Thread: Economics Investments & Personal Finance
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Old 01-30-2013, 11:03 AM   #93
Hoover Hoover is offline
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Quote:
Originally Posted by Amnorix View Post
There are many, many books and websites on this, but good general rules of thumb:

1. index funds are the way to go because the fees are lower. Fees eat away at performance and can add up to very substantial amounts over long periods of time. Managed mutual funds tend, over the very long haul, to UNDERperform the broader market, so you're usually paying more in fees to get less return even before the fees are factored in.

2. Keep a rainy day fund worth of cash in a liquid account. Figure on several months of expenses at least.

3. In investing, diversity is important. You can and should diversify across types of investments (real estate, stocks, stocks versus bonds) and across geography (domestic versus international). Being young, you should be heavy on stocks and you will almost inevitably be heavy on domestic. That's not terrible, but just be mindful that diversity is usually good.

4. You can NEVER time the market. Don't try. Forget the miracle of compound interest and learn the joy of dollar cost averaging, which means steadily contributing the same amount of money to your various mutual funds on a monthly basis over a long period of time so that your money gets invested when the market is low (and the price per share is cheap) as well as high. When it's high, don't stop, because it may yet go higher.

5. You don't lose or make money until you sell. Stay the course. If you're 35 and the market is tanking, who cares? You're not taking the money out for 20+ years. STAY THE COURSE. If your plan is good and consistent, you should be fine in the long run.

6. Your friend's hot tip? It ain't hot and it's not a tip.

7. Do what you can to reduce your tax exposure and increase your income. At a minimum that means making sure you understand your employer's tax advantaged retirement plans, if any, and AT LEAST contributing the amount needed to get the maximum match. If they match $1 for every $2 up to $5,000, then do whatever you can to put in $10,000 and get that free money. After that, consider traditional and Roth IRAs. Keep in mind that that money is out of your pocket until retirement age, so you must balance retirement plan savings with "regular" savings.
This is all great advice.

Here is some additional stuff to think about.

1. Pay down your debt. Its amazing how much power you have over your finances and life when you don't have debt. My wife and I built a house in 2010 and its the only debt we have. We should have it paid for in 10 years.

2. Rainy Day fund. This is important, and I might do it differently than other people. My wife and I have about 6 months of expenses socked away, but we actually use this money to fund major purchases when they pop up. We just spent 3k on electrical work for example. We put on the credit card which gives us 2% cash back and an extra month to pay the expenses. The CC bill comes and we pay in full. So while that $ came out of the emergency fund, we actually floated 2/3s of it. We basically sock away 1k a month into the reserve fund. We always replenish it, but it allows one to make large purchases much easier.

3. Live on a budget. Its the best thing I ever did. Know what you are spending your money on. It makes a difference.
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