How to Invest and Why You Need a Plan

What makes rich people rich? Looking at the spending pattern of various income groups in the U.S. makes it clear: Savings. The real difference between the rich and the poor is that the rich spend a larger share of their income on savings (pensions and insurance) and education.

Source: WSJ, Labour Department,

When building wealth, preserving wealth, and passing it to the next generation is the formula for financial success it is surprising that less than 20% of Americans do have a written plan when it comes to investing and even retirement [1].

The paradox in human behavior is that we are perfectly rational and capable of planning for a major event in our lives, but this is usually forgotten when it comes to investing. In fact, you will find that only a third of investors have a written plan guiding their investment strategy and retirement plans.

Why is a plan needed?
The investment world is a harsh jungle, a world of murky waters where the smartest and the most organized survive and become successful while the rest are gobbled up. A written plan short circuits our normal response to something as emotional as money. It prevents us from resorting to our gut feelings and emotions. Instead of following the herd mentality that may prompt you to make unwise investment decisions, a plan will force you to stick to a rational strategy that is underpinned by fundamental investment principles. Some of the difficult emotions that you will have to overcome while investing include:
1) The fear of failure
2) The tendency to continue with a certain approach just because you started it
3) Personal matters such as relationship issues at home

It is also important to point out the main reasons why investors fall prey to the market and lose their precious funds:
1) Omitted facts and figures mislead investors into investing in a structurally unsound company or financial instrument
2) Overconfidence makes some investors think that they are invincible and that they can always beat the market.
3) Everyone wants to be seen as a champion, the successful general capable of leading an army to victory. This can make you make investment decisions that are not based on rational thinking but rather the desire to impress your friends, co-workers or family members

By having an investment plan written down and actually following what it says, you will have dramatically increased your chances of winning and increasing the size of your nest egg or investment portfolio. The following are simple steps in creating a plan and avoiding the herd mentality and instinctual impulses that turn us into fools when investing:

1. Set up specific and realistic goals
For example, instead of saying you want to have enough money to retire comfortably, think about how much money you'll need. Your specific goal may be to save $500,000 by the time you're 65.

2. Calculate how much you need to save each month
If you need to save $500,000 by the time you're 65, how much will you need to save each month? Decide if that's a realistic amount for you to set aside each month. If not, you may need to adjust your goals.

3. Choose your investment strategy
If you're saving for long-term goals, you might choose more aggressive, higher-risk investments. If your goals are short term, you might choose lower-risk, conservative investments. Or you might want to take a more balanced approach.

4. Develop an investment policy statement
Create an investment policy statement to guide your investment decisions. If you have an adviser, your investment policy statement will outline the rules you want your adviser to follow for your portfolio. Your investment policy statement should:

Specify your investment goals and objectives,

Describe the strategies that will help you meet your objectives,

Describe your return expectations and time horizon,

Include detailed information about how much risk you're willing to take,

Include guidelines on the types of investments that make up your portfolio, and how accessible your money needs to be, and

Specify how your portfolio will be monitored, and when or why it should be rebalanced.

A smart investor with a written down plan and strategy has already won half the battle without making a single financial decision. By implementing the plan and adhering to laid down rules of operation, the smart investor will avoid the pitfalls caused by human emotion and behavior and end up winning big.

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Saving Habits: The Key Difference Between The Rich and The Rest

Since the invention of money, wealth creation and wealth accumulation has always been a fundamental goal of individuals and societies. This topic has become increasingly relevant in modern times, due to the increasing costs of living in a competitive, globalized society. Individuals who managed to crack the wealth code can get to enjoy a higher quality of life, especially in the future.

But here is one critical difference that separates the rich from the rest, that decides who will be propelled toward unlimited wealth, and who gets left behind: Saving habits.

The fundamental difference between the rich and the middle class can be seen from their saving habits. The middle class follows an earning and spending habit that looks like this:

1. Earn
2. Spend
3. Save

When a typical middle class individual receives his paycheck, he will be spending most of his income almost immediately, and then try to save the remaining monies. Often, what is left to save after all expenditure is little. Even if they managed to get a pay raise, their expenditure will somehow catch up with any increments in their pay. Thus, a typical middle class individual always have a compromised savings account.

Compare this to the earning and spending habit of a rich that looks like this:

1. Earn
2. Save
3. Spend

Whenever the rich receives money, he will immediately set aside a percentage of his earnings into a savings account. For example, he can dictate that 30% of his monthly income goes into savings every month without fail. Therefore, the rich pays himself first before he pays anyone else through expenditure.

Contrast this with the earning and spending habits of the typical middle class person, who spends first (and thus pay everyone else first) before paying himself.

Therefore, the message in the first step to abundant wealth is to always pay yourself first. On course, this requires discipline and the ability to withstand delayed gratification. Save at lest 10% of your income, even when you are still in debt, then spend the rest for your necessities and debt repayments.

Conclusion

Saving is the first step toward abundant wealth. You will be surprised to know that many people will struggle to even save a healthy sum of money every month! Hence, if you can get this step right, you will be one step ahead as compared to the general population who cannot even save a decent sum.

Article Source: http://EzineArticles.com/9479738