Start by understanding that you make money twice. First, you work hard to earn it. Then you must work hard to wisely invest and grow it.
One of the biggest mistakes I see people making is waiting to invest. The power of investing comes from doing it early and often and by taking advantage of earnings and dividends. Compounding on those earnings and dividends, with the opportunity of time, will help you build exponential wealth. It’s not even about how much you earn; it’s about staying consistent with investing the small amounts you have, as often as you can, over time.
Another mistake people make is not having clear objectives and goals as to why they are investing. Are you investing for retirement, to pay for your child’s college, to start your own business in ten years, or to move to a different city? When you’re not clear on your goals and you see the stock market going through wild short-term swings and start to panic, you’ll invariably start to sell at a loss because you weren’t really clear on why you were investing. If it’s for the long-term, you know that you can weather a short-term disturbance in the market because you know you don’t need this money for another decade or two. You have that in mind. Trying to time the market and expect overnight returns is extremely dangerous. Even the best traders on Wall Street struggle to predict what the market will do tomorrow.
When things get hard, go back to your why. Everyone’s why is going to be different, and also keep in mind that your why can evolve. When I first graduated college and started earning my first paycheck, my big why was to get on my feet financially. Then it became providing for my family and paying for my kids’ college. Now it’s growing my business and achieving financial independence. Standard investment advice includes emphasizing the importance of not having all your eggs in one basket. That’s good advice, whether you’re talking about investing in another’s success and happiness, or more traditional investments using your own money. In the latter case, you shouldn’t have more than a certain amount in stocks, bonds, mutual funds, or real estate. Diversify! That way, when one type of investment goes down, another is hopefully going up.
I believe there are three buckets of investing.
Bucket #1: Invest for yourself. Making money is fun. As a business owner, I love that feeling when I create and add value to people’s lives so they can make money and I, in turn, make money myself because it’s a win-win. When you think of money like a game, it helps simplify things. Money chases value. Add value to people and their money will chase you.
Working hard for your money isn’t enough, however. Leaving your money to hang out in your checking account won’t cut it. Your money deserves better treatment. It’s ready and willing to work for you, so put it in places where it will.
Bucket #2: Invest in yourself. The colors and sounds of fireworks are memorable for me. They shoot up in the air, brilliantly light up the night sky, then fizzle out. Has that ever happened to you? You’re highly motivated for an important project. You give it your all, but it ends up taking everything out of you. Then you’re burned out. Or there’s the man I spoke with recently who told me that instead of gaining twenty years of experience in his job, he had simply repeated one year, twenty times. He had progressed neither professionally nor personally. Reading a book once a month on what you’re good at to get better is investing in yourself. Take a weekend away to refocus. Ask yourself what’s important to you and whether you are moving closer or drifting further away from it. As I’ll explain shortly, it was a powerful time away like this that led me to sell my business and pursue my passion.
Bucket #3: Invest in others. If you want me to get emotional, invest in my children. When I see a friend, a coach, or a teacher encourage or motivate my children, it pulls hard on my heart-strings, and I may or may not have a tear roll down my cheek. I’ve come to realize why. It’s because I absolutely love investing in others and helping extract every ounce of potential a person has. I’ve also come to understand the power of the two-ears principle: What you say to your kids often goes in one ear and out the other. What you say to someone else’s kids often goes in one ear and stays there. Seeing the impact a small act of kindness or encouragement has on another person is one of the most rewarding experiences you can have. Every Tuesday evening Kara and I host what we call family dinner at our home. Young couples gather around our table while we provide the food. It’s a safe place where they can be themselves and we get to be part of their lives. They are some of our greatest and most valuable investments.
Go back with me to the concept of your money working for you. One way to make certain your money is working for you properly is to think of your investment strategy as four lanes on a superhighway.
When you are driving down the highway in your white Honda Accord or fire-engine-red Ferrari (you get to choose) and you see the lane next to you start moving faster, what do you do? You quickly move out of the slow lane you are in. Then what happens? The lane you just moved out of starts moving ahead, and you think you should have stayed where you were. The solution is to have a car in each of the four lanes. Now you have all strategies covered.
