1.How much should I save for retirement?
2.How long do I have to save that amount before retirement?
3.Where can I invest my retirement money?
4.How much risk am I willing to take on my investments?
Don't just skip past Question 1. Many people in the work force
assume the answer to that question is zero because their
retirement money will come from a company-sponsored pension
plan and Social Security. Unfortunately, both these options
combined may not provide a sufficient
retirement income. Also, you don't control these
amounts, so you can't guarantee how much will
truly be available to you when you retire.
Investmet Retirement Accounts
Know Your Income and Expenses
The next step is to keep track of your income and your expenses
month. Write down what you and others in your family earn, and then your
Pay Yourself or Your Family First
Include a category for saving and investing. What are you paying
month? Many people get into the habit of saving and investing by following this
advice: Always pay yourself or your family first. Many people find it easier to pay
themselves first if they allow their bank to automatically remove money from
their paycheck and deposit it into a savings or investment account. That way
they are never tempted to spend the money before they pay themselves first.
"But I Spend Everything I Make!"
Finding Money to Save or Invest
If you are spending all your income, and never have money to
save or invest,
youíll need to look for ways to cut back on your expenses. When you watch
where you spend your money, you will be surprised how little everyday expenses
that you can do without add up over a year.
Know Your Income and What You Spend
Monthly Income and Expenses
Health care _____
Small Savings Add Up to Big Money
How much does a cup of coffee cost you?
Would you believe $465.84?
If you buy a cup of coffee every day at $1.00, that adds up to
$365.00 a year. If
you saved that $365.00 for just one year, and put it into a savings account or
investment that earns 5% a year, it would grow to $465.84 by the end of 5 years,
and by the end of 30 years, to $1,577.50.
Thatís the power of "compounding." With compound interest, you
on the money you save and on the interest that money earns. Over time, even a
small amount saved can add up to big money.
If you are willing to watch what you spend and look for little
ways to save on a
regular schedule, you can make money grow. You just did it with one cup of
If a small cup of coffee can make such a huge difference, start
looking at how you
could make your money grow if you decided to spend less on other things and
save those extra dollars.
If you buy on impulse, make a rule that youíll always wait 24
hours to buy
anything. You may lose your desire to buy it after a day. And try saving your
spare change at the end of each day. Youíll be surprised how quickly those
nickels and dimes add up!
Now, once you have set aside some money to save and invest, what
Making Money Grow
The Two Ways to Make Money
There are basically two ways to make money.
1. You work for money.
Someone pays you to work for them or you have your own business.
2. Your money works for you.
You take your money and you save or invest it.
Your money can work for you in two ways:
Your money earns money. When your money goes to work, it may
steady paycheck. Someone pays you to use your money for a period of time.
When you get your money back, you get it back plus "interest." Or, if you buy
stock in a company that pays "dividends," the company may pay you a portion of
its earnings on a regular basis. Your money can make an "income," just like you.
You can make more money when you and your money work.
You buy something with your money that could increase in value.
become an owner of something that you hope increases in value over time. When
you need your money back, you sell it, hoping someone else will pay you more
for it. For instance, you buy a piece of land thinking it will increase in value as
more businesses or people move into your town. You expect to sell the land in
five, ten, or twenty years when someone will buy it from you for a lot more
money than you paid.
And sometimes, your money can do both at the same timeóearn a
paycheck and increase in value.
6.Products that earn interest:
some checking accounts
Products that could increase
or decrease in value:
bonds, if you sell them before they are due
Products that could do both:
stocks that earn dividends
The Differences Between Saving and Investing
Your "savings" are usually put into the safest places, or products,
that allow you
access to your money at any time. Savings products include saving accounts,
checking accounts, and certificates of deposit. At some banks and savings &
loan associations your deposits may be insured by the Federal Deposit Insurance
Corporation (FDIC). But thereís a tradeoff for security and ready availability.
Your money is paid a low wage as it works for you.
Most smart investors put enough money in a savings product to
emergency, like sudden unemployment. Some make sure they have up to 6
months of their income in savings so that they know it will absolutely be there
for them when they need it.
