- Now let's talk about personal savings
and investment plans.
Here's the key concept.
If you're considering a personal savings or investment plan
and it seems clever or complex,
it's almost certainly a bad idea.
Here's the kind of investment plan that you need.
This comes from Dave Ramsey's seven baby steps
that he explains in his website, daveramsay.com.
First, get $1,000 and put it in an emergency fund.
Nowhere fancy, just take it down to your bank
and put it there.
Life's troubles seem a lot easier to handle
if you've got $1,000 in an emergency fund.
Next, start paying off your debts,
starting with the smallest ones
because then you can build some momentum.
After steps one and two,
you've got $1,000 in the bank
and you've paid off your debts.
Next, build up three to six months
of living expenses in savings
in the same bank savings account, nothing fancy.
People who have three to six months
of living expenses in savings
have lots of financial flexibility
and lots of peace of mind.
Now, you've done steps one, two, and three.
Step four is a serious start
towards saving for the long-term,
such as long-term retirement savings.
Now you want to take advantage
of individual retirement accounts
and the 401(k) plan at work.
Now you're saying to yourself,
yeah, but if I do this,
I'm not going to get rich quick.
That's right, you're not going to get rich quick.
A few people who get rich get rich
through a combination of luck
and possessing some special skill or product.
But most of us aren't this lucky.
Long, steady savings is how most people get rich.
Long-term investing should be
in some kind of diversified fund
such as an S&P 500 index fund.
If you want to earn next month's rent, get a job.
Investing in the stock market
should be for the long-term,
the 20 to 30-year horizon.
Now eventually somebody's going to come to you
and say, "Listen, I've got this investment plan
"that will guarantee you high returns,
"30% a year guaranteed."
If anybody ever says that to you,
you run away from that person as fast as you can.
That person is either a fool,
meaning they don't know what they're talking about,
or they're trying to trick you.
Either way, you don't want anything to do with them.
High returns are possible,
but they can never be guaranteed.
Investing involves short-term risk,
so the best approach to investing
is to have a long-term planning horizon.
With respect to investments and savings,
beware of anything clever or complex.
Simple savings, a bank account to start with:
that's the beginning.