The 13 Steps part 2
June 18, 2011
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Continuing from part 1
As I walked into the Scottrade local branch to open my first online brokerage account, I saw sitting on the table in the waiting area...
(With a booming god like voice in an echo chamber)
The Motley Fool's 13 Steps to Investing Foolishly
...investment primer. A whole stack actually and I took one for myself and a friend. Copyright 2000
Now, continuing from part 1
Step 2: Settle Your Personal Finances
" A lot of savings tips are depressing. You follow the fashionable advice in the paperback bestsellers and find that you haven't bathed in a week, you aren't washing your clothes very often, and you've been alternating between ramen noodles and oatmeal all winter. We don't think you want to live that way (If Foolishness doesn't make saving money uplifting, it ain't worth it). Bring to your savings plans the good humor that pulled Scrooge out of hell. Your enjoyment isn't meerly crucial to the process. It is the process." - David and Tom Gardner, You Have More Than You Think
TO BE TRUE-BLUE FOOLISH INVESTORS MEANS WE FIRST NEED TO HAVE ALL OUR DUCKS IN A ROW. YOUR PERSONAL FINANCES SHOULD BE IN GOOD WORKING ORDER BEFORE YOU EVER PLACE THAT INITIAL TRADE. WHEN IT COMES TO INVESTING, FOOLS DON'T RUSH IN. THEY SETTLE THEIR PERSONAL FINANCES FIRST.
A Plan For Regular Saving
How well are you regularly paying yourself? Are you routinely setting aside an adequate established percentage of your paycheck every payday? Or do you only set aside money when there is something left over? Or worse, are you finding there's rarely anything left to pay yourself with?
If you answered yes to either of the last two questions, you're simply not ready to Pass Go just yet. It's time to examine why you aren't paying - or can't pay - yourself. Don't go investing your lunch money, or next month's rent, or with money that should go toward paying off a credit card. Only invest money that is free of other obligation.
Try to save around 10% of your annual income. If you can only manage 5% right now, that's okay. If you can swing 15%, go for it! The important thing is to establish a regular rhythm of saving - and stick to it.
Now, if you're already routinely saving, are you exploiting all your opportunities to make that money grow tax-deferred (i.e. through an IRA, or SEP, or Keogh, or 401(k), or 403(b) plans)? Since funds in retirement plans like these are not taxed until you begin withdrawing them, they can grow exponentially, compared to those taxed in a regular investment account. Further, a number of employers now offer to match a portion of employee retirement savings with additional monies kicked in for the employee's benefit. Make certain you are plowing as much of youe savings as possible into these highly Foolish vehicles. Remember: Pay yourself first and you'll thank yourself (lots!) later.
RENEGOTIATE DEBT. Did you know that you can renegotiate much of your debt? If your credit card interest rate is 18% a year, (Now, the rates can be more outrageous today) call the company and inform them that you plan to transfer to a lower-rate card if they won't bring your rate down to something less than highway robbery. They'll likely comply, as they'd still be making good money off you. If not, transfer to a new card as you dig out of debt.
Erase Credit Card Debt
Next stop... how thick is your billfold these days? Is it full of cash, or credit cards? One of the critical keys to investing is only to use money that is free of other obligation. If you're carrying a revolving balance on your credit cards, it ain't free! (Neither are you unfortunately.)
Credit card debt is probably the single best answer to the question, "Why can't I ever get ahead?" As of this writing, there were more than a billion credit cards in circulation in the United States... that's almost four cards for every American man, woman, and child. And nearly 70% of all credit card holders in the U.S. today carry a revolving card balance each month. Gadzooks! Consider that by making minimum payments (2% of the balance, or $10, whichever is greater) on just a $1000 balance with an annual interest rate of 18%, it's going to take you a little over 19 years to pay it off, en route to paying close to $1900 in interest on that $1000! It's enough to want to get into the credit card issuing or lending business, ain't it?
Only invest money that is free of other obligation.
Let's say you have $5000 to invest, but also owe $5000 on your credit cards, with an average annual interest rate of 18%. It doesn't take an astrophysicist to figure out you're going to have to get an 18% return (after taxes!) just to break even on that $5000. Even if your stock does pretty well and happens to earn you a 20% return this year, where does that get you if you're flush with credit card debt? When you figure in the 18% you had to pay on the credit card(s), you end up with a rather paltry return. You're not likely to outperform even a money market fund at this rate!
Maintaining debt on credit cards is not the right path to take through life... you'll never make your savings grow. So while going out to Tiffany's and Saks Fifth Avenue and Chez Cher can provide a great deal of short-term fun, where will it eventually put the credit card spender?
Can you say, "Chapter 13?"
Bottom line - the first thing to do to get control of your finances is to pay off your high-interest credit card debt as soon as you can.
(On a personal note: I firmly believe that all the recent changes in the rules for credit card issuers, is a direct result of this Foolish inspired thinking.)
Look At The Big Picture And Have Fun
Life may be complex, but life is good! Investing - for those of us Foolish enough to manage our own money - ought to be one of the most rewarding aspects of our lives. This message is too often lost on people. Either they're terrified of taking on risk (smart risk, that is) with their money, or they end up with heartburn because they took way too much risk, not really having known what they were doing.
So get your mallards in a queue. Take some time to learn about how to manage your money. Step away and look back at the big picture. And get in the habit of doing this from time to time, as the view can sometimes change!
On the back inside cover Acknowledgements
"The original 13 Steps was a group effort written in 1996 by David and Tom Gardner, Keith Pelczarski, Robert Sheard, Michael Knight, and Randy Befumo. In 1999, Selena Maranjian revised and updated the material in collaboration with Bill Barker, Dayana Yochim, Brian Bauer, Dell Wilkinson, and Ginger Huang. Thank you to Kristie Severn of Seve7n Design and Illustration for designing this piece for us."
To be continued...
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