Investing All-in-One For Dummies. Eric Tyson
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Название: Investing All-in-One For Dummies

Автор: Eric Tyson

Издательство: John Wiley & Sons Limited

Жанр: Личные финансы

Серия:

isbn: 9781119873051

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      If you don’t have the original statement, start by calling the firm where the investment was purchased. Whether it’s a brokerage firm or mutual fund company, the company should be able to send you copies of old account statements, although you may have to pay a small fee for this service.

      Also, increasing numbers of investment firms, especially mutual fund companies, can tell you upon the sale of an investment what its original cost was. The cost calculated is usually the average cost for the shares you purchased.

      Laying Out Your Financial Plans

      IN THIS CHAPTER

      

Knowing what you should do before investing

      

Understanding how your financial plan translates into your investing plan

      

Protecting your assets with insurance

      Before you make any great, wealth-building investments, you should get your financial house in order. Understanding and implementing some simple personal financial management concepts can pay off big for you in the decades ahead. This chapter explains what financial housekeeping you should do before you invest, as well as how to translate your overall personal and financial plans into an investment plan and ways to protect yourself and your property.

      Plenty of younger adults have debts to pay and lack an emergency reserve of money for unexpected expenses. High-cost debts, such as on a credit card, can be a major impediment to investing, in particular, and accomplishing your future personal and financial goals, in a broader sense. A high interest rate keeps the debt growing and can cause your debt to spiral out of control, which is why the following sections discuss dealing with such consumer debt as your first priority, just before establishing an emergency reserve.

      Paying off high-cost consumer debt

      Paying down debts isn’t nearly as exciting as investing, but it can make your investment decisions less difficult. Rather than spending your time investigating specific investments, paying off your debts with money you’ve saved may indeed be your best investment.

      Consumer debt includes borrowing on credit cards, auto loans, and the like, which are often costly ways to borrow. Banks and other lenders charge higher interest rates for consumer debt than for debt for investments, such as real estate and business, because consumer loans are the riskiest type of loans for a lender. Risk means the chance of the borrower’s defaulting and being unable to pay back all that they borrowed.

      Many folks have credit card debt that costs 18 percent or more per year in interest. Some credit cards levy interest rates well above 20 percent if you make a late payment or two. Reducing and eventually eliminating this debt with your savings is like putting your money in an investment with a guaranteed tax-free return equal to the rate that you pay on your debt.

      For example, if you have outstanding credit card debt at 18 percent interest, paying off that debt is the same as putting your money to work in an investment with a guaranteed 18 percent tax-free annual return. Because the interest on consumer debt isn’t tax-deductible, you would need to earn more than 18 percent by investing your money elsewhere to net 18 percent after paying taxes. Earning such high investing returns is highly unlikely, and to earn those returns, you’d be forced to take great risk.

      

Consumer debt is hazardous to your long-term financial health (not to mention damaging to your credit score and future ability to borrow for a home or general ability to save and invest) because it encourages you to borrow against your future earnings. People say such things as “I can’t afford to buy a new car for cash, given how expensive new cars are.” Well, okay. New cars are expensive, so you need to set your sights lower and buy a good used car that you can afford. You can then invest the money that you’d otherwise spend on your auto loan.

      Establishing an emergency reserve

      You never know what life will bring, so having an accessible reserve of cash to meet unexpected expenses makes good financial sense. If you have generous parents or dear relatives, you can certainly consider using them as your emergency reserve. Just be sure you ask them in advance how they feel about that before you count on receiving funding from them. If you don’t have a financially flush family member, the onus is on you to establish a reserve.

You should have at least three months’ worth of living expenses to as much as 12 months’ worth of living expenses as an emergency reserve (see Chapter 1 in Book 2). Invest this personal-safety-net money in a money market fund (see Chapter 4 in Book 2). You may also be able to borrow against your employer-based retirement account or against your home’s equity, should you find yourself in a bind, but these options are much less desirable.

      If you don’t have a financial safety net, you may be forced, under duress, to sell an investment (at a relatively low price) that you’ve worked hard for. And selling some investments, such as real estate, can take time and cost significant money (transaction costs, taxes, and so on).

      

Riskier investments like stocks aren’t a suitable place to keep your emergency money invested. While stocks historically have returned about 9 percent per year, about one-third of the time, stocks decline in value in a given year, sometimes substantially. Stocks can drop and have dropped 20, 30, or 50 percent or more over relatively short periods of time. Suppose that such a decline coincides with an emergency, such as the loss of your job or a health problem that creates major medical bills. During the 2020 government-mandated economic shutdowns due to the COVID-19 pandemic, remember how (U.S. and most international) stocks dropped more than 30 percent in just a few weeks while millions of people lost their jobs? Your situation may force you to sell at a loss, perhaps a substantial one. Stocks are intended to be a longer-term investment, not an investment that you expect (or need) to sell in the near future.

      Getting out from under 18 percent interest rate credit card debt is clearly a priority and a bit of a no-brainer. But what should you do about other debts that carry a more reasonable interest rate? This section talks you through some common examples: student loans and mortgage debt.

      Assessing student loans

      If you’re one of many young adults with lingering student loan debt, you’re probably wondering whether you should focus your efforts on paying down that debt or instead invest the extra cash you have.

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