It’s crazy to imagine money working for you all the time. But all the financial experts have said it, make your money work for you. But is it really that easy to do? Maybe, maybe not. It depends on ONE factor: YOU.

If you are willing to work FIRST, then your money will work for you when you sleep, when you’re awake, and when you eat. There’s no free lunch in this world, seriously.

So, you might be wondering, what exactly do you have to do right now to make money work for you?

I can think of one: Invest in the stock market.

Why?

In my previous lesson on saving, I talked about putting money into the stock market to earn more than half a million dollars, just by putting $150/month in the Roth IRA for 40 years. It’s the power of compounding returns.

To illustrate, let’s double the amount per month to $300. Invest for the same 40 years, with average annual returns of 8% based on historical data, you will end up with about one million dollars in your account! Here are the results based on this investing calculator I used:

And because you’re young and ambitious, you know it’s going to pay off in the long haul. You just don’t know how to get started or if you’re doing it right.

This is where you’ll make serious money! It may sound scammy but it’s true. If you’re interested to be a millionaire when you retire, here are the steps on how to get started investing in the stock market:

1) Set up an investing account

You need an investment account. I use Vanguard because it has the lowest expense ratio. The catch is that the minimum contribution for every fund is $3,000. If you don’t have that much money, either save up three grand or go for T. Rowe Price or Charles Schwab, where the minimum is $1,000 for both.

I’d go for Roth IRA if you do not already have 401k account with your current employer. If you do, you would usually need to stick to whatever investment firm your employer decided to go with. The good thing is it doesn’t have a minimum contribution upfront. (My company went with Fidelity.)

2) Choose a fund(s) to invest in

Long story short, I went for Target 2050 Retirement Fund. It’s an index fund that invests in the S&P 500, with the expectation that you will retire in year 2050. And when people talk about “the market”, that’s S&P 500. Historically, it’s averaged about 8% return every year. Unless you believe someone’s going to kill the capitalism in this country, it’s pretty safe to say the trend will continue.

Here’s the asset allocation of the Target 2050 Retirement Fund I invested in:

If you don’t believe in index fund, then you might want to pick a stock. In fact, I talked about stock picking before, and it has its own merits. Find out what you’re willing to spend time on, and do it. The only equal opportunity we have against the big guys is time. Everybody has 24 hours a day. You, me, Bill Gates, Warren Buffett, Barack Obama. But what you do with your time is what separates one from another. If you go the Warren Buffett’s fundamental investing style, you might be able to beat the 8% returns year to year. Again, you need to do a lot of homework before you can beat the market consistently like him, so be mentally prepared.

3) Decide on the amount you will contribute every month

Always pay yourself first. Pay at least 10% of your income to yourself every month.

This also forces yourself to not overspend the money you should have put away to invest in.

You can repeat the same process for your 401k account, although you will probably have to use a specific investing firm to do it. If you’re getting your company’s match, then go for it. It’s like someone giving you extra 50 bucks to save 100 bucks, just take it!

4) Automate your investment process

Set up the automatic investment schedule so you don’t have to think about it every month. You can do this easily in Vanguard. Just click on “View/maintain automatic investments” and set it up with your checking accounts and you’re good to go!

But remember we talked about reautomating for maximum returns? So, remember to do it every 6 – 12 months. Your financial situation changes all the time, so you might want to invest more or less based on that. But the minimum should still be 10%.

I don’t really pay attention to the stock market even though I have a good amount of my money in it. It’s essentially pointless to look at the short-term changes because you’re focusing on the long-term end goal. In fact, if you don’t want to get heart attack and see your investment tanks in the next stock market crash, you’d better off ignoring the returns for a while. The stock market will crash again, and it will go back up again. And when the next one hits, I’ll buy even more shares when it’s on the cheap!

Pay Yourself by Investing

Nothing ever happens when you’re sitting in front of your computer and reading a blog post. Things happen when you start doing the right thing, right now.

Bottom line: Start paying yourself today if you want to be a fulfill your dream of being a millionaire, and be rich and happy.

The Personal Finance School Series:

1. Personal Finance School: An Introduction to Effective Personal Finance

2. Cash is King, Net Worth is Queen

3. Why and How You Should Kill the Debt Monsters

4. Personal Finance Automation: The Art of Doing Nothing with Your Money, or Not?

5. How You Can Spend, Save, and Earn Half A Million Dollars

6. Your Money Will Work for You 24/7, If You Are Willing to Work FIRST

7. Why Investing Deserves Another Round of Lesson

8. The Most Important Personal Finance Lesson of All…

As I learned more about investing, I can’t stop but to think about index fund. There have been many advocates for index fund, and I’m one of them, at least for now. But in this post I’d like to take a more neutral standpoint, and give you a better idea of what should be your primary focus in investing, i.e. index fund vs individual stock picking.

