Friday, June 6, 2008

Investing Basics: Getting Started Continued

Getting ready to invest

After seeing all those impressive numbers, you're probably itching to take the next step. You want to drop everything and start investing right now. But ho-o-o-ld on! Would you start running a marathon without first stretching? Would you pour syrup on the plate before the pancakes are done? Having dazzled you with the power of compounded returns, we want to make sure it's not working against you. This means that you've got to get rid of your high-interest debt.

Why? Because, by the very same principle discussed above, a dollar of debt can quickly compound into a few hundred dollars of debt. Does it make sense to try to save money at the same time your debts are multiplying like bunnies? The first thing you should do to prepare for investing is to pay down all of your high-interest debt, such as credit card debt. Although some kinds of debt may be low-interest or tax-advantageous (such as your mortgage), the rule of thumb is: Be free of high-interest debt when you begin to invest.

Every dollar you can put toward investing is a dollar that can work for you. And, Fool, every dollar you avoid putting in the pocket of a financial professional, a full-service broker, or a mutual fund manager, is also a dollar that is creating value for you. (We'll get back to this point later.)

Pay yourself first

How can you become a successful investor? By making investing a part of your daily life. It's not such a stretch -- money is already part of your daily routine. Think about each decision that affects your finances, whether it is ordering a $4 glass of wine with dinner or getting a home equity loan to pay down credit card debt.

We're not suggesting that you obsess over every penny you throw into a wishing well. (Please don't embarrass your mother by diving in after it.) If you pay yourself first, you won't have to. What do we mean? When you pay your bills -- the credit cards, the gas, water, electric, cable, and phone bills, and the kid who mows your lawn and the one who throws the newspaper onto your neighbor's porch instead of yours every other morning -- add one more item to that list. In fact, we think it should be the first item. Put yourself at the top of that list: Pay yourself first. Then you don't have to think about it again until next month.

The Motley Fool recommends that you put away as much as possible, with the goal being to save 10% of your annual income (total, not take-home). Depending on your obligations, you may be able to save more or less. The more you save, the more wealth you create -- but anything is better than nothing. Remember, even a few dollars saved now will be worth more than lots of dollars saved later. So take advantage of services that automatically withdraw money from your checking account and transfer it to some savings or investing vehicle. You'll be surprised how easy it is to live on a few less dollars each month. You probably won't even notice the difference.

You can be flexible about this. If you find yourself eating beans and rice every night for a month (and you don't like beans and rice), then maybe you're paying yourself too much, or perhaps you're not in a position to start paying yourself at all. But as soon as it's feasible, jump in. Remember Patrice and Bianca!

Stay tune for descriptions of Saving and investment vehicles ...