Lane #1: Checking or savings. Imagine you’re driving in the far right-hand lane, which is typically the slow lane. That’s going to be your checking or savings account. That money isn’t accumulating much interest, but it’s safe, nicely tucked away, and easily accessible through an ATM. It’s not going to earn very much, maybe ⅒ of 1 percent these days, so it’s definitely not your get-rich-quick fund.
Lane #2: Two-to-five-year lane. What does that mean? Well, let’s say you’re saving for a house or a nice family vacation, but at the same time you want to pay off a certain amount of debt. This lane of your investments is not as conservative as a checking or savings account. Maybe it’s earning 3–4 percent interest. These are your high-quality investments, so they’re not going to be tremendously volatile if the market suddenly drops. The worst thing you can do is use this lane for high risk, aggressive investments and find that when you need the money, it’s not there. That would be a huge disappointment.
Lane #3: Retirement lane. Now let’s take a look at the next lane over, the second lane from the left. This is the long and steady part of your portfolio—think well-established, blue chip, dividend-paying investments, like stocks, real estate investment trusts, exchange traded funds, mutual funds, annuities, and bonds. While these may fluctuate with the market, they offer growth potential and are part of a well-diversified portfolio. Keeping in mind your risk tolerance and investment time frame, this is the lane for retirement accounts such as 401(k)s, 403(b)s, and IRAs.
Lane #4: Play account. Finally, move over to the far-left lane, the fastest lane on the highway where you’re most likely to get a speeding ticket. Let’s call this lane your play account. Maybe you heard about an investment a friend or coworker made a ton of profit on and you missed out. This is the kind of investment you might want to put a little bit from your portfolio into to take advantage of a hot stock or a speculative investment. These can be risky, but the bulk of your money is diversified among the other three lanes. Driving in all four lanes will allow you to earn money twice. First, you work hard to earn it and second, you invest it wisely.
“Save like a pessimist, invest like an optimist,” says Morgan Housel, a former columnist at The Motley Fool and the Wall Street Journal and author of The Psychology of Money. What Morgan means by this is to save as if you are about to be unemployed, as if the country is about to head into a recession or a bear market. Save like bad things are going to happen. At the same time, invest like an optimist—for the long-term, as if humanity is going to solve problems, companies will become increasingly productive and profitable, and the stock market will do well over time—as if economic prosperity is just around the corner.
Morgan told me that getting rich requires optimism, whether about the stock market, your other investments, or in your own career or business, but that staying rich requires conservative pessimism. It means making sure you leave room for error and enough buffer and low levels of debt so that you can withstand bad times to enjoy the long-term optimism that ultimately will be rewarded.
I want to give you another pro tip. When Kara and I were first married, I handled all things money, including paying the bills and saving for the future, but things began to fall through the cracks. I overcomplicated spending and saving, and what’s worse, I didn’t enjoy it. (I find that people are good at what they enjoy, and vice versa.) This led to some money disagreements, but we solved the problem with some straight talk. Kara has an uncanny ability to see how pieces fit together, so we agreed that she would take over managing the day-to-day, and I would focus on our long-term investment plan, which was my strength. Getting on the same page financially had a positive impact on our marriage as well as our finances. I’d been driving in two lanes—recklessly in one, it turned out. Once I settled into my own lane and Kara found hers, it became a much smoother, more successful ride for both of us. Find your fast lane—and start winning races.
Working hard for your money isn’t enough. Leaving your money to hang out in your checking account won’t cut it. Your money deserves better treatment. It’s ready and willing to work for you. By investing in the three buckets and the four lanes, you’ll teach your money to work hard for you.
Now that you’ve seen that even investing can be made simple, I want to introduce you to the three levers that will change your relationship with money.
(To be continued...)
This excerpt is taken from “Good Money Revolution: How to Make More Money to Do More Good” by Derrick Kinney. To read other articles of this book, click here. To buy this book, click here.
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