Something I’ve learned from The Wealthy Barber by David Chilton

Save 10% of your take-home pay
Do it automatically, and you won’t miss it, because you’ll make do on a lower paycheck. Case in point, I took home $300 less, and it took me 3 paychecks to notice because A) I never really tracked my money but more importantly B) I never saw it to begin with, because it came out automatically.

Put the money into a mutual fund, or if you want easy access to it, put it in 1-year bonds, or whenever you think you may need it, or even in a Money Market Fund. Me, I put mine in a savings account yielding 4% interest. It isn’t fantastic, but it’s the best on the market right now. If there was an account yielding 5% interest or more, I’d switch to that in a heartbeat. Why? Because inflation is 3% a year, so the 4% I’m earning, minus the 3% inflation per year.. .my money is only making me 1% a year. But the security of having it there just in case really helps because of little incidentals like an old truck *ahem* that may come up on the market.

But basically, if you save 10% of your pay, at the end of a year, you have a full paycheck set aside, free and clear, earning money for you! Now, they say NOT to even touch this 10%, and just let it sit there, but then in my mind, you’d have to save another 10% for your spending needs, in case you want to buy something, which is kind of moot. I guess my point is, try not to spend it, unless it’s a special circumstance, don’t blow it on an iPod.

But for me, saving that much money and having it sit there is not good because my student loan is charging me 8.5% interest, which means I’m effectively losing 4.5% in interest a year. So once my debts are cleared, a nice healthy savings fund will blossom and grow. I think I my look into talking to a professional about mutual funds though, or bonds… Just so I know for the future.

Some of you may be wondering why I invest 50% of my portfolio into index funds (the other 50% is in my company defined benefit plan, so I don’t get a choice above and beyond what they’re offering me as retirement investment options or “vehicles”)

The website: Index Funds Advisors (IFA) – 12 Step Program for Active Investors, totally changed my view on investing.

Short reasons why I invest in index funds:

- To me, the stock market is like gambling. I know Apple’s stock has risen like a shooting star, but what if it had gone the other way, and the Zune took off instead? No one can predict what’s going to happen in the future, how the economy will fare, what will happen to change and shape it, because the world is unpredictable – and what the economy is based on. And if ANY financial advisor/manager/guru says they can predict what will happen, they’re lying.

- It’s simple. I don’t have to check up on 50 stocks every day, and cry about every dollar I lose, I throw it all into index funds, invest for long to longer term (I’m talking 20 to 40 years) growth, and check on it periodically.

- It isn’t sexy, but it makes sense. No one wants to say at the cocktail party: “Darling, I just made $100 over 4 months, it’s fabulous how slow my index funds are growing!”… but index funds can also grow pretty fast, but the thing to remember is that they will AVERAGE out to be better in the LONG to LONGER run. Not immediately. They all want to talk about the flash in the pan stocks, the super star hares, not about the slow and steady tortoises. But it’s been based over tons of fab Nobel Laureate geniuses who have all done the same research over a long period (100+ years), showing that historically, the S&P 500, although boring and “average”, has “averagely” always beaten out any other actively managed fund, over the long and longer term. I can’t imagine any other advisor being able to show me his portfolio of even 30+ years of consistently gaining returns and beating the S&P 500 every single year, without fail. Most can show you the portfolios for the past 1, 3, 5, maybe even 7 years. But who’s to say that this very year that you sign on with them, the portfolio won’t tank, crash and burn? With all your money going down with it?

- It makes sense because you’re automatically diversified (another fancy word for “not putting all of your eggs in one basket”). So if an industry goes up and makes lots of money, another industry may fall as a result of their success, but it doesn’t matter to you – you’re diversified! You have holdings in both! You’ll always balance out, and/or reap the benefits as each one goes up and down. And the cost of investing in index funds is fairly low, about 0.18%, versus the 3% that some financial managers will charge you for the privilege of playing with your money and investing it in the stock market, trying to see whether they can get money back for you because that’s all they’re doing. Playing in the stock market. With your money. Charging YOU a commission. In the end, your money becomes theirs.

It might seem like I’m making generalizations, it’s because … I am. I’m not trying to convince anyone to put money in the S&P 500 Index Fund, but I’m just telling you what I do with my money and why. I could go on and into more detail, but reading that book/pdf/website above, really changed my view on the stock market. And has made me more comfortable with investing and my choices.

By the way, that IFA link above? It’s the ENTIRE book, free on their website, and it used to be downloadable in (.pdf) form. You can buy it for $88 and get a pretty colour copy in a nice binding, or read it for free online. Me, I want to save my fun money fund for something like the Docupen.