Many people begin investing with a "fire, aim, ready" approach and, if luck smiles on them, they acquire wealth. They may not realize the successful acquisition of wealth is a benchmark-driven process over time. It involves getting ready for investing by accumulating your financial support base, then aiming for goals in a systematic manner and firing at risk targets only when you can truly say you are investing money you can afford to lose.
Put and Take
Your put-and-take account is your checking account. You put your income in that account and you take money out to pay for the things you need. Budget your money in this stage to provide a little extra left over at the end of each month. When your income is high enough, combined with careful spending, to provide a regular surplus it is time to move to the second stage.
Accumulate your extra monthly money, bonuses, gifts and inheritances in a savings account or money market fund. Safety is the most important thing because the money you accumulate is your emergency money. Once you have accumulated six months living expenses, start applying extra money in this account to the third stage of investing.
With your basic financial needs covered, begin that comprehensive financial plan to buy a house, send the kids to college and build a comfortable retirement income. Invest in growth stocks, index exchange-traded funds and balanced growth mutual funds. If you work for a company that provides a pension benefit, you already have a start on this third stage. Conservative growth investing helps you accumulate money faster than just your income will allow, but without the risks involved in higher risk investing.
As your monthly income increases, and you have purchased your house and are well on the way to a suitable college fund and retirement savings, any extra money can be devoted to higher-return investment opportunities. This could be rental units, a small business or investments in a moderately risky investment fund, such as an aggressive growth or small cap growth fund. The money you use for this forth stage might make you unhappy if the investment results in a loss, but it will not harm your standard of living or your other financial activities.
Higher risk investments can return substantial profits and, hopefully, not too many investment loss tax deductions. Most people never reach this stage of investing because they either do not have the emotional tolerance for risk investing or they do not have sufficient cash flow. If you do, this is when you take your educated gambles. Unless your retirement fund is overflowing with cash, don't use your retirement income for risk investing. The best stage of life to engage in this kind of investing is during your 40s and 50s, while you still have time to make up for any losses taken.
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