In this section I will answer some basic questions that
everyone should be familiar with. Learning what you need to know in
order to start investing is not difficult. Making wise decisions
requires that you stick to a sound, long-term approach to investing rather
than a get rich quick scheme. There will always be risk associated
when you invest but a greater risk is present when you choose not to
invest. Learn the basics of investing and then continue to increase
your knowledge and understanding.
FAQs
Investing money is different from saving money in that money that is invested is committed for a period of time with certain risk for the purpose of earning a financial return. Saving money merely means to put it aside as a store or reserve. Your goal in investing should be to make the greatest return possible in the shortest period of time without losing any of the principle amount you originally invested. Many people are afraid to invest their hard earned money. One of the main reasons for this fear is ignorance. The more you learn and understand the better equipped you will become to make wise decisions as a money manager. This session will give you the basics needed to get started on your journey towards becoming a better investor of your money.
One of your key responsibilities is not only to provide for yourself and your family in the short term but also in the long term. Unlike saving money, investing will always incur risk. The degree of risk is dependent on the investment option you choose and is usually proportional to the potential return of the investment. The old saying, "If it sounds too good to be true..." it usually is. Each person has a different tolerance for risk. You should not invest in things that make you lose sleep at night.
Due to the negative effects of inflation, it is my opinion that making the choice not to invest is the greatest risk you can make with your savings. Inflation is the single greatest threat to your future financial well-being. It results in the constant, steady erosion of money's value.
When should I start investing?
Time is your greatest asset in the
accumulation of wealth. You should begin to invest as soon as
possible but not until you have built a solid financial
foundation. Investing requires a long-term commitment. The
money you allocate to your investments should not be money that will be
required for many years. In the event of a major negative financial
situation, you don't want to me forced to withdraw money that has been
allocated in a long-term investment to meet the requirements of a short
term need. It is therefore imperative that your financial foundation
be strong. As a minimum, you should eliminate all of your consumer
debts (credit cards, student loans, furniture loans, car payments, etc.)
and build an adequate cash contingency account (emergency
fund). If you start your investment program while you still have
existing consumer debts it is in effect the same thing as borrowing money
to make your investments. Your greatest risk free return would
always be to pay off your existing consumer debts prior to committing your
money to investments. The example below will show why it is so
important to start early.
The Long-Term Links below offer several sites that will allow you to experiment with the magic of compounding. As a rule of thumb you can use a very simple formula to compute how fast a dollar will grow.
The chart below shows you the growth rates of $1.00 invested monthly at an average return of 12% for 20, 30, and 40 years.
| Amount | % Return | 20 years | 30 years | 40 years |
| $1.00 | 12% | $1,000 | $3,500 | $12,000 |
Using the above chart, if you invested only $100 per month for 40 years and earned an average annual rate of return of 12% your investment would be worth approximately $1,200,000. You would be a MILLIONAIRE! If your investment had been in a Roth IRA, you would be able to enjoy your $1.2 million dollars TAX FREE!
There are an unlimited number of investment opportunities. Your investment selections should include a moderate level of risk in exchange for a reasonable rate of return with the maximum degree of diversification. When you are ready to begin investing, your first investment plan should be one that is qualified by the IRS. Qualified savings/investment plans are those that are designed by the IRS (government) with certain tax advantages to encourage Americans to participate in a long-term savings program. The most basic qualified plan that is available to all Americans that have earned income is the Individual Retirement Arrangement (IRA). An IRA can consist of many different types of investments. It can be a mutual fund, a certificate of deposit (CD) at a local bank, or a number of other options. An IRA comes in three different flavors:
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Traditional Deductible IRA
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Traditional Nondeductible IRA
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Roth IRA
Every American that has earned income can open and contribute a maximum of $2,000 (2001), $3,000 (2002-2004), $4,000 (2005-2007), $5,000 (2008 and after).
The chart below shows how long it would take to accumulate $1 million dollars using the new 2001 maximum limits of an IRA. If the IRA were started in 2001 and continued until 2011 with no further contributions, the balance would grow to $1.1 million by 2033. If you continued the maximum contributions the balance would grow to $1 million by 2029.
If it was a Roth IRA and all of your contributions were made after taxes, the total earnings on your investment would be TAX FREE!
The chart below assumes a 12% average rate of return.
The following is a excerpt from a study conducted by Georgia State University's department of Risk Management Insurance: "2001 Retire Project Report". It deals with the required ratios that will adequately satisfy income replacement in retirement.
The 2001 RETIRE Project Report represents the fifth iteration of the ongoing joint work by Aon Consulting and Georgia State University in the study and analysis of retirement income replacement ratios. With only minor changes, the research methodology used in the RETIRE Project has remained fundamentally the same since the initial 1988 Report. The income replacement ratios themselves, however, have changed somewhat from one report to the next, primarily as a result of changes in (1) federal income tax legislation, (2) savings rates, and (3) the extent to which key expenditures differ between pre-retirement and post-retirement.
In comparison to the findings contained in the 1997 Report, we observe a decline in pre-retirement savings rates, particularly at salary levels of $50,000 and below. At the lowest salary levels examined (i.e., $30,000 and below), the estimated savings rates in the 2001 Study are less than 3 percent of disposable (after-tax) pre-retirement income. As a percentage of pre-retirement (final year) salary, the savings rates would be correspondingly lower. Further, these percentages are estimated from the savings behavior of employed individuals in the 50-64 age range-a key earnings period for most individuals. Certainly, these low rates of savings raise serious questions about the ability of these individuals to achieve a financially secure retirement.
Gross income replacement ratios decline from a high of 83 percent at a pre-retirement salary level of $20,000 to 74 percent at $50,000, followed by a slight upturn to 76 percent at $90,000, which is the highest pre-retirement salary level examined in the RETIRE Project. These replacement ratios are for the base line scenario consisting of a married couple, one wage earner (age 65 worker, age 62 spouse) under the Tax, Savings and Expenditures Model. Income replacement ratios have been calculated for this particular consumer unit configuration in all prior RETIRE Project reports. Replacement ratios are also presented in the 2001 RETIRE Project Report under three additional consumer unit scenarios: (1) single worker, age 65; (2) married couple, one wage earner (age 65 worker, age 65 spouse); and, (3) married couple, two wage earners (age 65 worker, age 62 spouse).
The "flattening out" of income replacement ratios at higher salary levels has been observed in nearly all of the previous RETIRE Project studies. It is our belief that this pattern is a direct result of the federal income tax structure-specifically, the successive increases in marginal tax rates together with the increased taxation of Social Security benefits at higher incomes. In terms of the base line scenario, the gross income replacement ratios at the $20,000 and $30,000 salary levels in the 2001 Study are nearly identical to the percentages at the corresponding salary levels in the 1997 Report. At salary levels of $40,000 and higher, however, gross replacement ratios are four to eight percentage points higher in the current study. These higher percentages are primarily the result of much smaller decreases in key expenditures, in comparing pre-retirement consumption with consumption during the post-retirement period, than what was observed in the 1997 Study. Higher income replacement ratios argue for increased levels of pre-retirement savings if individuals are to maintain their current standard of living into their retirement years.
