Things you should know about investing
When confronted with the world of investing many people feel overwhelmed. The intricacies of knowing how and when to invest seem to frighten many people into inaction.However experts advise that by simply educating yourself on a few key principles of how money works and what you should do with it can provide you with the knowledge you need to be a successful investor. So before you throw up your hands in despair and give up on investing here are some things that you should know about investing-
- Start by understanding that most of what you learned growing up about money, income, and wealth are not true.From confusing high incomes with wealth to not knowing the importance of tax asset placement when choosing your investments, after learning some basic principles it might make more sense to you why some professional athletes making $20 million a year quickly go bankrupt, while a bus driver can retire a multi-millionaire and have no financial worries.
- Understand that income is not wealth-This is because even if you are making a seven-figure salary you could lose your job any day.(Just check out the headlines of any news service to verify this.) However if you are making the same amount of money from owning businesses no one can take that from you.It is crucial to remember that simply having a high income does not mean financial independence.
- Consider that the real secret to amassing wealth is to spend less then you make. Many financial experts define wealth as the part of your net worth (assets minus liabilities) that generates capital gains, income, and dividends without your labor. The level of your wealth should be measured by the length of time you could maintain your standard of living without an additional paycheck. In other words, if you had to stop working right now, how long could you keep up your current spending patterns?
- Realize that you must have the extra money you need to invest. The only way to take advantage of investment opportunities is to have the money to invest. This can not be money that is required to pay the rent, mortgage, buy food or other necessities of life. Money you invest should always be money that you can afford to lose without jeopardizing your basic necessities (food, lodging etc.).
- Remember that successful investing takes time. Amassing wealth and becoming financially independent is a slow process that happens over time. This will happen as you do small things every day such as cut your expenses, generate extra income, and put the money into brokerage and tax-deferred retirement accounts.Keep in mind that as each new opportunity appears you can react on a larger scale than your previous investments. That's called compounding. It's when the interest, dividends, and capital gains your money has earned begin to generate their own interest, dividends, and capital gains, and on and on in a cycle.
- Know that taxes matter-a lot! Investors who actively work to lower their taxes through the use of IRA's, 401(k)'s, real estate appreciation and any other legal means add a few percentage points to their overall net worth each year. The bottom line is that those with little or no real wealth generate a lot of taxable income while those who end up financially independent work to generate large unrealized gains that can legally be tax-free. This is the major reason why you should do everything you can, (within legal statues) to fully fund your retirement plans, as well as to focus on how your seemingly small decisions help or hurt tax planning. Remember that no decision is too small.