My two-year anniversary with investing is around today. This means I have been owing you this post for 2 years. In the past 2 years, I have spent more time learning about investing and actually investing than doing anything else with my personal finance. And yet I have posted very moderately on investing. The reason is, investing is complicated. Very complicated. I did not feel comfortable sharing my meager knowledge and experience with you in fear of leading you astray in this complex universe. 2 years later, I finally feel that I have something to offer.
“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.” – Warren Buffett
Investing plays a crucial role in your personal finance. If we make a reliable source of income the foundation, an adequately funded emergency fund the pillar, then investment funds make up the walls, the floor, and the ceiling. This is where the bulk of your future money will be located. This is where you store your personal savings, retirement savings, and more. This is how you become financially stable and wealthy. And you need to start now.
Investing is simply putting your money into something that generates a future return. Future return can be positive or negative, and hopefully mostly positive. You can invest money into your own start-up company or buy a piece of art that you think will appreciate. While these are no doubt legitimate investing vehicles, they are too unique for me to include in my common investment vocabulary. I will focus on mostly traditional investment vehicles.
Most people think of investment money as what is left over from their income after expenses. I take a different approach: investment money is what I deliberately set aside to generate future return rather than satisfy immediate needs. If you have a 401(k) through your employer, you know how this works. Every paycheck, a designated percentage of the money gets contributed to your 401(k) investment fund. There is a lot of advantage to periodic, deliberate investment; it forces you to save and invest, does not require discipline, and gives you peace of mind.
Spontaneous saving and investing does not work as well because real life spending pattern is unpredictable. Controlling your spending is harder to do in practice than in theory, and you don’t want to always think about saving when you go to a restaurant to eat. It’s much easier to just periodically set aside an amount of money for saving and investing and let yourself be creative with the leftovers.
Old investment mindset: investment money = income – expenses
My investment mindset: expenses = income – investment money
It is very importantly to determine how much of your money should be dedicated to investment. You should not withdraw your investment money except for very large one-time purchases such as a house or a wedding. Therefore, you want your investment money to be sufficient for your future goals but also realistic for your lifestyle. Sure, I can put 70% of my income into my investment funds and live like an old rag, but I will be miserable. After all, the purpose of investing is to make our lives easier, not harder.