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Choosing a sound investment plan means looking at more than just raw numbers. Though data is useful, it’s vital to know the investment philosophy behind each plan. Every good investment strategy comes with its own philosophical underpinnings, even if the broker doesn’t speak about his or her strategy in such terms.
Below are five money philosophies that need to be present in every investment plan that you take seriously.
1. Every Saved Penny Counts
A good place to start with an investment plan is with the idea that every penny you save matters. We aren’t talking about learning where to get quarters here, but rather about a monetary philosophy that takes a microscopic view of your investing practices.
Indeed, this philosophy starts with a base assumption that anything that you put towards your investments matters. It doesn’t simply say that you need to put a specific percentage of your income into your portfolio or that you should only invest if you’re willing to make a specific savings commitment. This philosophy states that you will benefit no matter how small an investment you can make.
At its heart, this is a philosophy that promotes doing something over doing nothing. There are certainly some plans that will tell you not to bother with putting anything away until you can meet a more substantial goal. But, the truth is that starting the process of saving and investing is an action that requires a first step. If your investment plan doesn’t recognize the benefit of the little contributions, it’s not one that is worth pursuing.
2. Index Funds Over Active Funds
You will have to make important choices when investing, including very specific decisions like VTSAX vs VTI and broader decisions like choosing index funds over active funds. Not only is this decision one that tends to protect the funds of the consumer, but it is also one that prioritizes stability over unnecessary risk-taking. This philosophy casts investment plans not as wild gambles but rather as relatively safe ways to accrue wealth.
When an investment plan prioritizes index funds, it’s looking to bring in a slow, steady amount of money. While active funds can theoretically beat the market, they also can get hit harder by major swings in the economy. When you choose an actively managed plan, you may have the chance to make more, but you’re more likely to make the same or less while paying more in fees. Always choose those plans that put the relative safety of the index fund in a primary position.
3. The Goal Of Money Is Freedom
One of the most important money philosophies concerns the process of accruing money. Many see having money as an end unto itself, but the most successful monetary plans see money as a tool. The goal of investing is not to have an investing account, nor is the goal of planning for retirement to build up the nest egg. Instead, the goal of both is to provide yourself with a degree of freedom from the rat race, one that will give you a better chance of accomplishing your own goals.
If your financial plan doesn’t center around what making money will allow you to accomplish, then that plan is short-sighted at best. While it’s true that money can’t buy happiness, it can buy you the freedom you need to pursue happiness on your terms.
4. Pay Yourself First
One of the most honest statements that any person can make is, “I need money now.” When you save money, you are paying yourself before you pay anyone else. The monetary philosophy of paying yourself first might seem like it is somehow rooted in selfishness, but it’s actually rooted in prioritizing your own financial safety. While there are many places that you could put your money when you get paid, the most important place it can go is towards your own goals.
Paying yourself first is the process of setting priorities. Your first payments will always go towards what needs to be paid, whether an emergency account or taking care of your monthly bills. Far too many plans put the idea of sticking to something unrealistic at the forefront, making it not only easy for the plan to fail but easy to fall away from investing in the first place. Simply put, you cannot be successful with any plan that does not prioritize your needs.
5. Save All You Can
Finally, every investment plan must spring from a place that prioritizes your overall savings. Investors looking to build towards retirement or even towards a bigger safety net need to prioritize having money in the bank. So, any philosophy that prioritizes spending big to make significant gains or taking unnecessary risks will run afoul of this monetary philosophy.
Many investment plans run counter to this philosophy because they focus on the money you have in play rather than the money you are taking back home. In fact, they put relative emphasis on what you save because the money you take home doesn’t actually matter to these brokers. These are the sorts of plans that look at your portfolio as the be-all and end-all of investing rather than as a tool that will help you plan for the future.
Whether you are looking to save money by getting free internet or by reducing other expenses and fees, everything that you save matters.
What’s Your Money Philosophy?
An excellent monetary philosophy is one that will always benefit the consumer. Each of the philosophies above puts a premium on keeping more of your money in your pocket and minimizing the risks you take on the road to financial freedom.
Though there are undoubtedly many other philosophies that you can follow, these are the five that accomplish the most for the average investor. If you are ready to put your money to work, you should first take the time to ensure that your investment plan has solid philosophical underpinnings.