But how "safe" is a savings account if you leave all of your
money there for a
long time, and the interest it earns doesnít keep up with inflation? What if you
save a dollar when it can buy a loaf of bread, but years later when you withdraw
that dollar plus the interest you earned on it, it can only buy half a loaf? This is
why many people put some of their money in savings, but look to investing so
they can earn more over long periods of time, say three years or longer.
7.The Basic Types of Productsó
certificates of deposit
commodities (like gold or silver)
When you "invest," you have a greater chance of losing your money
you "save." Unlike FDIC-insured deposits, the money you invest in securities,
mutual funds, and other similar investments is not federally insured. You could
lose your "principal"óthe amount youíve invested. But you also have the
opportunity to earn more money.
What about risk?
Investors protect themselves against risk by spreading their
money among various
investments, hoping that if one investment loses money, the other investments
will more than make up for those losses. This strategy, called "diversification,"
can be neatly summed up as, "Donít put all your eggs in one basket."
Once youíve saved money for investing, consider carefully all
your options and
think about what diversification strategy makes sense for you. While the SEC
cannot recommend any particular investment product, you should know that a
vast array of investment products existsóincluding stocks and stock mutual
funds, corporate and municipal bonds, bond mutual funds, certificates of
deposits, money market funds, and U.S. Treasury securities.
Diversification canít guarantee that your investments wonít suffer
if the market
drops. But it can help you balance risk.
What are the best investments for me?
The answer depends on when you will need the money, your goals,
and if you will
be able to sleep at night if you purchase a risky investment where you could lose
For instance, if you are saving for retirement, and you have
35 years before you
retire, you may want to invest in riskier investment products, knowing that if you
stick to only the "savings" products or to less risky investment products, your
money will grow too slowlyóor, given inflation and taxes, you may lose the
purchasing power of your money. A frequent mistake people make is putting
money they will not need for a very long time in investments that pay a low
amount of interest.
On the other hand, if you are saving for a short term goal, you
donít want to
choose risky investments, because when itís time to sell, you may have to take a
loss. Since investments often move up and down in value rapidly, you want to
make sure that you can wait and sell at the best possible time.
What are investments all about?
When you make an investment, you are giving your money to a company
enterprise, hoping that it will be successful and pay you back with even more
Stocks and bonds
Many companies offer investors the opportunity to buy either
stocks or bonds.
The following example shows you how stocks and bonds differ.
Letís say you believe that a company that makes automobiles may
be a good
investment. Everyone you know is buying one of its cars. Plus your friends
report that the companyís cars rarely break down and run well for years. You
either have an investment professional investigate the company and read as
much as possible about it, or you do it yourself. After your research, youíre
convinced itís a solid company that will sell many more cars in the years ahead.
The automobile company offers both stocks and bonds. With the
company agrees to pay you back your initial investment in ten years, plus pay
you interest twice a year at the rate of 8% a year.
If you buy the stock, you take on the risk of potentially losing
a portion or all of
your initial investment if the company does poorly or the stock market drops in
value. But you may also see the stock increase in value beyond what you could
earn from the bonds. If you buy the stock, you become an "owner" of the
company. Youíll only make money, if the company makes profits.
You wrestle with the decision. If you buy the bonds, you will
get your money
back plus the 8% interest a year. And you think the company will be able to
honor its promise to you on the bonds because it has been in business for many
years and doesnít look like it could go bankrupt. The company has a long history
of making cars and you know that its stock has gone up in price by 12% a year,
plus it typically paid stockholders a dividend of 4% from its profits each year.
You take your time and make a careful decision. Only time will
tell if you made
the right choice. Youíll keep a close eye on the company and keep the stock as
long as the company keeps selling a quality car that consumers want to drive.
8.The main differences between stocks and bonds
The company promises to return money plus interest.
Risk: If the company goes bankrupt, your money may be lost.
But if there is any
money left, you will be paid before stockholders.
If the company profits, its stock may go up in value and
pay dividends. You may make
more money than from the bonds.
You can never ask a dumb question about your investments and
the people who
help you choose them.
Here are some questions you should ask when choosing an investment
What training and experience do
you have? How long have you been in
What is your investment philosophy? Do you take a lot of risks or are you
more concerned about the safety of my money?
