How much does my ability to delay present gratification in favor of future gratification play in personal financial success?
The belief that it is acceptable to do without something now, and save for something in the future, is the core to your financial success. You have to make the decision every day—that it is acceptable to delay your rewards today, in favor of future rewards. This is something you can learn to do each day, so that you may become comfortable getting rewarded for your work many years later.
Too many investors panic when the market takes a downturn, forgetting the wisdom of always buying low and selling high because they fear losing money in the short term.
What do average investors do that decreases their returns?
Many investors buy investments when markets are at their highs, and panic and sell their investments when prices are at their lows. This happens because these investors do not understand that they “are” the markets, or at least participants in a rather large way in the markets. As more stories fill the airwaves and Internet saying the market is at an all-time high (meaning prices of investments and demands are high), these investors buy stocks, mutual funds, and other investments. And when the opposite happens—when prices fall, demand decreases, and stories fill the airwaves and Internet saying a crash is happening—these same investors sell at precisely the wrong time. The markets may be depressed compared with an over-inflated price before. So some investors see crashes as great opportunities during which to invest. These same investors see market highs as when prices are peaking, and sell when everyone else is buying.
What is “risk”?
In investing, risk is a quantifiable number that compares an investment’s actual return against what was expected. This number is probabilistic, and gives an investor an indication as to how the investment might perform against some benchmark.
What are some examples of risks?
Some examples of risks that may affect the prices of investments include: a natural disaster that causes Wall Street to shut down; a disruption in the pumping and transportation of oil; an abrupt change in the exchange rate between two currencies; an abrupt change in interest rates; corporate expenses that never made the expected return for the company; and use or misuse of technology in a company. All may have an adverse effect on an investment’s price at that moment in time. Some of these events may have extremely short-term effects on the prices of target investments, while others may affect the long-term prices of potential investments. Short-term and long-term risks need to be considered when making investing decisions.
How can potential investors evaluate risks?
It is important for you to understand the concept that you must balance risk with reward, and evaluate investments that reward more highly than riskier investments. At the same time, you must be quite clear in evaluating your own personal tolerance for risk.
How do I determine my tolerance to risk?
To determine your tolerance to risk, you can simply ask: If I were to lose a sum of money that I am thinking of investing, how much of this portfolio am I willing to lose? According to CNN/Money, investors tend to underestimate risk when financial markets are doing well, and overestimate risk when markets are in a tailspin.
What tools may investors use to evaluate risks of default?
If a company is having serious financial difficulties, this usually is reported to a third-party company, that in turn measures the health of many companies, especially their ability to repay obligations. Many companies, such as Standard & Poor’s, Moody’s, Dun & Bradstreet, and Fitch Ratings track how well companies are meeting their obligations. Companies with little debt and lots of cash, and that always pay off debts and obligations, are relatively safer investments than those that cannot.
Are questionnaires available that may help people evaluate their tolerance for risk?
There are hundreds, perhaps thousands, of online tools—many for free—that allow users to evaluate their own personal feelings toward risk.
What is “saving”?
Saving, or savings, has many definitions in the English-speaking world. But most definitions describe saving as the act of putting aside money, after all consumption expenditures, for future use. Some experts add to the definition that savings may be more liquid and accessible than investments, which may not be immediately accessible.
What influences my ability to save?
Among many variables, the most basic influence is your preference, belief, and ultimately your decision to do without or abstain from present expenditures in order to have the ability to use this money at some time in the future. You should understand or have a goal in mind, and then make adjustments in current expenditures in order to meet your goals.
Why should I save my money?
Many people save money in order to attain certain goals. Some of the most widely accepted reasons to save money include: having extra money in order to invest regularly; accumulating money in case of an emergency (usually three to six months of living expenses in the form of cash); deferring on paying taxes by using before-tax income and employer matching funds (in an IRA, 401(k) or other retirement account); putting away money in order to purchase a principal residence; saving for vacations, to purchase cars, or unexpected medical expenses; and to fund your current or future educational expenses. Before you begin investing, you should have your emergency funds set aside, and should exclude these sums from what you will ultimately use for your investments.
What are some strategies to help me save money?
It is important to understand that the act of setting aside just a tiny amount of money on a regular basis quickly multiplies. If you save only one dollar per day over the course of a year, with even a fraction paid in interest to you, it will result in helping you achieve some of your financial goals. But it is not necessarily the amount that you ultimately save. It is having the financial discipline to stick to your plan of accumulating money that guarantees your success over time.
What are some other strategies to assist us in saving money?
Some of the best strategies employed to assist us in saving money include: knowing where you are in terms of our income/expenses and net worth today, and creating a goal with a time frame of where you wish to be. Caring about saving even small amounts gives you the practice and trains you to have the discipline to save and care about larger amounts. The very act of keeping track of our spending will cause many people to begin to see how they can cut their expenses, by not purchasing on impulse, comparison shopping for lower prices, decreasing the usage of credit/debit cards, and creating and sticking to a monthly or weekly expense budget.
Why should I get in the habit of paying myself first?
In light of everything written above, it is important to create the behavior of paying yourself first. This means setting aside money from your normal weekly or monthly expenses that you use only for your savings and investments. Even if it is a small amount, it is important to set this money aside first so that it is not redirected to meet other expenses.
What is a “cash cushion”?
A cash cushion is a special savings that you may cover three months to one year of your expenses.