Saturday, October 15, 2011

Common Sense Investing...

The book I read this week is Common Sense Investing by Rick Van Ness. It's a pretty awesome little book. It is a short book that walks the first time investor through the basics of getting started. And the reader can do great at investing without reading another book because the book follows the principles of investing laid out by John C. Bogle.

I think it would be ideal for every high school senior in America to have a class based around this book. There are so many benefits if the average investor starts early. Just $100 a month goes a long, long way! Rick Van Ness discusses these simple ideas and a few more. He goes into detail explaining the benefits of long-term investing in low-cost index funds. He even has very much the same ratio of Vanguard investing that I currently use... same funds too. No doubt the Boglehead in each of us coming out. (Referencing our admiration for the investing styles of John C. Bogle.) And I think it's completely necessary to go into great detail, as he did, and really drive in the need for someone to put their money into a fund and then walk away from it. It goes against our very nature. When investing during the long-term you are bound to see recessions and possibly depressions, and people want to take their money out of investments during these time periods and put it under their mattresses. However, like I have said many times, this is not a good strategy. It is important to hold tight and let the market run it's course because over the long-term you will come out ahead!

Now there is one very simple idea that is written about in this book. The idea of figuring out what big purchases you are going to be saving for, the time you have to save, and the amount of total money needed. Writing down these things is a really good way to brainstorm your budgeting plan. The alternative is just having an account set aside and just saving. But ultimately, you should incorporate basic goal planning strategy into all areas of your life, including personal finance. And basic goal planning strategy dictates that you should plan be specific and have a timeline set on your goals. The goals laid out in this book go like this:

Big Ticket Items
Money Needed
Newer Car
5 years
House (down payment)
7 years
25 years

From here, it's pretty easy. You can evaluate how these goals fit your current income and do some simple division to figure out how much you need to save each month to make your goals come to light. So with the above examples you should be putting away $250 a month for a newer car, $240 a month for a down payment, and, hopefully, you have started investing before you have 25 years left to make your million dollar mark. But if you don't have any money put away and you are 40 years old and want to retire at 65 you should be putting away about $11,000 a year into a index fund assuming a 11% return. My suggestion is to put anything less than 5 years in a money market or high-yield savings account if you are being conservative, and definitely anything less than 1 year. I like ING accounts and personally I would put both my down payment and new car into different ING accounts and turn on automatic withdrawal so you absolutely pay yourself first once you get your paycheck.

I really liked this book. I think it's very concise and it gives the reader just the right amount of information while also providing excellent resources in case their appetite wasn't quite satisfied. I suggest you pick up a copy for yourself or a friend. If you have any questions about anything, don't hesitate to ask!

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