Personal Life Before You Invest
In This Chapter
▶ Calculating how much you have
▶ Drawing up a family budget
▶ Taking care of life and limb
▶ Paying into a pension investment
▶ Checking the roof over your head
Investment truth #1: Losing money is easier than making it.
Investment truth #2: More domestic break-ups and rows are caused by money, or rather the lack of it (or the spending habits of one partner), than anything else. Money is more important than love, any day.
Investment truth #3: You’ll be a better investor if you’ve secured your home base – getting a roof over your head whose costs are sustainable is the vital first move. Buying, if you can, is usually better than renting, so a mortgage is the number one investment. Provided, that is, that you can find the deposit.
Investment truth #4: Paper profits have no more value than the piece of paper they’re written on. What your investments are worth on a statement is just a row of figures. Until you turn that investment into cash by selling, it won’t put a roof over your head, put food on your table or provide an income if something happens to the breadwinner.
Investment truth #5: Borrowing money to buy investments can be a very fast route to the bankruptcy court, as can gambling on stock markets.
Feeling down after reading that? Wondering why Chapter 2 doesn’t launch straight into how to analyse stock futures and double your money in minutes? Or how to clean up with a simple, can’t-fail formula?
You’ve every right to be depressed and puzzled. But it’s a good thing you are. Investment knowledge has as much to do with when not to do something, when to hold on to what you have, and when to hold back and let the next person pick up the problem as it has to do with plunging headfirst into financial markets.
And that’s what this chapter is about. Before you invest, you need to consider all the above truths. You need to take a close look at yourself, and those around you. You should be aware that no easy routes exist in finance. But more importantly, everything revolves around you and your family – not the commission needs of assorted advisers and hucksters who claim to have the solution to all your problems.
I’ve probably been involved in investment writing for far too long. I’ve seen it all and then all over again. I can remember the great 1970s bust and boom, the 1980s boom and bust, and the 1990s boom that, inconveniently for my neat decades, only bust just after the decade ended in 2000. Then, back in 2008, we saw the great banks’ boom and bust. Add to that more than a few property bubbles, and some crazy ups and downs in gold, oil, wheat, sugar and just about everything else under the sun. Every time share or other financial market prices advance to new highs, I ask myself just how long it can last.
Unfortunately, those running our finances never see it that way. They learnt nothing from the great 2008 banking crisis (or any other). This isn’t surprising: they can’t own to up the fact that finance runs in cycles of up and down because that’s more than their very highly paid job is worth. Asking them, ‘Just how do you do it? Where does the money come from and go to?’ is like asking the emperor about his new clothes. ‘Don’t worry. Nothing will go wrong,’ they reply. After all, these people control some of the world’s biggest firms, so how could they not know? How could they be anything other than full of wisdom? How could anyone taking home millions a year in bonuses be anything other than supremely able? But reliance on these people was wrong, wrong, wrong.
Despite what politicians and bankers often say, the world will never usher in a new financial era in which boom and bust have been abolished. I wish this age could exist, but wishes don’t turn into investment success. The rules of investment that I lay down in this book must catch up sooner or later.
Everyone who tried to convince me that we were into a new world with new rules probably earned 10 or 100 times as much as I did. But they could take this devil-may-care attitude because they were playing with other people’s money (known as OPM or opium). They didn’t care what happened because they made sure that they were number one. By the time it went horribly wrong, they’d made their cash and locked it away somewhere impenetrable.
The morals of all this? Don’t chase fads. Never assume a quick or easy route to riches exists. And never give up the day job, no matter what someone offers!
Before you start investing, take a long, cool look at your personal wealth. Draw up a balance sheet (Figure 2-1 shows an example) so you can check how much comes in each month from work, interest payments, dividends and/or pensions. Then look at where the money goes.
Figure 2-1: Use a balance sheet like this one to keep track of how much money comes in each month and where it all goes.
Repeat this exercise over three to six months so that you balance out low-spending months in one category with months in which you had to lay out a lot. Also take into consideration months in which a big bonus or overtime payment boosts earnings. Averaging means you even out these peaks and troughs.
Investing involves taking chances. Serious investing, as opposed to taking a wild punt on a short-term stock market move, ties up your money for a length of time. Assuming that you have some spare money (see the preceding section to find out whether you do), think about how investing it rather than spending it will affect your household.
Weigh up the happiness quotients for all concerned. For example, compare spending the money now on piano lessons with investing it for later use on university tuition fees. I don’t pretend this is easy.
Talk over investment strategies with adult members of your household. You’ll feel much better if you get them on your side. But if they aren’t happy with your strategies and you can’t convince them then hold back.
