Debt is money that you have borrowed from someone else and promise to payback plus interest. Since loans typically result in you paying more money than you initially borrowed they are considered liabilities. Most kinds of debt can be dangerous if not managed safely.
Credit cards typically have high interest rates around 20%, mortgages can have rates as low as 2-3%. You can consider paying off credit card debt as providing you are 20% rate of return. A 20% risk free, rate of return is an amazing investment.
There is the caveat that low interest debt can be used wisely (mortgages can be thought of as a forced savings plan on money that would otherwise be wasted, student loans get you an education that should increase your future income). With the current interest/inflation rate environment it can make sense to take on a loan if you are able to obtain a better rate of return than the loan interest payments.
There are many types of debt including student loans, business loans, car loans, mortgage, investing on margin (borrowing money to invest), lines of credit, home equity line of credit (HELOC) and more.
You should have money set aside for emergencies like losing your job, your house catching fire, car breaking down etc. This should be in a savings account that you don't touch except for emergencies.
The standard amount to save is 6 months worth of expenses. However, this varies depending on your life situation.
I find budgeting doesn't work for me because random expenses often come up. The biggest thing is tracking where you spend your money so you can identify areas where you spend too much. A good website for this is mint.com.
Your broad goal should be to earn more money than you spend and increase your net worth (assets-liabilities).
There are many rules like the 50-30-20 rule (50 needs,30 wants, 20 save) or 70-20-10 rule (70 expenses,20 save, 10 invest). However, this breakdown will be different for everyone. Generally aim to spend as little as you can while maintaining your desired quality of life, save enough for your emergency fund, then you can save for things like trips, cars, houses etc and invest as much as you can.
Other tips to reign in your spending are
I consider this to be the best choice if you do your homework (learn about the companies prospects, competitive environment, calculate its fair value etc).
When buying stocks you have two options: investing or trading.
Trading is when when you buy a stock because you think you will be able to sell it (usually very soon) to someone else at a higher price. This is often based on technical analysis. I do not do this.
Investing is when you buy a stock to own a company based on the basis of a good financial track record. It is based on fundamental analysis. I recommend this method.
add efficient mark et hypothesisSimply put, bonds are receipts for loans that you give to others.
Presently I am staying away from bonds
These loans can be to various governments (US Treasury bonds, Canadian GICs), or to companies (corporate bonds). When you buy a bond you expect to recieve your money back plus some extra interest to account for the risk of the bond issuer defaulting on the loan (going bankrupt).
There are a couple different properties of bonds that you should know:
For example a bond that says par value $1000, term of 30 years and coupon rate of 5% means that you are lending $1000 for 30 years, and every year for 30 years you will get $50.
Bonds are good in low inflation and high interest rate environments. Stocks are better for all other situations. When buying bonds you need to consider the effect of inflation on your future payments.
Almost always stocks are better than bonds. Stock outperform bonds:
In general holding cash under your mattress, or more commonly in your bank account will end up losing you money. What! How is this possible!
This is the effect of inflation. Inflation is when the price to buy everyday items increases. For instance an apple might cost $1 this year, but $1.02 next year. The long term average inflation is around 2%-3%. How is inflation measured see here href. You might ask why we have inflation, see the answer here href.
\For this reason cash that is just sitting around is losing 2-3% in purchasing power each year. Presently savings accounts will end up losing your purchasing power since they pay interest rates that are much lower than inflation.
difference between real and nominal
In the presently overvalued market it is a good idea to have a decent amount of cash ready to buy stocks when they are at better prices. You can hold this cash in money market ETFs or short term bonds that can give you interest payments near inflation. You can also buy TIPs.
THIS IS THE BEST OPTION FOR MOST PEOPLE
ETF stands for Exchange traded fund. You can think of it as a basket of a large number of stocks, so that you can achieve diversification. As they say, don't put your eggs in one basket!
Statistics show that this is the best way to make money in the long term. This is very easy and the best option for most people! Since the stats say that most people cannot beat the market by picking stocks, I recommend having a large part of your portfolio in ETFs (50-100%). There are lots of options when it comes to ETFs Be wary of some things that banks will call ETFs but actually have fees around 2%
You can think of mutual funds as a fund where lots of people give their money to a mutual fund manager to manage it for them. The manager will actively buy and sell stocks with the goal of maximizing returns and minimizing risk. They often have signficant fees, which for a standard 2% fee would cost you 50% of your nest egg over 35 years (1-0.02)^30 and does not outperform the market (95% of active managers fail to outperform the market (market=etfs (VOO/VFV)))
There is a large number of investors who have achieved extradordinary returns over their life and become reasonably famous. The most well known is Warren Buffett. An investing strategy you can use is buy whatever a famous investor buys. Large investors (when they are over 10 mill) have to put out annual and quarterly statements about what stocks they own. You can find this information on sites like https://www.theinvestorspodcast.com/legend-investors-stock-portfolio/ or dataroma.com
I like to see what these large investors are buying to get ideas of companies that I can research myself. If the geniuses are buying it, they must have good reasons
Say a CTC stock costs $100 today, and you think it will be $50 tomorrow. So you borrow one CTC stock from the bank today and sell that stock immediately for $100. Tomorrow comes around and CTC is selling for $50, so you buy one stock for $50 and give it back to the bank to pay off your loan. You made $50. Infinite potential losses.
Stay away from. They rely on derivatives and over the long run don’t give good returns
Don’t produce value or cash flow, and tend to be a bad investment over long term. Example sugar was super expensive in 1600s now it is super cheap. Gold is said to be a way to protect your wealth in uncertain times and a hedge against inflation I see this as trading. Heavily influenced by macro factors
