So you’ve just plunked down a cool three grand on the latest, greatest, behemoth high-definition plasma TV with all the bells and whistles. You have all your friends over for the big game, and while their gazes are fixed to the vivid colors and much-too-clear close-ups of sweaty 300-pound linemen, the only thing you can focus in on is a serious case of buyer’s remorse.
Sure, the TV is nice and all, but deep down you know it wasn’t the wisest of financial moves. Ready to ditch your spendthrift ways and learn how to invest, rather than waste? Then read on, my friend.
Rule 1: Dump high-interest debt first
First things first, before you even start to think about investing, you must get rid of your high-interest debt. That means credit card balances have got to go. Sit down, crunch the numbers, and put together a plan that will quickly eliminate this debt. Most credit cards carry an annual interest rate of 16 to 21 percent.
If only you could get that kind of return on your money! Credit card companies are raking in the dough on interest fees that continue to compound month after month. It’s a vicious cycle, and one you need to break free of. Try not to use credit cards at all, and if you find yourself in a bind and absolutely have to swipe the plastic, pay off your balances in full each month.
Rule 2: Invest for the long-term
Okay, once you’re free of that high-interest debt (low-interest and tax deductible debt like a mortgage or student loan can actually be advantageous) and you have a nice little chunk of change to stash away, you’re ready to invest. But where do you start? Good question.
There are so many ways to invest your cash, all of them offering different advantages and disadvantages. If you know you’re going to need access to your money within the next couple of years, look into a savings account, money market fund or certificate of deposit (CD). You won’t be rubbing elbows with Bill Gates anytime soon, but these funds do offer limited growth for the short term.
But if you want to see a real return on your money, always invest for the long term. Put away money that you know you won’t need until a long way down the road, like retirement. Stocks, bonds and mutual funds are all great long-term investments, with stocks historically showing the highest rate of return over time. In fact, from 1926 to 2005, S&P 500 stocks showed an average annual gain of 10.46 percent. That’s more than double of what bonds—the next highest performer—returned in the same time period.
Rule 3: Do not, we repeat, DO NOT, invest in stocks short term
On October 19, 1987, the stock market crashed 22.6 percent. It was the biggest one-day drop in history. If you invested in the stock market around its peak in 2000, three-fourths of your money would have disappeared in the next three years. The lesson: stocks are not for the impatient. Stick with them through the years, though, and history shows you’ll be very happy when it’s time to cash out.
Rule 4: The worst investment strategy is doing nothing at all
Sure, markets rise and fall, and there’s no guaranteed amount that you’re going to make on your investments long-term. But whatever you make, it’ll be a lot more than if you invested nothing at all. Also, the longer you wait to invest, the more money you miss out on in the long run. Thanks to the wonderful world of compounding interest, time is money in the investment world. The TV can wait; start investing as soon as you can. You won’t be sorry.
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