Income is growing, and loans are multiplying. Traveling during vacations is a real pain in the ass. But some people manage to save for a rainy day or a decent pension. To become one of these lucky ones, you don’t have to get an education in finance or read mountains of books. Everything is much simpler.
Read moreThose who barely manage to live from paycheck to paycheck look at those who successfully invest their savings in securities as financial gurus. In fact, anyone can invest their own funds wisely. To do this, you just need to take a number of specific steps, and most importantly, learn to behave correctly. After all, it is often people’s behavior that prevents them from saving money and, by investing it in shares, receiving a good income. A financial planning specialist explains why people manage their savings illogically and shares simple tips that will help correct the situation.
This article will be useful for those who want to learn how to save without making serious sacrifices, get rid of loans, start saving money and increase their savings.
There are no completely safe investments. Everything changes over time. And trying to predict the future growth of stocks, based on the data that they have grown so far, is about the same as guessing which side a coin will land on, given that the last time it came up heads. The previous result does not guarantee anything.
But this knowledge should not paralyze you. If you are going to invest your money and want to make a decision based on common sense, and not on vague prospects, make a plan. Not a 200-page treatise that you will never have time to even reread, but a short list of actions that will fit on a small card.
For many, financial planning seems so overwhelming that their first reaction is to throw up their hands and beg an expert to tell them what to do. No expert can give universal and effective advice.
Every person’s financial situation is unique because their goals are unique. It’s not just abstract dreams… it’s specific ideas about a comfortable retirement and a good education for their children. And if what makes your neighbor happy can’t make you happy, then someone else’s financial plan won’t work for you either.
So the first (and most important) question you should ask yourself is: “What does money mean to me?” For some, it’s a synonym for security or opportunity; for others, it’s the equivalent of freedom. Once you’ve come up with your unique answer, think about your real goals, time horizons, and risk tolerance, as well as what you’re willing to change.
Once you have your goals, choose the three biggest ones. And every time you think about investing, ask yourself if it will help you achieve those goals.
When we act like others, we feel safe. That's why we buy high-priced stocks in the hope that they will go up, and sell stocks when they start to go down, out of fear. We might hold our employer's stock because we are loyal, or sell stocks because it's... fun. This behavior is more like gambling. It's exciting, but you wouldn't recommend someone play casino games to save money for the future.
Investing is not entertainment. It should always be aligned with your goals and principles, not based on feelings about what will happen. Don't play the stock market.
The easiest way to avoid making stupid financial decisions is to not make them at all. Personal accounts on bank websites and mobile applications allow you to automate most everyday transactions.
Instead of forcing yourself to make the same decisions over and over again, automate them - this way your good intentions will turn into good behavior. You can automate payments to a pension fund or just to a savings account, but not only. It is better if auto payments are also set up for paying off a mortgage and car loan. The essence of the procedure is that the necessary write-offs from the account without your participation will relieve you of the painful desire to postpone the payment, spending the money on something else.
Once you start spending less and saving painlessly, evaluate how profitable your past investments were.
Acting according to plan, you will put your current expenses in order. But past investments may have been made without regard for your financial goals, under the influence of emotions or under the influence of acquaintances. Therefore, sooner or later you will have to sort out previous investments.
To do this, imagine that overnight all your investments returned to you in cash. And ask yourself which investments you would make again under the same conditions and without losses. Any investments that do not pass this test should be redirected.
1. Pay off your loans on time.
2. Pay off your loans quickly. Once the debt is gone, you won't have to pay interest on it.
3. Spread your investments. The point of diversification is to combine investments that each carry their own risks. Such combinations are often less risky than their individual components and yield higher returns.
When you bet on "systemic risk," you're investing in the concept of capitalism as a whole. It's based on the idea that, despite the ups and downs of the market... it still keeps growing. So you should invest in stocks of different companies. Sure, some of them will go under, but that won't affect you much because others will grow and their stocks will grow.
Mutual funds, which involve spreading your investments among different companies, are much better than individual stocks. When choosing mutual funds, be sure to review your financial plan.
Leaving aside the arguments and reasoning, here is a list of recommendations for those who want to learn how to manage their money wisely.
1. Don't try to predict the future - it's impossible. And trying to invest - based on an analysis of past events, gambling - has nothing to do with investing.
2. Determine what money means to you, and with this in mind, set financial goals. Make a simple plan and make sure that your investments are subordinate to it.
3. Don't act under the influence of strong emotions. Smart investing is a boring activity, and should always remain so. Don't play the market.
4. Use the 72-hour test. Buy any selected items, except for vital ones, after three days. This will help to avoid impulsive spending.
5. Automate good behavior. This is the best way to maintain it.
6. Use the night test. If all your investments came back to you in the form of cash, which investments would you repeat? Money that is poorly invested can be invested differently.
7. Rely on the basic rules of investing: pay your loans on time, try to repay loans early, invest in different assets.
8. Be ignorant and lazy. The flow of information pushes you to impulsive actions, which is always bad for investing. If your money is already working, why interfere with it?
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