Investing - Principles of Financial Management #5

by epicharmus

by epicharmus

Could there possibly be more to Principles of Financial Management than already posted?

Of course! Love it or hate it, money is a part of our lives. Money has been used for thousands of years and there is no end in sight. Money does not buy happiness but it does buy freedom. Freedom to choose where you want to live, what you want to do, when you want to retire are just a few examples of the freedoms that money will buy.

Our first 4 Principles of Financial Management are intended to simply put you on the right path. Repeating a previous comment, Financial Management is a lifestyle, something you must work on every day, every week and every year. Financial Management is not like a diet, a short term behavioral change to reach a “target”.

Are you on the right track? Do you continue to educate yourself, spend less than you earn, you are debt free or on the path and you are now saving a considerable portion of your income? What comes next?

If you have begun to accumulate some spare money it’s time to begin letting your money work for you. Investing is the next major step.

Investing in and of itself is broad and complex subject, the challenges are immense, the complexity grand. There is no way to cover everything to know about investing in a single blog post, a single site, or book. Today we will only provide you 3 guidelines to investing. Regardless of how much you invest or where you invest keep these in mind.

1) Never invest every dollar! 
Regardless of how well you manage your money or how detailed your budgeting process is, everyone exeriences the unexpected. Be prepared by keeping some of your money in readily accessible cash or cash-like fund, a money market fund, treasury bills or short-term CD’s.  How much? At a minimum begin with 6 months living expenses. Then depending on your particular situation and comfort level with risk you may want to add more.

2) Never put all your investments in one place.
Real estate prices can collapse, commodity prices can collapse, stock prices can collapse, bond prices can collapse. Scared? I hope so. Does this mean you should stick your money under the mattress? Thanks to inflation, putting your money under the mattress guarantees that it will be worth less in the future.

You must work to diversify your investments for two reasons. The first reason is to protect your investment. Putting all your money in one place is extremely risky; if the chosen investment collapses you’ve lost everything. Second, you should diversify to maximize your opportunity to achieve gains.

Outside of catastrophic economic situations like we recently experienced, different investments tend to do better or worse in different economic climates. Generally speaking, when stocks go down the values of bonds go up. Historically, when the value of the dollar falls the value of gold goes up.

Diversifying your investments helps ensure the losses in one asset class may be offset by gains in another helping to reduce the volatility of your investment. While you always risk losing money when investing, diversification ensures you retain a chance to gain as well.

3) Take advantage of the power of 72!
There is a mathematical formula that makes it easy to conceptualize how much you can benefit by putting your money to work for you. The rule of 72!

The rule of 72 helps you to easily determine how long it will take to double your money. Want to invest in a CD that is paying 3%? Divide 72 by 3 to find out how many years it will take to double your money. 72 divided by 3 = 24 years, not the greatest investment! Have a business loan to a family member that will pay you 9% interest. 72 divided by 9 = 8 years to double your money!

If you never invest, you will never double your money!

If you never save, you will never have money to invest!

If you never live on less than you earn, you will never save!

If you never educate yourself, you will never learn how to make the best decisions for your long-term financial well being!

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