So you know time is very important. Now our second aspect of this is how much to invest. That’s a critical thing because the more we can test the more that compounding our time can work on that number and build that number up and it really kind of compounds and builds on itself.
Now you know my rules of thumb if ever the phrase rule of thumb nail kind of these wisdom or rules to live by and one of the rules of thumb in investing is you know that you should invest 10 percent of your income.
What is the right amount to invest.
And that sounds nice it’s a nice round number right 10 percent. Why not nine and a half percent or 11 percent or 2 percent but 10 percent seems to be a number or final 15% of your pretax income that a lot of people have agreed on as a rule of thumb.
Now I have some disagreement with that. I think 10 is a great number to shoot for it or maybe to work your way up towards what maybe we can do better. Or maybe it’s hard to start with 10 percent I know when I first graduate from university the thought of actually trying to invest 10 percent of my income was really difficult and a starting level job.
And you know with some student loan debt to pay and all that I mean I really understand that. So how much should you invest. My recommendation would be to start investing to get started because then you get that momentum behind you invest as much as you can especially starting out.
Maybe that’s two three four percent maybe five percent maybe it’s $50 or $100 U.S. a month whatever it is you can find some low cost mutual funds. You can find some things to invest in where you can get started with some lower cost investments some index funds possibly exchange rate funds different things you can look at as far as investment vehicles.
But to get started particularly for your employer maybe has a plan at work where they match up to the first 3 percent in the U.S. They call those 401k plans but maybe other parts of the world you might have a similar work plan or government plan that you can contribute to and the key is to get started
and to contribute because letting that time build up even over a small amount is huge and very impactful. We saw look at the money and compound interest. So start with whatever you can and try to strive for that 10 percent it’s a good rule for a reason so try to strive to get to that 10 percent but then start going beyond what 11:12 try to strive to get to 15 percent and then beyond that or even more really stretch. I mean just think if you get 30 percent of your income how much more impact will that be specially over a long time horizon.
We’ll talk about risk and reward coming up next.
So you can understand how to manage that well and you got 30 percent income in there but you’re enjoying life today but also saving for a very secure future and giving you options in the future to reach whatever goals you have. So strive for that 10 percent but at least get started with something to use that powerful combination of time and money working together. OK so where do we get this money right.
I mean talk about how I got started was you know didn’t have any money was actually $10000 in debt from student loans more money. Most folks are actually me in many parts of the world worse off than that. So where do you get money. Well one is living below your means. That’s a real old adage of living below your means.
Probably I’ve heard this before too and the more you can live below your means and give up some things the more you can then invest and put that money in.
Feel free to drive a little bit older car if you live in an urban area maybe you really need a vehicle or a car or an automobile and use the subway use to train use a bus whatever it might be you know to live below your means maybe you’re not going out as many times a week are going to rustle maybe you cut that back or you’re bring your lunch or whatever it is.
Look for those small things that can really add up you know me it’s a large coffee maybe you get a medium coffee. You’d be surprised when to do the numbers.
How how much they can add up so if you’re going five six days a week for that coffee maybe a couple times a day even look at those small things. I’ll be be surprised like Boy that really adds up. But also you know a lot of folks say well look at the small things because it’s true they do it up. But then they might ignore like these big monster things like I have a big carpooling or I have this big expense you know that I’m not taking.
You know I’m not even using I just have this big expensive room me as for cable TV or something. I mean it’s cell phone extra services see what you can cut back or pay back in there or maybe live without so little smaller areas of those big areas and then direct those things into your investments.
And one other thing that really works well and did work for me over my whole career is you know taking things like raises or bonuses maybe you’re a commission type thing and taking that money and just piling it right into investing.
That doesn’t mean you can’t take a little bit and go out and have a nice dinner to celebrate your promotion or something like that or a nice bonus he made me even take a nice trip even maybe a frugal type trip you can do that too. But many people they get like maybe a big windfall of money or maybe they get a bonus and they just blow it right away.
You know it was like was it worth it for that time when you think about the power of compounding over time if I were in let’s say a $10000 bonus What a great thing. Well instead of blowing that all on some mind boggling trip maybe I take a nice trip or I go out to eat but only upon most of that money into my savings and let that work over time.
So then later my life I can have these funds available to me and even much more to the whole idea of investing.
We’re trying to grow that pot of money.
So my feeling is enjoy life now for sure. But also you know we are investing to have that secure future. Many people like live like Popper isn’t all that when they could live a little bit better. That’s all up to you. It’s your own personal choice. I would say you know you’d be well had to give up something. Now for that secure future a long term one last comment to about the right amount to invest one thing you’d want to do and highly recommend it. Others recommend the sou’west to build up an emergency fund for those unexpected bills.
It’s a health bill or health care bill or an automobile repair or something you like cash or just got hit with this repair or this bill and I wasn’t expecting it. That’s where your emergency fund comes into play. I’d recommend or other small tradesmen like six months worth of expenses that you look at your budget you look your expenses you track your expenses and say if I lost my job or I was out of work or I hadn’t expected Bill I would have.
What will be your plan.
We’ll it’s good to have six month of your expenses not your income but six months of your expenses available to in a fund cash whatever might be that you can easily get out easily liquidate. So start with the six month but depending on your situation you can maybe move that down to three months. If you’ve got more funds in other places or you know you’ve got some money and maybe you don’t have to you know expect the many things you can you know play that down a little bit to three months.
We still need something some good three months or you might need to build that up to nine months or even a year depending on your situation like well maybe you’re in a job where it’s a you know the job is kind of shaky. Even the companies really struggling or there’s a lot of layoffs in your industry. If you’re in that situation you might want a longer emergency fund because you might need to help cover your expenses during a period of a layoff or during a period of unemployment for you.
So the idea of emergency fund though is it’s there for emergencies so create your emergency fund get your expenses paid start paring back where you came with expenses and then get started with investing. To let the power of investing in time work for you and then build on that over your over your career and over your investing lifecycle.
You get those two things together those core principles and just to think about those even if you’ve been investing for some time can be very very impactful. So right now if you’re like I’ve been investing for some time maybe now’s the time to say oh maybe I can invest a little bit more or even getting started with investing money I can just get started now and see the advantages of that and play around with the money. Compound interest calculator offer calculators that are up for free out there on the Internet money
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Take advantage of that one.
All right so those are two core concepts. Let’s move on to the third core concept which is risk and reward or how much are we going to make this.