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July 28, 2006
You Can't Invest What You Don't Save
I often talk about the four legs of financial success and the six basic tenets, or principles of the Snider Investment Method™. Hopefully, people don't get them confused.
I define financial success as having sufficient financial resources that work becomes a personal choice instead of a financial necessity. I believe financial success is built on a foundation made up of:
1) a long-term, conservative approach to money
2) prodigious saving
3) prudent and purposeful investing
4) entrepreneurialism
The six principles of the Snider Method are:
1) you alone are accountable for whatever financial condition you find yourself in
2) emotions are an investor’s worst enemy - our herd instinct causes us to buy when we should be selling and selling when we should buying
3) most investments are designed to make Wall Street rich, not you, and the more people selling them the less likely they are to be a good investment
4) stock picking and market timing do not work -the empirical evidence is overwhelming that stock prices are random and cannot be predicted consistently over time
5) minimizing risk is as important as returns
6) the key to building wealth is making your money work consistently every single day, regardless of market conditions, economic conditions or geo-political events
Let's talk about saving - not an area I typically focus a lot of attention on. My primary focus is on #3 - prudent and purposeful investing. But I often get emails like this one:
I have very little money and I don't mean a couple of thousands either. I am lost in where to put it to make it grow and work for me. I tried to grow it but that doesn't seem to work, I don't have a greet thumb either. How much do I save to even begin making my money work for me? I know I'm probably helpless but I thought I would give it a shot. Thanks!
Most of us get the cart before the horse. The biggest mistakes I see people male are:
1) try to invest before they save
2) try to invest without really knowing what they are doing
3) try to turn almost nothing into a little something by taking too much risk, thereby almost guaranteeing their nothing will always be nothing
When you have no savings, your focus can't be on investing. The first thing you have to do is put at least six months of expenses in a money market fund. This is not negotiable. You should not be investing to try to create your emergency fund. You save that first!
Work on your financial education while you are saving so when you are ready to invest, you know what you are doing. I believe the most important job you will ever hold is that of Family CFO. Make sure you are qualified to do the job.
Finally, once you have a little money to invest, don't go out and take a flyer on stocks. Build slowly and focus on managing risk. The biggest fallacy most people fall prey to is that taking a lot of risk guarantees a bigger return. It does not. It guarantees that, if you play long enough, the losses will be bigger and more frequent. Mathematically, a lot of risk guarantees a lower return, not a higher one.
Of course, the next thing out of most people's mouth will be, "I can't save. I am living paycheck to paycheck." I know it is hard but it can be done. I've been there and I've done it. So can you.
If you are in a position where you have not started socking away money, the best resource I can recommend is David Bach's books, "Automatic Millionaire" and "Start Late - Finish Rich."
Warning: I do not agree with David's approach to investing. That is probably no surprise given his former life as a senior vice-president of Morgan Stanley. I'd rather stick pins in my eyes than invest in a mutual fund. But … his advice for saving money, while it seems simplistic, is very doable. You can find the "Automatic Millionaire" on my reading list in Kim's Korner.
So I am curious. How many of you have six months of expenses in liquid assets like a savings account or money market? Take the poll below. Also, what constructive advice can you give the person who wrote the email above? Leave your comments below.
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
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Focus of This Blog
Kim Snider is an author, speaker and host of Financial Success Coaching, Saturdays at noon, on KRLD Newsradio 1080, Dallas - Fort Worth. This blog is primarily devoted to empowering individual investors with information to help them be good stewards of their money. Above all, it is about achieving true financial success. Kim's book, How To Be the Family CFO: Four Simple Steps to Put Your Financial House in Order is in bookstores now. Order yours from Amazon or other fine booksellers today.
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