This problem is very common – what to do with money – not just across US but around the world. Lack of financial literacy is wide spread. People love to make money, but are at loss when they have too much of it. They just don’t understand what to do with that money and almost always invest in a bad product and suffer losses. Then why work hard and earn that money when you will end up loosing a chunk of it because of a bad investment decision?
It’s important to know what to avoid when taking a financial decision:
Most people will tell you what to do with your money, where to invest etc, but few will tell what not to with it. Frankly speaking what not to do with your money is a totally different topic than what to do with it.
If you do a small survey like asking your friends or relatives you will find that rarely someone have actually utilized their money in an optimum way or invested in a great product. This is mostly because we are *sold* to a bad advise of a financial planner who has very narrow objective of maximizing his/her profits. They will advise you to invest in a product that will benefit them financially and not necessarily you. They are experts in packaging and marketing a bad product in a good way. STOP listening to them. Do your own research before investing your money. The internet has vast resources of money investing tips and it is a great place to start with.
Let us give you an example of a bad investing tip. If you buy a fundamentally strong stock and have decided to keep it for a long term, your broker is not making much money because you are not trading much. Your broker by the way makes money through the brokerage charges (a small percentage of your stock sales), whenever you buy or sell a stock. He/she will therefore lure you towards the benefits of investing in equity derivatives. Why? Because in equity derivatives the period of investing is very small. You trade much more in a small period making more money for your broker.
From WikiPedia: http://en.wikipedia.org/wiki/Equity_derivative
In finance, an equity derivative is a class of derivatives whose value is at least partly derived from one or more underlying equity securities. Options and futures are by far the most common equity derivatives; however there are many other types of equity derivatives that are actively traded.
Can you in your life name a single person who has made a lot of money in equity derivatives? They are bad investment and will throw your hard earned money down the drain, and in the hope that you will get your lost money back – you will trade again – increase the volume of your trade – and thus making more money for your broker. Sooner or later you will lose more money. By the time you realize that you took a bad financial decision – you would have lost a substantial amount of money and in the process made a lot of money for your broker.
Equity derivatives should be avoided like plague, even if your broker advises they will make you rich very quickly. They are selling hope – don’t buy it.
Similarly financial planners advise to buy Unit Linked Endowment policy. Now these are not necessarily bad investments but they do not solve any purpose. If you are really interested in an insurance product then buy an adequate term insurance plan (they are cheaper than Endowment policy – whether unit linked or traditional with profits plans). Whatever excess money you have can be invested through the mutual fund route buying them systematically every month. Over a course of 10 years these funds can make you a lot of money. Please understand that mutual funds are subject to stock market risks. Therefore you should do through research before investing in a fund.
If you don’t know what mutual funds are then in short we can say that they are a fund managed by an educated fund manager who invests in stocks and other financial instruments like bonds, short-term money market instruments, and other securities on your behalf to maximize gains of the fund over a period of time.
Here is one place you can research about mutual funds.
http://www.investopedia.com/university/mutualfunds/default.asp
If you keep your investments simple and you know what you are doing with your money – chances are over a long period of time you will end up making a lot of money that can help fulfill your needs of higher education for your children, retirement etc. But if you fall into wrong advice and in the hope of making money quick will invest your money in bad products you will only help someone else make money. The choice is yours.