Guys! I just finished reading a fascinating...well, not really fascinating, but certainly informative, book on investing. It's called Investing 101 by Kathy Kristof. It is a little dated, but provides foundational tips to investing. This post may read a bit like a book report, but I am hoping to focus on the general question: Why Invest? I've promised to share with you all the knowledge I glean about investing, so this will be one post of many on this subject as my research continues. Here we go!
Why do you want to invest? What are the goals you have for increasing your money? Do you need to beef up your emergency fund? Do you have a goal of purchasing a home in the next five years? Or are you saving for retirement?
Understanding your goals for investing should be your starting point. Kristof makes this very clear because its the first point she makes in the book. It fits in with the mantra she proposes all investors live by: invest to have the amount of money you need when you need it.
As you can imagine given past posts, investing based on goals really appealed to me. Goals provide an end destination to base your road map on, and they serve as check points along the way to make sure you're still on the right path. Without goals in mind, we could end up making some faulty decisions (in investing and in life!) because we had nothing to base those decisions on. Despite my inclination to goal set - I had never considered setting goals for my investments! I am sure that I'm not alone in that thinking either. Typically, we are told to invest to save for the "future." But what does that mean? How can we invest so that we are planning for a concrete rather than an abstract future? The answer: goals.
Kristof proposed investing based on goals for theoretical and practical reasons. The theoretical is that it helps you maintain a balanced mindset around investing when the market dips or rises. The practical is that goals allow you to determine the types of investments you need to achieve them. They also help you determine how much money you want and by when. For example, if you need $1,000 in three months, the investment choices you make are going to be a lot different than if you need a down payment on a house in three years. Understanding why you are investing, how much you need and when you need it by are critical. Kristof's book has very helpful worksheets that assist in determining how much you need based on examples of goals (emergency fund, buying a car/house, kids' college tuition, retirement etc.). Even if you don't used those worksheets, thinking through these questions can help you better determine your investment strategy.
The other thing to consider in the "why invest" question is how much risk you are willing to assume in your investments. Risk is usually the sticking point for folks when they think about investing - myself included. However, Kristof assures us that there are ways to invest that mitigate risk. In order to understand how much risk you are willing to assume, you have to understand your current situation: Are you in a steady job and plan on being there for a while? How old are you? Do you already have money saved up to achieve some of your goals? And the most important question: how much risk are you comfortable with? Kristof has some worksheets that help answer some of these questions to determine how risky (or volatile in investment-speak) your investments should be.
While most of Kristof's book focused on practical knowledge--what types of investments there are; what are stocks; how do you determine which stock/mutual fund to invest in; what it means to diversify (all topics fit for future blog posts!)--I thought it was important to take a step back and consider the goals and the mindset that will inform your investment strategy. This was a big take-away from her book for me. The other big take-away was to do your research. Investing doesn't necessarily need to be hard, but doing your research upfront will save you significant headache (and potentially financial loss) in the long run.
When we think about being financially fit, we don't want to think just in the moment, but for the long haul. Taking control of your money means understanding and addressing your current financial situation and needs, and developing a strategic plan for addressing future financial needs and goals as well. Investing is one tool among many to consider within that strategic plan. As we continue to learn and grow on this journey together, I hope that you make the decision whether or not to invest based on what you've learned, and not (only) based on what you've heard. This book has already started me looking into ways to invest, and I hope that through this blog and future posts, you feel comfortable looking into investing as part of your financial fitness path as well.