FCF Q&A: Investing 101: "Do you have advice on Investing vs saving? None of this makes sense, I need help!" Investing broken down to it’s simplest form.

Welcome back to FCF Q&A! To see other Q&A's see HERE.
Lately I've been getting lots of questions regarding investments, savings and checking accounts, IRA's, what it means to invest, How do I invest? Where do I start? How important is it to invest? Should put money into savings, or into investments? With the economy the way it is, is it wise to invest any more?, and so on. (This is mostly due to the “7 Bank Accounts Every Family Should Have” post (see HERE) that has, quite frankly, gone viral.)
 
First of all…I hear ya! It's confusing!
 
Whether it's investing in real estate, IRA's, stocks, or your crazy uncle John's “next big thing” business idea, there are lots of ways to invest to make your money work for you rather than having it sit in a bank account collecting dust, and to *hopefully* result in cash flow for the future. 
My husband is really the one that hones in most on investments for our family, but I thought I would pass along a few resources that we have enjoyed using in hopes that it helps:
“Where do you consider investing? A good friend of mine who is really smart with money told me to invest or save 10% of what I make a year. Could investing in Edward Jones be a “Family Emergency Savings” account?” – Christine

Great question, Christine!
Here's the thing…In terms of investments I'm no professional, and don't claim to be. 
However, I can certainly pass along tips that my husband and I use to help us! But do understand, Investing, credit cards, banking in general is a very personal thing. Find what works best for YOU by checking out lots of options, and you can't go wrong!

First of all, get informed!!

We use Mint for just about everything, including finding one central place with lots of options to choose from. Here are some tools below that we use to make answering your questions very easy:

Click on the link below to see a variety of options to choose from/learn from, all in one place:
And while I'm at it, here are more helpful links that we like to use…

Another amazingly helpful link is to Usa.gov's page on investing. They break it down as simply as can be. For example, you can find this chart on their website:

Here are some tips they include on their website as well:


  • Define your goals. Ask yourself “Why am I investing money?” Maybe you want to save money to purchase a house or to save for retirement. Maybe you would like to have money to pay for your child's education, or just to have a financial cushion to handle unexpected expenses or a loss of income.
  • How quickly can you get your money back? Stocks, bonds, and shares in mutual funds can usually be sold at any time, but there is no guarantee you will get back all the money you paid for them. Other investments, such as limited partnerships, often restrict your ability to cash out your holdings.
  • What can you expect to earn on your money? While bonds generally promise a fixed return, earnings on most other securities go up and down with market changes. Also, keep in mind that just because an investment has done well in the past, there is no guarantee it will do well in the future.
  • What type of earnings can you expect? Will you get income in the form of interest, dividends or rent? Some investments, such as stocks and real estate, have the potential for earnings and growth in value. What is the potential for earnings over time?
  • How much risk is involved? With any investment, there is always the risk that you won't get your money back or the earnings promised. There is usually a trade-off between risk and reward: the higher the potential return, the greater the risk. The federal government insures bank savings accounts and backs up U.S. Treasury securities (including savings bonds). Other investment options are not protected.
  • Are your investments diversified? Some investments perform better than others in certain situations. For example, when interest rates go up, bond prices tend to go down. One industry may struggle while another prospers. Putting your money in a variety of investment options can help to reduce your risk.
  • Are there any tax advantages to a particular investment? U.S. Savings Bonds are exempt from state and local taxes. Municipal bonds are exempt from federal income tax and, sometimes, state income tax as well. For special goals, such as paying for college and retirement, tax-deferred investments are available that let you postpone or even eliminate payment of income taxes.

Forbes also has a good article, “4 tips for investing like a pro” that is helpful.

 

Our family here's how we have invested thus far:

  • My husband is self-employed, so we don't have the luxury of investing through employment. So for my family right now, investments are minimal. We've chosen to use our money to pay off debt and build up savings first, especially after running into hard financial times. Our family is still pretty new so once we reach our financial goals in terms of savings and debt, then we will focus more on investing.
  • When it comes to the money we HAVE invested, money we put in is gone forever in our minds. We consider it spent, and never look back. So to answer your question, Christine, about using Edward Jones as a savings account, we don't like to think of it that way.
    • For example, when we were first married we put $5,000 into stocks. Technically we could sell our stock at any time to go buy or pay off something. But as a family we have decided to let that money sit as long as possible and consider it gone.
  • Another thing we did was decide how much we could afford to lose. When we were first married, we had dual income, no debt, and no kids. We decided that we could afford to lose $5,000 without it really hurting us in any way. There's no telling how investments will do, so any money that you put into an investment shouldn't cause any damage to your finances in any way. If you will have trouble making payments that month because of it, if you have to pull from savings to invest, or if you are in trouble if the investment doesn't pan out in terms of making you money, avoid it!
 

So really, once again, I'm no pro. First, make sure your family is financially secure before investing much money. To me, secure means:

1) Paying off debt
2) Building up savings
3) Having a defined financial plan for the future

Once those things have been accomplished, by all means, invest! Make your money work for you rather than sitting in a piggy bank! Just get informed and start slow. Hopefully the resources above help a little, happy investing!
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