessary to take out a calendar or even write anything down.  Just think of foods you would like to eat in the coming week(s) and things you would like to do on the weekend and make a mental note of them.  This mental planning will help you get a better idea of what you will be spending on food and on entertainment/hobbies.  When it comes to meal planning, it helps when you remember that you haven’t had pizza in a while and may want to have a few slices with friends or family on Wednesday night.  That way, you can go to the grocery store and buy enough pizzas and side items for the meal without spending money on delivery and while knowing that the expense is accounted for.  And when it comes to weekends, if you have an idea of what you would like to do and have planned on spending a certain amount, you won’t be as surprised when weekend related expenses come up.

#2 – Minimize your current bills and financial obligations

This step is one of the more difficult methods of saving money in this economy, simply because most individual’s bills and obligations are not that flexible.  However, if there are any bills or obligations you are in doubt about having, eliminate them if possible.  Also, keep in mind that if you do get rid of a service you like, you can always pick the service back up should you realize that you are better prepared for the expense in the future.  Another suggestion is to call your various service or product providers, and ask them if they have less expense plans or rates.  Granted, 9 out of 10 companies will say “no”  and that they don’t have a less expensive plan, but the one company that says “yes” is worth the time spent.  Plus, the worse they can say is “no”.

#1 – Save money before accounting for personal expenses and bills

This is by far the hardest way for most individuals to save.  That is because it requires people to be more selfish than they usually are.  When saving this way, you will take a portion of whatever money you make or receive and save it prior to paying bills or accounting for personal expenses.  However, while this method is the most selfish, it is the best method of saving because it is built on the principle that as long as you are taken care of, everyone else that you are responsible for and to will be taken care of.  Simply put, if you are not okay and can’t take care of financial emergencies, should they come up because you don’t have any savings, then every other responsibility and obligation won’t be okay either.  Therefore, by saving first you ensure that you will always be at least somewhat prepared for life’s little surprises and as a result can take care of any responsibilities and/or obligations you have accepted.

#0 – Do something NOW to save

I know I am cheating by having a zero, but the most important thing to do in order to save in this economy, is to actually save money in this economy.

Knowledge becomes wisdom only after it has been put to practical use. -Anonymous

(Image Source: Flickr user Juju Inspired)

Two of the Top Entrepreneurs of the Last 100 Years

This post will touch on the lives of two entrepreneurs who were recently featured in a Forbes article which listed the top entrepreneurs of the last 100 years.

Henry Ford
Henry Ford was the American founder of the Ford Motor Company and father of modern assembly lines used in mass production. He started the Ford motor company in 1903 at the age of 40 with only $28,000 in capital.  His introduction of the Model T automobile revolutionized transportation and American industry. He was a prolific inventor and was awarded 161 U.S. patents.  Read more about Henry Ford at Wikipedia.

Richard Branson
Branson’s first successful business venture was at age 16, when he published a magazine called Student.  He then set up an audio record mail-order business in 1970. In 1972 at the age of 22, he opened a chain of record stores after selling records from the trunk of his car.  The chain of record stores was originally known as Virgin Records, and later become known as Virgin Megastores.

His Virgin brand grew extensively in the 1980s and now includes Virgin Atlantic Airways and expanded the Virgin Records music label.  As of 2009 Branson was the 261st richest person on the Forbes list of Billionaires with an estimated net worth of $2.5 Billion.

Read the rest of the article here at Forbes.com. (Top Entrepreneurs of the Last 100 Years)

(Image Source: Flickr user Dan Anderson)

The Economy As Told By Bugs

This is a great video that depicts a basic explanation of the economy, but all the roles are played by animated bugs.

(Video Source: Viral Skool)

(Image Source: Flickr user Claudio Morlock)

Investing For Non-Investors: What Is Investing?

This article is part of a series entitled Investing For Non-Investors which is intended to turn non-investors into investors.  Once every few weeks I will update this series with a new article until the series is complete.
View Part 1: Where Do I Start?.

To make the transition from non-investor to investor you have to know exactly what investing entails.  When investing you will be allocating you money or capital to an enterprise or asset with the future expectation of profit.

While the above definition may sound overly formal, the reality is that when  investing you should expect more money to come back to you, than you originally allocated.  This is because without the expectation of receiving more money or capital than previously allocated, investing would be consumption.  Where consumption is simply allocating your money or capital to items that don’t have an equal exchangeable value in the present and have the expectation of a lower exchangeable value in the future.

As a soon-to-be investor, you should be aware that most investing is done over the long term.  For the purpose of this article, I will define “long term” as periods greater than 15 years.  Investing is done over longer terms, because it attempts to take advantage of the fact that over longer periods of time, items that are valuable, profitable or limited in quantity should increase in value (although this increase is never guaranteed).

Now that you have an understanding of what investing is, stay tuned for future articles in this series that will discuss topics like what you should invest in, how much you should invest and whether you should invest at all.

(Image Source: Flickr user AIDE-M)

Success, One Cake At A Time

It is when faced with our most difficult times and trying situations that we truly discover who we are as individuals and what we are willing to do to not only survive, but thrive.

I recently read an article that depicted the story of a woman who when faced with unemployment, a mountain of debt and the prospect of foreclosure and homelessness, decided that she would not let circumstances impact her personal desire to provide for herself and her family.  As a result, she literally decided to bake cakes and sell them for $40 in order to pay her mortgage.

While this idea probably would not have crossed her mind if she weren’t 10 days from having to make a $2,500 mortgage payment, the way she opened her mind and considered what her skills were and how to make money off of them, is amazing to me.  Even if stories like this happen all the time.

The fact is that regardless of what outside actions may happen, you are still in control of your life.  Granted, you may not be able to control when you get hired, fired, how much you make, when you die and several other outside influences beyond our control.  You can control how you let these external influences affect your internal mood, goals, dreams and desires. This is because we subconsciously project our own internal state onto the world around us.  Therefore, if you make a conscious decision to not let external influences drastically affect you internal mood you won’t be as mentally and emotionally affected when negative external influences come across your path.

There are two analogies that I like to use when motivating myself and others through tough times and they are as follows:

Be the duck
While it may seem funny to imagine yourself as an actual duck.  Imagine your life as the duck instead and think of situations, obstacles, and hindrances as the water that tries to weigh the duck down when it is swimming and when it attempts to fly through the rain.  Then remember that the water is going to be there and that it is always going to rain at some point, but as a duck your feathers were made for repelling water.  As long as you keep swimming (i.e. don’t sink  mentally or emotionally) and keep flapping your wings, you will make it through the water/rain that life throws your way.

Be a chameleon

“Change is the only constant.“ Heraclitus

This is one of the most undeniably true statements every made.  That is because as long as time goes on, your life, the world and the universe will be constantly changing.  So in order to move forward in life, you as an individual also have to be able to change and adapt to new situations and information.  This doesn’t mean being a pushover or a door mat, but simply means being open to new ideas, options and possibilities.

I’m guessing that you never thought that this article would have included an exercise where you imagine yourself as a duck or a chameleon, but in my opinion these are applicable analogies for self motivation.  Plus, they are easy to understand and remember.

I hope this article helped or informed you and if it didn’t, share it with someone you think it could help.  Also, read the rest of the story about the woman who baked her way out of foreclosure.  It is really inspiring. (Today Show: She Baked Her Way Out Of Foreclosure).

Image Source: Lotustuol