Hey,

How have you been? It’s Mike from Fabulously Broke, are you ready for another lesson to control your personal finances?

I want to reassure you, we are almost done with this email series on how to control your personal finances. I know it has asked you a lot of you. You probably had doubts and / or questions. If that’s the case, please send me an email at me@fabulouslybroke.com and I’ll answer your questions to the best of my knowledge. I’m sure the email will flow after this one though! Today, we are talking about how to invest the 10% of your income you saved from Day #8. Saving is great, but you need a little bit more than that to make your retirement dreams happen!

Day #9 Learn How to Invest

The lesson of the day is pretty easy: You just have to download my free dividend investing guide. I wrote this investing eBook for beginner investors. You will learn the basics of investing along with a solid method to make sound investment decisions. I even plugged in a few jokes here and there to make it more fun! I assume that if you take a day to read the book and complete the exercise, you will be in a solid position to start building your portfolio the next day.

Is investing that easy? Definitely not. However, when you start investing with a few hundred dollars per month, you don’t need to be the next Warren Buffet to manage your portfolio!

What should happen if you get an income raise (’cause boy, you will get a lot of them over the next few years!). Split each income raise in 2:

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  ü 50% in your investment account through a regular periodic investment
• 
  ü 50% toward your bad debts (we want to get rid of them as fast as we can!)

Nothing left for a more comfortable life? Nope! If you want a bigger piece of the cheesecake, you must make some sacrifices first. You will be able to enjoy life once your debts are paid off ;-).

Why Should You Not Concentrate All Your Money On Debt

In Day #8, I told you that paying down debts wasn’t your #1 priority. I know you probably frowned when I wrote that you should not pay your debts as fast as possible. Even worse, why am I telling you that one of the most important things in finance is investing on Day #9? I should have told you that a long time ago, right? This is because I wanted you to get familiar with your own finances and develop this interest in finance before hitting your mailbox with a long investing email. Don’t close it yet! I made it very simple to understand, no big theories here ;-).

Don’t get me wrong; I’m not telling you that debt is good and that you should keep spending all your money. The reason why you should do this is simple: it’s all related to the concept of compounding. Thisis what people ignore about investing: it grows faster than debt!

The Concept of Compounding in 2 Minutes

You don’t need a bachelor’s degree in advanced finance to understand this concept. Here’s a quick example:

What’s the difference between the interest rate paid on a personal loan and the interest rate earned on an investment?

Assume you have a $100,000 loan at 5%:

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  ü  The $100,000 loan will require regular payment.
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  ü  Each payment will include the interest due + additional money to reimburse the loan.
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  ü  A $1,000 monthly payment would be split accordingly: $416.67 for interest and $583.33 to reimburse the loan.
• 
  ü  The following month, the interest portion is reduced as you pay interest on $99,416.67 ($100,000 – $583.33).

ü  The more you progress in your payment schedule, the more you reimburse your loan capital and pay less interest fees on your payment.

ü  The interest on the loan is not “compounded” since you pay the interest on a monthly basis.

Assume you have a $100,000 investment earning 5%:

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  ü  The $100,000 investment will grow by 5% by the end of the year.
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  ü  This equals a profit of $5,000 (5% of $100,000).
• 
  ü  The following year, your amount invested will equal $105,000 ($100,000 + 5%).
• 
  ü  Therefore, you will now earn 5% of $105,000.
• 
  ü  This equals a profit of $5,250.
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  ü  You are now making and additional $250 as compared to the first year.
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  ü  This is because you are making profit on your profit.
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  ü  In other words, your $5,000 earned the previous year will also generate a 5% profit on top of your original $100,000 that you first invested.

ü  The interest on the investment is “compounded” since it earns intereston the interest

What’s The Next Thing to Do: Get an Investment Strategy

I’ve realized that investing is a very heavy topic for most people. You probably don’t feel comfortable to read a book and start investing the next morning. I totally understand and respect that. This is why I’m offering you another option to accomplish this step:

Option #1: Download my Dividend Investing eBook

• ü You have a high level of discipline.
• ü You want to take care of your investments.
• ü You like playing around with numbers from time to time.
• ü You know someone who can assist you if you have any questions.
• ü You are a DIY person.

Option #2: Meet with a financial advisor

• ü You want someone to assist you with your investments.
• ü You feel more comfortable leaving your money in the hands of an expert.
• ü You don’t like finance very much and investing sounds like a real pain for you.
• ü You are not a DIY person.

You know what? There is nothing wrong with using a financial advisor! Many people (bloggers and financial journalists to name a few) will tell you that you pay ridiculously high fees to have your money managed by someone else and that you can do it yourself. I mean; I’m paying $70/hour for a mechanic to repair my car. I guess I could save those fees if I’d take mechanic classes, right? But I just don’t care about mechanics; I just want my car to start every morning! So if you are like me and just want things to be done and don’t want to learn how to do it yourself, dealing with a financial advisor is a very good decision!

It is right that you will be paying fees. Are they ridiculously high? If you shop around for a great service (ask your friends and family for references), you shouldn’t be ripped off by fees either. You are better off following a strong investment strategy established by a professional than trying to make a few trades just to make a quick buck. They usually end-up being very costly!

Feeling unsecure about picking the right financial advisor? Here’s a great series where you can find useful tricks to deal with the right one:

How to find a good financial advisor part 1

How to find a good financial advisor part 2

How to find a good financial advisor part 3

How to find a good financial advisor part 4

After reading my book and meeting with a good financial advisor, you will be able to start your investing plan. All you have to remember is to keep 10% of your income invested in your retirement account (401(k) or RRSP) and follow the investment strategy that you have decided on (alone or with your financial advisor). The best results by far are made by people who invest in a balanced portfolio and keep it for a very long time. Unless you are about to retire in the next few years, this strategy will work like a charm for you too!

Phew! That was a long email, wasn’t it? But I’m sure it will be worth it. Taking the time to tweak your personal finances will drastically change your life.

Upcoming email: Day#10 ; The Best Checklist Ever

All the best,

Mike

www.FabulouslyBroke.com