FYI, index fund is a mutual fund (or other types of hodgepodge stocks/bonds) that mimics financial indexes such as the S&P 500. The goal of an index fund is to replicate the movement of an index, so the performance of, say S&P 500, would be the same as the performance of the fund.

Why is index fund the way to go?

First off, I’d like to tell you some benefits of investing in index fund, and I believe it should be your primary asset if you don’t have a lot of background on investing (and you don’t plan to learn about it either). Here are some significant benefits that would hopefully make you go out and invest right now:

1) Easy and therefore good for busy people like us

2) Low cost, means more money to spend on latest gadgets such as iPhone, iPod, Mac

3) Good returns if you can ride out the recession that happens every 10 years or so (average annual returns of 8%)

Wait, everybody loves the hot stocks!

On the other hand, why are some people against individual stock picking? Well, it’s difficult, possibly costly, and time consuming. But it’s sexy. If you pick a stock and tell your friends about it, you’d suddenly look smart and money savvy. If you pick an index fund and tell your friends about it, they’d first ask you what it is and then shrug you off because it sounds boring. “Set if and forget it? Forget it man.”

Here are some advantages of stock picking:

1) Huge rewards if you get it right. If you manage to pick the superstar stock, your returns would most likely reach hundreds of percent. Imagine if you bought Google, Microsoft, Berkshire Hathaway when they first got public. I don’t think you’d be reading this blog any more!

2) The research and analysis will give you a good background on different types of industries, possibly helping you in your own career, especially if you’re in the financial services field (or just business in general)

3) Simply sexy.

These days, investing is all done online. So, no need to deal with the brokers or whoever and you can get set up in less than an hour (I should’ve timed myself, probably like 27.594578 minutes for me because I had to search for some documents)

Successful Example

Warren Buffett is a good example of a master in stock picking, and his efforts have been rewarding thus far. Could he have become the 2^nd richest person in the world if he had invested mainly in index funds? I doubt so. But it takes time and efforts, and a lot of courage (possibly money to lose too). However, it’s doable if you have the passion and talents (read: good at numbers). After all, Warren Buffett also started from a blank paper, just like most of us.

Kevin Rose, the founder of Digg, is a big fan of fundamental investing. And he picks his stocks. I haven’t heard anything about Digg going down because of that, but then again who knows how much of money he put into his investment (which comes from us Digging, what a brilliant way to make money).

Anyhow, don’t stop yourself from doing it because a personal finance expert tells you so. Find out more about it, maybe try picking a stock or two by running your own analysis, and dive in.

Easy Way to Get Started

A good way to get started is to sign up for Investopedia Stock Simulator and invest with virtual money. A drawback is that you might not take it as seriously as if you had invested with your own money. But every bit helps when you don’t have either money or expertise, or both.

If you finally figure out that it’s too much work (and it is!), then it’s probably a good idea to go along with index fund. That’s actually what I did too. I figured I wouldn’t have enough passion and time to put into stock picking, so I invested in target retirement fund, which consists of several index funds (I talked a little bit more in this post). It saved me a lot of time and brain power so I could focus on writing for this blog, which is my primary focus now.

My final thought is that if you’re just starting out, you might want to check out individual stock picking and see if it works out for you. If you figure that it’s too much trouble, I’d suggest you go for index funds. And if you mean to learn stock picking, but somehow just keep procrastinating, start with your index fund investing first and go from there. After all, you can have both index fund and individual stocks in your portfolio, and that’s what I have.

Do you invest?

What’s your investing strategy?

Are you a firm believer in index fund? Or individual stocks?

Alright, it’s been close to a week since the last post on jumpstarting your personal finance. Did you get started/complete the 3 basic steps before investing? If not, go check it out. Otherwise, congratulations and read on!

It’s a no-brainer that if you start investing early, you will get way more at retirement than someone who starts 5 years later than you. The key is in the compounding effect of your investments. Here are some figures:

1) At age 25, you invest $4,000 every year. Your portfolio when you’re age 65 would be worth over 1.1 million dollars! (Assuming historical 8% average annual return)

2) At age 35, you invest $4,000 every year. Your portfolio when you’re age 65 would be worth less than 800k, three hundred thousand dollars less than first scenario, hardly interesting! (Assuming historical 8% average annual return)

See, just by starting 5 years earlier, you’d retire with 300k more in your portfolio, giving you close to $1,700 more per month for retirement! (Assuming you die at age 80)

So, you’re convinced. How can you get started? Here are a few simple steps you should take RIGHT NOW:

1) Open a Roth IRA account at Vanguard. It generally has the lowest expense ratio (fees). You can also opt for T.Rowe Price or Charles Schwab. Minimum to open an account for the latter two is $1,000, but waived with $100 and $50 automatic monthly contribution, respectively. Vanguard’s minimum is $3,000 (non-waivable). Each has its own pros and cons, check out this post on investing in 401k and IRA to get more details.  I chose Roth IRA because even though the contributions are after-tax, the withdrawals will be tax-free so you won’t have to worry about your ultimate income tax rate (peace of mind!).

