Today I wanted to talk about how one in general should be allocating funds. As stated previously, this blog is primarily concerned with strategies to grow funds quickly, assuming that an investor is starting out with little money but working a steady job with a reasonable income. It also assumes that an individual has scaled her “lifestyle” so that she is making more than she is spending. This is the most basic requirement for becoming wealthy. Virtually everyone can scale back to have extra income left over, but it takes a degree of sacrifice and patience since one will need to wait a bit longer to buy things but they will be quite a bit less expensive when one does (because one will be paying cash rather than buying them on credit).
The first place a person should put extra income is in a cash account that is readily accessible. This should be built up until it contains enough to cover several months worth of expenses. These funds are used to take care of the various unexpected expenses that occur (such as the car breaking down, heater going out, roof leaking, unexpected surgeries, etc…). These funds should be guarded judiciously and not spent for things such as vacations, shopping, etc… since these are the funds that prevent you from needing to take out loans or run up the credit cards if something happens. This account will also be used to live on if one loses one’s job, allowing time to find a good job, not just one taken out of desperation.
The second account is a retirement account. This is the money you will live on when you’re ready to retire and also should be guarded carefully. The only reason to access this kind of account is if you’re about to be out on the street if you don’t. Absolutely don’t use this money for any other purpose, including taking out a loan against it. The reason is that if you start saving in your 20’s each dollar will be worth over $128 when you retire, so if you take out $10,000, for example, you just robbed yourself of $128,000 in retirement worth, which translates into $12,000 per year in income. This account should be filled with index funds when you’re young and gradually be filled with more dividend paying stocks, bonds REIT’s, and cash as you get closer to retirement.
The third account is your investment account. This is the account that will use the strategies in this newsletter to grow large, allowing you the financial freedom at some point to work or not work, as you choose. This account will be invested in stocks starting with 1-3, and eventually growing to 10-20 as your wealth builds to the $500,000 – $1 million range. Because the money in this account is not critical – you still have enough money to pay for emergencies and fund your retirement with the other two accounts – you can afford to take the risk of one or two of your positions taking a substantial loss. Also, if you find you are not a good stock picker, such that your investment account does not do as well as the markets, the other accounts will make sure you end up in a good position as well.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.