Make Saving As Your Investment Strategy

Tuesday, March 1, 2011, AM | 1 Comment

Make saving and investing as a strategy in your personal finances for the future. That way you can easily get out of bad debt that you may have accumulated over the years. You might find articles on some blogs that would have you believe that there is no difference between bad debt and good debt. I define good debt as mortgage loan, student loan and business loan that can potentially give you a good return over time. In comparison, I have defined bad debt as stinking debt.

Social Security

The money you save in the new social security tax laws ought to be invested instead of spending it on clothes, restaurant and such similar misadventures. The social security tax rate has been reduced by 2%, from 6.2% to 4.2% in 2011. Let’s say you are at the high end and you make $80,000 a year. That means you could be getting an additional $1,600 a year in your 2011 paycheck. If you are smart, you would save and invest it.

That’s your new-found money. Put it to good use. I can think of two ways you can use the extra money.

  1. One way is to reduce your credit card debt if you have one and who doesn’t? If your interest rate is more than 9% on your credit-card debt, consider using your payroll tax relief to pay that debt down first.
  2. If you don’t have credit card or other pressing debt [you are the lucky one], then increase your contributions in tax-advantaged retirement accounts – 401(k), 403(b), or other workplace savings plan.

But please don’t let your emotions come in the way. Don’t spend the extra money in restaurants [stay home. You cook better], clothes [check your closet. It has no more space for new clothes], vacations [you went on one 6 months ago] and other such mishaps [you have had mishaps one too many already].

How to Invest

Whatever and however you invest in, diversification is the key. The reason is parts of your investment would do better than others and eventually you would come out ahead. That, by definition, is considered by some experts as part of risk management.

There are two key steps you can take to invest your money:

  1. Asset Mix

    Without asset mix, your investment of any kind might not give you the return you want. The important thing you gotta do is to have financial goals. Generally speaking, appropriate mix of stocks, bonds, and short-term investments will do the trick. The next question is how much, in terms of percentage, you want to invest in each category. It would depend on your financial situation, tolerance for volatility and risk, and when you expect to use the money. Talk to your financial adviser.

  2. Monitor your Asset Mix

    Your financial or personal circumstances change. Come back to your investment to monitor it at least once a year if not twice. If you believe you have to rebalance it, do so for another year or so. For instance, if you find that gains and losses in your stock allocation cause it to drift from its target by more than 5%, then that would be the time to rebalance, according to some experts.

In a Nutshell
Obviously when you want to invest your hard-earned money, you first gotta save it. When you are ready to invest, always look for diversification in your assets.

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