2) Choose a mutual fund. If you have no idea how things work at all (asset allocation, fund type, time horizon, etc), choose a target date fund. You’d see names like Target Retirement 2050/2045/2040/2035/2020 etc. The year is the year you plan to retire (say you’re 25 and plan to retire at 65, you should then choose Target Retirement 2050). Note: there have been hoo-hahs going around about target date funds not allocating the assets appropriately for those people close to retirement, so you should pay close attention to the predetermined asset allocation if you’re going to retire in the next 5 to 10 years. We’d touch on asset allocation some time, which gives you more control over your portfolio.

3) Invest $333 per month (or whatever amount you’re willing to pay yourself FIRST). Put it on the monthly automatic investments plan and forget about it for now. If you have more money, invest in your company-sponsored 401k. These are tax-efficients accounts that would give you more bang for your bucks in addition to the ROI. Not to mention, part of your 401k contributions might be matched by your company, essentially giving you free money (for real!).

That’s really it for now. Don’t swarm yourself with too many actions and thoughts when you’re just barely getting started. Execute these 3 steps, and you’d be way better off than most people when you retire! (The millionaire part seems like a pretty good bonus too)

(Picture created by Ben (yeah I’m back) from Flickr, Thanks!)

First off, if you’re reading this, I assume you’re interested in fixing or improving your personal finance. This is only the beginning of a month-long series that would help you to build a solid financial future. Of course, not everybody would be a millionaire at the end of the journey. But if you don’t start doing something now, it’s difficult to even come close to a hundred-thousandaire! My main focus for now would be in investing, which is a major part of personal finance. Other aspects such as saving and budgeting would naturally follow some time after.

$1.67 a day for your retirement, less than a latte!

And if you think you don’t have enough money right now to start investing, STOP and think if you can keep $50 per month to paint yourself a better future. That’s $1.67 per day, which is less than the 2/3 of the $4 Starbucks latte that you get! Investing involves risk, you CAN lose money, there’s no doubt about it. But if you understand how exactly investing works, you’d be taking calculate risks which would help you a good deal in the long run. If you want to at least retire comfortably when you’re age 65 (or earlier), you’d better have a good long-term investment plan in place, or earn so much money that you don’t even need your money to work for you (which is what investing is all about!).

So, I’ve been reading this book called “The Bogleheads’ Guide to Investing”, which contains a lot of useful ideas and advices on stuffs that you could start doing NOW to solidify your personal investment. However, before you even jump into investing, there are 3 things you need to do FIRST:

1)      Switch from paycheck mentality to net worth mentality – Investing is not about having a big fat paycheck (although it does help a lot). Investing is truly about how much you keep rather than how much you make. You can make $30,000 a year and save $4000, or you can make $60,000 and save only $2000. Obviously, your lifestyle should have been more luxurious if you’ve been spending more, but what matters in the end is how much you have to sustain your current lifestyle.

Therefore, you need to change your mindset from living paycheck to paycheck, to focusing on your true net worth. Basically, add up all the dollars that you own (or assets), and minus all the dollars that you owe (or liabilities). If you’re just starting out in your career, you probably only have things like bonds, stocks, mutual funds, savings, family heirloom as your assets. Liabilities, on the other hand, would include credit card debt, car loan, and educational loan.

Once you know your net worth, you will have a better idea of where you are in terms of reaching your financial goal.

2)      Pay off credit card and any high-interest loans – This is simple. Pay off all the loans that incur the highest interest first! For credit card loan, don’t just pay the minimum monthly payment, strive to pay off all the balances on your cards. In a way, they’re the best investment you could ever make in your life because you’re practically “earning” more than 15% returns (interest in fact) on dollars that you would have otherwise owed to the credit card companies. I don’t think any investment vehicle could provide that much of returns in such a short period of time. So, pay off the balances!

3)      Build an emergency fund – Protection. You want to be covered in case you lose your job, divorce, etc. It’s always a good idea to have enough cash easily accessible when you put the rest of them into work (investing!). If you have to constantly tap into your investment to pay your bills, it’s difficult to pull off a good and sound long-term investment plan. A heuristic approach to establishing an emergency fund would be to assess how much you’d need per month to live IF you didn’t have the paycheck coming. The amount is your monthly living expenses. Multiply that by 3 to 12, depending how stable you think your income would be. As a general rule of thumb, 3 – 6 months of living expenses should be adequate for most people. This gives you the peace of mind, so you won’t have to sleep on the street if something goes wrong (company going bankrupt, layoffs, unexpected medical bill not covered by insurance).

Step 1 would be the easiest step to take, and you can do it now. Then, spend time over the next few months to complete Step 2 and 3. If you’ve already done these steps, congratulations! I will blog about the next step you can take to put your money to work in my next post, and I promise it will be simple. Stay tuned till then!

(Picture created by AMagill from Flickr, Thanks!)