Save and Invest Early

    Posted on Monday, Apr 16, 2018

    Years ago, talking about investments, an image of professional Wall Street traders shouting on the NYSE trading floor would first come in my mind. The game was hard, which kept me away from investing in any asset rather than leaving my savings in the bank, where interest rates were nearly zero. However, you do not need to beat the professionals to pursue a financial independence in the future. I believe anyone, through self-financial education and independent thinking, can achieve the goal in twenty or thirty years. The key is to learn, save and invest as early as possible.

    Get rid of debts on credit cards and save regularly

    If you check the agreements of your credit cards, their annual percentage rates may be as high as 18%. Let's assume that you have a balance of $1000 and pay only the minimum $25 a month. You'll pay $300 a year but $180 of them are actually the interest you pay the credit card company for the $1000 balance. You still owe the credit card company $ (1000 - 120) = $880 at the end of the year. If you stand on the side of the credit card company, they earn $180 a year by lending you $1000. It is so terrific a deal that they may work extremely hard in stocks to achieve an 18% annual return.

    I use several credit cards, but I only use them for their bonus and cash backs and I always pay off the monthly balance.

    It is easy said than done. To get rid of debts on credit cards, the key is to change the mindset of spending and budgeting. A good way is to only spend what you can afford and to save a little bit regularly, which I learn from my wife.

    My wife has a habit to put a small portion of her salary into a mutual fund every month. And, she does that as soon as she gets the money. Surprisingly, you may find that you'll live well without that portion of fund. However, it may be very  hard to save the same portion of money at the end of the month. My experience tells me that I'll always find a way to spend all my salary.

    Investing

    Saving is the first step and investing comes the second. Importantly, there are two parts in the game of investing: one is to invest the fund and the other one is to invest in yourself.

    To invest the fund, there are many ways. But only those holding the long-term views, at least three years, stand out in history. Personally, I like the methods of Peter Lynch, Warren Buffett, Charlie Munger, John Bogle, etc. I will not dive into details but rather recommend a book 'Invest for dummies' by Tony Levene. The eBook is offered by our library for free.

    To demonstrate the importance of investing in yourself, I'll use Warren Buffett's quote that goes "the very best investment you can make is on that you can't beat, can't be taxed and not even inflation can take away from you. Ultimately, there is one investment that supersedes all others: invest in yourself." I know our university provides entry-level financial education for students for free. Maybe it is a good place to start. There are also a lot of free financial educations online. For example, you can open a free account on Fidelity and use their well-designed learning center, which is free as well.

    Conclusion

    In the world of investing, time is your friend. Therefore, start as early as possible. It is reasonable to expect annual return of 5-10% from stocks, such as SP500 index funds bought at a reasonable price, with limited effort devoted to investing. In twenty years, your original fund will look great.

    ---
    Dunyu Liu
    Dunyu is a Ph.D. student in the Department of Geophysics



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