Investment Check-up: Are YOU Ready? – Investment Series Part Two
| July 12, 2007 | Posted by Roshawn Watson under Uncategorized |
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By: Roshawn Watson
Controversy: One big controversy in investing is whether people should be debt-free before they start. The most obvious reason to wait is that you will actually have more money to invest. Another less intuitive reason to wait is that you will be assuming less risk. For example, a paid off car is less risky than a financed car because paid off cars do not get repossessed. Generally, I believe that if you will pay off your debt within 2 to 5 years, it is ok to delay your investing; however, an alternative way is to pay 20% of your gross on your debt and to invest 10% in stocks and index funds. Either way, the bulk of your investing is done after paying off your debt.
Investing before you are financially ready is dangerous because investments do not always go up, and without having your debts minimized or eliminated, you will likely lack the financial stability required to weather a temporarily depressed market. Consider the housing bubble(s). I know several people overleveraged because they thought the housing market only went up. Presently, the “great ideas” that got them in trouble, such as using a “balloon” or an “ARM” to purchase a house, seem idiotic.
Nonetheless, good investments, such as some index funds, almost always go up further than they go down in the long run. Honestly, it is those who jump in and out of the stock and real estate markets or those who chose poor investments who get their heads taken off.
Investment Purposes: I will discuss investing for retirement in more detail next week. For now, a good rule of thumb is that you should invest 15% of your gross income after becoming debt free, excluding any employer matches. One can also invest for other purposes like purchasing a house; still, one generally should plan to hold good investments at least 5 to 7 years to minimize risk (volatility). I have also heard of people having car funds, where they will keep ~$30,000 in investments earmarked for a car and will cash out about $12,000 from the dividends and/or interest every 6 years. This way, they can get a paid for car every 6 years without ever having a car note. Another good reason to invest is for your children’s college education. By starting early, you can tremendously reduce the amount of strain tuition puts on a family budget. However, if it is late in the game for you or your love one, don’t lose courage, I recently heard of a guy working in a lab as a technician for 3 years, saving tens of thousands of dollars, and is now paying his way through medical school without student loans.
What about short-term goals? I would save (not invest) for short-term goals because you don’t have time to recover if your investments temporarily go awry. Consider a good money market account or an online savings account. Nowadays, you can typically earn between 4.5-5.5% interest on your money. This will not make you rich, but it will give you something for your troubles.
Next week, we will discuss types of investments and some advice from famous investors.
© Copyright 2007, Roshawn Watson, Pharm.D.
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