As our series on mutual funds continues, they are probably sounding like a pretty good way to save and invest, but remember there are always at least two sides to every story, so let’s now examine the disadvantages. The biggest disadvantage of using mutual funds for your investments is the range of fees they charge and expenses they accrue to manage the fund. These costs can significantly reduce your earnings. 1.5% costs may seem small, but if a mutual fund had a 7.5% total return, then its 1.5% expense ratio would reduce your earnings by 20%.
Continuing our discussion of mutual funds, let’s review their advantages. Investing in mutual funds is easier, less risky, takes less time, and costs less cash than investing in individual stocks or bonds.
Family members have been having smartphone issues and here are some money saving tips I have learned. New phones can be as expensive as PCs and laptops, perhaps not surprising since they are mini-computers with phones, flashlights, compasses, GPS features, alarm clocks, and media players, but not the kitchen sink thrown in. You have probably heard that a smartphone has more computing power than the Apollo moon rocket. So when something goes wrong, it often pays to fix it rather than junk it.
In our last blog post we discussed the fundamentals of investing based upon risks versus rewards. Now we can move into the interesting topics dealing with what kinds of investments should we consider. Let’s skip over stocks and bonds with just the simple point that while there are many kinds of each, in general, long-term investors buy some of each so they can combine the relative safe, but low yielding bonds with the potential for bigger rewards, but more volatility from stocks. Buying a number of different investments, especially both stocks and bonds, provides diversification with the goal that if one investment or type of investment is doing badly, the others will be doing better. How you diversify your savings among different investments is called asset allocation. The easiest way to get a wide range of diversification is to invest in mutual funds and exchange traded funds. Today let’s begin discussing mutual funds and cover what they are and the types.
Let’s move into a new topic we haven’t explored in detail before – investing. This will help with our two New Year’s resolutions dealing with saving for goals and make investing easy. Your different savings goals need different investments. Your short-term savings like emergency fund and home down payment should be in safer investments such as a savings account, certificates of deposit, or money management fund; while your long-term investments like retirement and college savings should be in higher paying investments like stocks, mutual funds, and ETFs. Why? Because of the trade-off between investment risks and rewards. So before we get to the fun stuff of how to pick investments, let’s explore the fundamentals that should guide our investing.
In my last post, I discussed why doing a budget makes your other personal finance goals easier, how to do one the easy way, when to update it as your finances change, and resources to get you started. Today, let’s conclude the budget topic with tips and tools for sticking to a budget.
I have proposed four New Year’s resolutions that are achievable and will improve your financial future. I have included strategies and tips to help you follow thru with them past your first month so they become part of your personal financial foundation for life. Now let’s discuss a tool that will make it even easier to follow thru with two of the principles: “living within your means” and “saving towards your goals by paying yourself first with auto-pay”. That all important tool is commonly called a budget, but let’s call it your “money management plan” so I don’t frighten people off before we even get started. I will show you how to make budgeting easy.
Many people shy away from budgets as too much work or from too little knowledge, so why go to all that trouble? Because a money management analysis or budget gives you the hard data you need to live within your means, identify areas for potential savings, match what you should do with what you currently do, make hard choices about how to meet priorities, find areas to economize, determine how much you should be able to save in key areas, identify “wants” and “needs”, and figure out whether you can afford that next big expense. Would you start a new trip without a map or GPS? Well a budget gives us a similar tool to help ensure our financial journey will go well, too.
This is my recommendation for your fourth New Year’s personal finance resolution. “Avoid paying full price” is the most fun and easiest. Even better, it makes our other three resolutions much easier. The more you spend wisely, the more money you have for living within your means, saving towards your goals, investing, and of course paying off debts. It means adopting this as a mindset whenever you are spending money, following strategies to make it happen, and reviewing my tips for buying certain stuff. I have already written about these with many more to come, so see the following blog posts:
This is our third of four recommended New Year’s resolutions that together form the foundation of the Financial Guide to Life personal finance principles. Investing is a big topic that we will cover more thoroughly in the future, but for now let’s explore how easy it can be if you choose. Investing can be as complex or easy as you choose and for most of us, complex does not mean richer. You may not think you have enough money to “invest”, but if you have savings that aren’t buried under the mattress or in the back-yard, then you are investing it. Your emergency fund is likely invested in a low risk/low rewards savings account while most people (and all young people) should have their retirement savings invested in higher risk and reward investments.