Tips for the New Investor

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Three Must-Do’s

1. Make a monthly budget, stick to the budget, review the budget quarterly. You can’t successfully invest until you learn how to live within your means. You can’t know how much to invest until you know how much it costs to ‘run your basic operation.’ Be very honest with yourself in this process.   

2. After you know how much it costs to ‘be you’, learn about what investment options are available through retirement plans from your employer. If you are self-employed, learn what investment options are available through retirement plans for the self-employed. Don’t be concerned that you are decades away from retiring. The funds you accumulate in retirement plans is more accessible than you think, under the right circumstances. The important thing is that it is tucked away every time you get paid or pay yourself. Start participating in everything you can, as soon as you can, except Long Term Care Plans (LTC) and company stock plans. Plenty of time for that later. Participate up to the company match, in the very minimum, i.e. the company will match 3%, 4%, etc. It’s a double your money deal.

3. Calculate a way to save some percentage of every paycheck. Your first goal is to have 3 months of bottom line expenses available in your checking account at all times. This includes all of your room, board, debt payments and auto expenses. When you have 3 months reserve in place, start building another 3 months of reserves in an interest-bearing account. Credit Unions are great options. Try to match the amount you are saving with the amount you are accumulating in the company plans. Build up to that amount. This savings account will also be your reserve for those larger than normal, unusual expenses. When you have achieved steps 1, 2, and 3, you are ready to find a professional to guide you on the investing step. But first you have to demonstrate that you are ready to be a competent investor, which means getting your undergraduate degree in managing your day to day cash flow.

Three Common Pitfalls

1. Not talking to a investment professional. It shouldn’t cost money just to talk to a competent professional. Ask someone you trust for a referral to an investment professional. Not your barber or auto mechanic or drinking buddy. The blind can’t lead the blind. 

2. Buying individual stocks instead of funds. When you are starting out the most important thing is to NOT GET KILLED. Individual stocks can get killed. Funds can’t. 

3. Failure to understand that investing is a very, very long-term business. Some people just don’t have the constitution for long-term stuff. If you are one of them, don’t try to be an investor. You will get yourself killed, or maimed, and will lose your stomach for investing for your entire life, which means your financial life will always be small. And that is just a crying shame because financial freedom is all about the choices you get to make way down the road, rather the roads you are forced to take. 

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Edward D. Foy, President, Foy Financial Services, Inc.