Describe your typical client. Can you provide me with references, the
names of people who have invested with you for a long time?
How do you get paid? By commission? Amount of assets you manage?
Another method? Do you get paid more for selling your own firmís
How much will it cost me in total to do business with you?
Your investment professional should understand your investment
youíre saving to buy a home, paying for your childrenís education, or enjoying a
Your investment professional should also understand your tolerance
That is, how much money can you afford to lose if the value of one of your
An investment professional has a duty to make sure that he or
recommends investments that are suitable for you. That is, that the investment
makes sense for you based on your other securities holdings, your financial
situation, your means, and any other information that your investment
professional thinks is important.
The best investment professional is one who fully understands
and matches investment recommendations to your goals. Youíll want someone
you can understand, because your investment professional should teach you
about investing and investment products.
10.Steer Clear of Trouble
Broker not registered with state or SEC
Promises of quick profits
Pressure to invest
Broker has been in trouble before
11.Important Phone Numbers:
How Should I Monitor My Investments ?
Investing makes it possible for your money to work for you. In
a sense, your
money has become your employee, and that makes you the boss. Youíll want to
keep a close watch on how your employee, your money, is doing.
Some people like to look at the stock quotations every day to
see how their
investments have done. Thatís probably too often. You may get too caught up in
the ups and downs of the "trading" value of your investment, and sell when its
value goes down temporarilyóeven though the performance of the company is
still stellar. Remember, youíre in for the long haul.
Some people prefer to see how theyíre doing once a year. Thatís
often enough. Whatís best for you will most likely be somewhere in between,
based on your goals and your investments.
But itís not enough to simply check an investmentís performance.
compare that performance against an index of similar investments over the same
period of time. You should also compare the fees and commissions that youíre
paying to what other investment professionals charge.
While you should monitor performance regularly, you should pay
every time you send your money somewhere else to work.
Every time you buy or sell an investment you will receive a confirmation
from your broker. Make sure each trade was completed according to your
instructions. Make sure the buying or selling price was what your broker quoted.
And make sure the commissions or fees are what your broker said they would be.
Watch out for "unauthorized" trades in your account. If you get
slip for a transaction that you didnít approve beforehand, call your broker. It may
have been a mistake. If it happens more than once, or if your broker refuses to
correct it, call the SEC or your state securities regulator.
Remember, too, that if you rely on your investment professional
for advice, he or
she has an obligation to recommend investments that match your investment
goals and tolerance for risk. Your investment professional should not be
recommending trades simply to generate commissions. Thatís called "churning,"
and itís illegal.
How Can I Avoid Problems?
Choosing someone to help you with your investments is one of
important investment decisions you will ever make.
While most investment professionals are honest and hardworking,
watch out for those few unscrupulous individuals. They can make your lifeís
savings disappear in an instant.
Securities regulators and law enforcement officials can and do
wrongdoers. But catching them doesnít always get your money back. Too often,
the money is gone.
The good news is you can avoid potential problems by protecting yourself.
Letís say youíve already met with several investment professionals
recommendations from friends and others you trust, and youíve found someone
who clearly understands your investment objectives. Before you hire this person,
you still have more homework.
Make sure the investment professional and her firm are registered
with the SEC
and licensed to do business in your state. And find out from your stateís securities
regulator whether the investment professional or the firm have ever been
disciplined or have any complaints against them. You can get that number by
calling the North American Securities Administrators Association (NASAA)
toll-free at (888) 84-NASAA.
You should also find out as much as you can about any investments
investment professional recommends. First, make sure the investments are
registered. Sometimes a simple phone call to your securities regulator can prevent
a lot of heartache.
Be wary of promises of quick profits, offers to share "inside
pressure to invest before you have an opportunity to investigate. These are all
warning signs of fraud.
Ask your investment professional for written materials and prospectuses,
read them before you invest. If you have questions, now is the time to ask.
How will the investment make money?
How is this investment consistent with my investment goals?
What must happen for the investment to increase in value?
What are the risks?
Where can I get more information?
Finally, itís always a good idea to write down everything your
professional tells you. Accurate notes will come in handy if ever thereís a