Investment Planning: The Basics

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Investment Planning: The Basics

Why do so many people never obtain the financial independence that they desire? Besides procrastination, other excuses people make are that investing is too risky, too complicated, too time consuming, and only for the rich. The fact is, there's nothing complicated about common investing techniques, and it usually doesn't take much time to understand the basics. One of the biggest risks you face is not educating yourself about which investments may be able to help you pursue your financial goals and how to approach the investing process.

Saving versus investing
Both saving and investing have a place in your finances. Saving is the process of setting aside money to be used for a financial goal, whether that is done as part of a workplace retirement savings plan, an individual retirement account, a bank savings account, or some other savings vehicle. Investing is the process of deciding what you do with those savings. Some investments are designed to help protect your principal--the initial amount you've set aside--but may provide relatively little or no return. Other investments can go up or down in value and may or may not pay interest or dividends. Stocks, bonds, cash alternatives, precious metals, and real estate all represent investments.
 

Why invest?
You invest for the future, and the future is expensive. Because people are living longer, retirement costs are often higher than people expect. Though all investing involves the possibility of loss, including the loss of principal, investing is one way to try to prepare for that future. You have to take responsibility for your own finances. Government programs such as Social Security will probably play a less significant role for you than they did for previous generations. The better you manage your dollars, the more likely it is that you'll have the money to make the future what you want it to be. Because everyone has different goals and expectations, everyone has different reasons for investing. Understanding how to match those reasons with your investments is simply one aspect of managing your money to provide a comfortable life and financial security for you and your family.

What is the best way to invest?
Get in the habit of saving. Set aside a portion of your income regularly.
Invest so that your money at least keeps pace with inflation over time.
Don't put all your eggs in one basket.
Focus on long-term potential rather than short-term price fluctuations.
Ask questions and become educated before making any investment.
Avoid the urge to invest based on how you feel about an investment.

Before you start
Organize your finances to help manage your money more efficiently. Make sure you have an adequate emergency fund, sufficient insurance coverage, and a realistic budget. Also, take full advantage of benefits and retirement plans that your employer offers.

Understand the impact of time
Take advantage of the power of compounding. Compounding is the earning of interest on interest, or the reinvestment of income. For instance, if you invest $1,000 and get a return of 8 percent, you will earn $80. By reinvesting the earnings and assuming the same rate of return, the following year you will earn $86.40 on your $1,080 investment. The following year, $1,166.40 will earn $93.31. (This hypothetical example is intended as an illustration and does not reflect the performance of a specific investment).

Consider whether you need expert help If you have the time and energy to educate yourself about investing, you may not feel you need assistance. However, for many people it may be worth getting expert help in creating a financial plan that integrates long-term financial goals such as retirement with other, more short-term needs. However, be aware that all investment involves risk, including the potential loss of principal, and there can be no guarantee that any investment strategy will be successful. Investment and insurance products are: not FDIC insured; not guaranteed; and, may be subject to investment risk, including possible loss of principal.

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