Living Within Your Financial Means

You cannot ever maintain a debt-free financial profile if you do not first make the conscious decision to live within the confines of your income. To do this, you must first establish a budget that will direct how you spend that income on a monthly basis. If you have no budget, you have no way to plan. A budget must include all normal expenses to include rent or mortgage, utilities, car payments, insurance, gasoline, medical, clothes, etc., as well as any non-essentials you typically purchase. If the total of expenses exceeds your income, you are obviously living on credit. Bad idea. If this is the case, you must first decide to sacrifice everything except the bare essentials until you have your credit debt paid off.

Once that process is complete, you must develop a budget which allows for regular and sequential savings and investment. If you do not currently have credit or revolving debt, you are in a much better starting position. You will need to analyze your income and expenses with an eye toward establishing an amount that you will save and invest each month.

The Progression of Savings and Investment

Anyone can begin a savings plan, no matter how small the amount available each month. If the amount is quite small, the fist step is a regular passbook savings account with a bank. These savings accounts pay very little interest, but the idea is to accumulate enough to be able to meet the minimum requirements of higher interest-bearing savings and investment accounts

The next step in the investment progression is to transfer money from a regular savings account to higher paying money market accounts or CD’s. These are safe places for savings and will earn more interest while you continue to save. As well, your money market account is liquid, that is, you can withdraw from it in emergency without penalty. This is not the case with CD’s, however, so be certain that money you put into CD’s is permanent savings.

Once you have accumulated a large amount of savings, you have decisions to make regarding investing. If you do not own a home, this is probably your best long-term investment. Although the housing market has its ups and downs, financial analysts say that over the long term, homes increase on an average of 6% a year. In boom times, homes can appreciate as much as 10-12%, so the market is worth watching

Investment Options

There are a number of investment options, ranging from safe to very risky. Amateur investors need to tread very carefully in making choices. The options listed below range from the safest to the most risky:

1. CD’s always provide safe investments. The longer a CD is held, the greater the interest rate given.
2. Money-market savings provide very safe homes for cash, and rates vary with changes in the federal discount rate
3. Triple-A rated bond funds are considered extremely safe. Many of these bond funds involve municipal, state or federal bonds and provide tax-free monthly income to the investor. Other funds are corporate bonds. Income from these is not tax-free, but income from them is greater.
4. Mutual Funds are good long-term investments and can provide monthly income and regular dividend payments to investors. There are good and bad ones, however, and the smart investor will research the history of such funds and take a look at current ratings of these funds before sinking large sums of money into them.
5. Real estate can be a great investment if approached with knowledge and caution. Buying and selling homes can generate great profits, particularly for the person who has the wherewithal to make some improvements and then flip the home for a nice profit. The general housing market will determine whether these types of investments are safe or risky.
6. The stock market is the playground of both amateurs and professionals. Fortunes have been made and lost quickly. Wise investors diversify their stock holdings, so that if one area of the economy experiences a slow down or recession, it can be offset by holdings in another area. Without professional and trusted advice, hge investments in the stock market are not wise for amateurs.

The point of investing is twofold: The investor is interested in generating regular income from his investments to allow a better current lifestyle, and regular savings and investment will guarantee a much more comfortable retirement. It is said that if, at age 25, an individual were able to save $286 dollars a month, he would be a millionaire by the age of 60.

Living Within Your Financial Means

The Progression of Savings and Investment

Investment Options

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