5 Foundations of Personal Finance, #5: Learn to Invest

Build your nest egg. Photo by mary_thompson

Most personal financial advice is limited to savings and debt payoff. After we paid off our debt, we looked around and asked, “What now?” What were we supposed to do now that our money was freed up from not having to make any debt payments? Should we just save it?

I used to think saving money was enough, and I didn’t invest for two reasons:

  1. I was cautious.
  2. I didn’t know where to start.

It’s good to have money in a savings account that is easily accessible, but if all of your money is sitting in a savings account earning three percent interest, it will be eaten up by inflation. Inflation is caused by the government’s increasing the money supply. When more dollars are created, the existing dollars have less buying power. 

The “official statistic” for the Consumer Price Index (CPI) shows an increase of only two to three percent each year, but it’s been heavily modified. It doesn’t have to include basic needs like food or gas. It’s clear that inflation is really much higher when you see how the price of eggs and milk have gone up at the grocery store.

As we thought about saving for the future, we realized that we needed to learn how to invest those savings.

What We’ve Learned:

* Do your research and learn how to read a balance sheet. If you invest in individual stocks, read up on the annual report and all of the information available to you online. If you invest in mutual funds, know how the funds are allocated. 

Example: After the tech bubble burst in 2001, one of the mutual funds in my 401(k) tanked. All I knew at the time was that it was called something like “Small Cap Growth”. I hadn’t looked at the prospectus to see that the fund was mainly invested in technology.

* Do not make investment decisions based on popular news from mainstream media. Do not go along with what everyone else is doing. By the time something reaches the six o’clock news, it’s too late. You need to be watching for future trends.

Example: In 2006 Yahoo highlighted an article about how silver was the hot investment. It had reached a record price, and my coworkers asked me about buying silver. Listen, when something reaches a record price, it’s too late to buy, it’s time to sell.

* Invest for growth, but also invest for income. We often think about making money by selling a stock at a higher price than you paid, but another strategy can work well too: invest in stocks that pay reliable dividends. When the stock price goes up or down, the companies continue to pay stockholders a steady divided amount.

Example: The stock price for Chevron stock has dropped from almost $105 down to $55 during the past year, and yet the dividend payment slowly increases every quarter. Those who are looking to buy and hold a stock can enjoy regular income payments. (The Simple Dollar has a more detailed explanation of investing for income.)

* Find an expert to learn from. Instead of looking for stock tips, gain an understanding of the bigger picture. Stay clear of anyone who wants to focus on only one area, whether it be in real estate, hedge funds, or any other niche. The investment market shifts in waves, and there is never an all-the-time, one-size-fits-all strategy.

Example: We’ve learned so much from Financial Sense. The weekend podcasts are long but full of insight and explanation. We spend a couple of hours a week studying and learning more, and the results are definitely worth it. (Note: This is my personal recommendation.)

You may be at a point right now where the idea of a retirement fund or investment account seems like a far-away goal, and that’s ok. It certainly doesn’t happen overnight. It’s also normal to be discouraged by the market downturn. For those more comfortable with investing, what advice do you hold to?
About Rachel

I write about practical tips that will help you simplify at home. Connect with me on Pinterest and Twitter.


  1. Thanks for this great breakdown of ways to get started. We’ve avoided the topic too. My husband, though, has gotten into doing his research during this time of waiting to have enough to invest. This will help me feel a little more up to speed.

    Nicole´s last blog post..Bad Handwriting…Redeemed

  2. To be honest we don’t plan on investing in any of the above-mentioned ways. Sustainably speaking, land is a good investment. Not real estate to rent or sell, but a piece of land for our family to live off of. Even if the market tanks and the banks go under you can still feed your family and live the good life :).

    Shannon´s last blog post..Salmon Cakes with Lemon-Caper Butter

  3. Hi Rachel,
    It’s normal to be discouraged by the recent market downturn but in my opinion it’s the best time to be investing (buy low sell high). I’m not a financial person by any means but I know that diversification (not having all of your eggs in one basket) is very important. By diversifying, if one sector does really poorly you have money in others to counter balance that. Of course it doesn’t help too much when every sector drops but it is a bit of protection and I think a wise thing to do.

    I really like this post because you’re encouraging people to educate themselves not just follow blindly that’s great!

    Sherri (Serene Journey)´s last blog post..When Life Gives You Lemons…Use Them!

  4. I recently (finally!)got my husband to agree to hand over the reigns of the 401K and *OUCH* gotta love finding out you had 40% of your $ in global equities and real estate! Doh! Anyhoot, I am really risk-averse, as they say, and I have all our money in guaranteed or low risk vehicles getting anywhere from 4-8%. In my mind, the $ is pretax (awesome!) and with our employer match (awesome again) even if we just stay ahead of inflation some years, I feel we are doing well.

    The most sage bit of wisdom I have is this: although the market does go up, in aggregate, over the long haul, it may not be up in what you have when you need it. Lots of folks who took responsible long view still had their retirement savings reduced if not wiped out because they were still in risky vehicles and now don’t have time to recoup the loss.

    In my mind it is better to take a modest return and focus on eliminating your financial liabilities like mortgages, car payments, student loans ect. before retirement, so you can live comfortably on less.

    Juliet´s last blog post..Irredeemable

  5. My husband has 401k which he contributes to regularly at work, however, it has not been doing too great lately. But, one other thing we started several years ago was putting money into a Roth IRA at our bank.

    It is a safer investment, but earns a lot more than just a regular savings account. Now it is actually earning pretty good quarterly dividends.

    For anyone who doesn’t know, a Roth IRA is one in which you deposit money that you have already paid taxes on, unlike the traditional IRA, in which the money comes out of your paycheck pre-tax.

    Amanda @ Mommy’s Idea Book´s last blog post..Get Up, Get Moving, and Get Sexy, Part 2

  6. Kiplinger’s magazine (kiplinger.com) and Investor’s Business Daily newspaper (investor.com) are both excellent.

    Also, everyone who can afford to do so should consider having stock dividends automatically reinvested. It’s a fairly painless way to build your portfolio.

  7. Lily (from Italy) says:

    My parents always invested some money and made me invest some too (sums I inherited from aunts) – I’m talking about investment funds and such, not risky stuff.
    Well, now I’m in my 30s and I got enough money to be quite safe even now that I’m working as a freelance and things are not so rosey. AND, my mother (my father is dead unfortunately) is buying me and my boyfriend a house entirely with dividends accumulated through the years.
    As you can guess, I’m so grateful! :)

  8. Great advice. Our investments have been so depressing lately! We are just thankful that we are a ways away from retirement so losing SO much money isn’t quite as sad. It is good to remember that over time the market always turns around. I’m enjoying your series!

    Andrea´s last blog post..What’s the deal with mac ‘n cheese?

  9. this series is wonderful. i hope your pregnancy is treating you well!

    nicola´s last blog post..corner of my home

  10. Your first two points hit the nail on the head for me.

    Do your own research. This is critical if you want to know that you can trust what is there. Great investors all take pride in their pre-purchase research before buying assets, and then keep it up once they actually own a company.

    Don’t make investing decisions from “pop-media”. No doubt – but it is surprising how many people still do this. It must be happening regularly, otherwise these shows (and stations) would not still be in business.

    Thanks for your insight, Rachel.

    James @ Learn How To Invest Online´s last post…Should I Invest In Mutual Funds?