DiscoverOmaha.com Money Matters column
From my father: be disciplined; From Warren Buffett: invest in what you know
In Omaha, my home is just down the street from billionaire Warren Buffett’s house. Financially, my economic neighborhood is miles away.
Like most of us, I have a shaky grasp on the dizzying world of personal finance with more questions than answers when it comes to managing money for my retirement and my child’s education. How much should I invest? What should I invest in? How can my investments perform better?
After four years of investing, I have found two principles that work for me. From my father: be disciplined. From Buffett: invest in what you know.
Be Disciplined. It’s difficult to start saving money. When you are in your 20s, long-term investments can wait when your entry-level salary seems better spent on buying your first possessions and reducing debt. Stashing away a few bucks doesn’t seem to be an option.
That’s why pre-tax 401(k) contributions removed from your paycheck and investing through automatic withdrawals from banking accounts are an excellent way to invest painlessly. If the money is never in your hands, you won’t miss it, and the discipline aspect of investing becomes easier.
My goal is to save 10 percent of my gross income, yet I fall a bit short. Seven percent of my gross income goes into my employer’s non-matching 401(k) and 1 percent each goes into a Roth IRA and a garden-variety savings account. Without increasing my contributions and assuming a 15 percent rate of return, I should have $1 million saved by my mid- to late 60s.
Invest In What You Know. Buffett says he succeeds by investing in companies he understands. I don’t know about companies, but I have a basic understanding of how mutual funds and 401(k) plans work. This gives me security in knowing the risk and reward involved in my investments.
But I don’t understand the stock market—at least not yet. Selling short, going naked on options, stop-limit orders; it’s Greek to me.
For the time being and until I get a bit more knowledge under my belt, I plan to stay away from the stock marketing until I know what I am doing and have more money and time to invest wisely.