7 Habits of Highly Effective Investors (For Beginners and Anyone)

the seven habits of highly effective people is one of the most popular business and self-help books of all time he sold more than 25 million copies and 1.5 million audio copies i read that book last year and one written by his son that's about a similar kind of business topic and it got me thinking since this is a personal finance channel how do we become effective investors are there seven rules we could follow are there seven principles that would turn us from ineffective to effective i think there are these tips are completely my own i came up with them and they don't count as investing advice the goal is to outline seven habits of an above average investor so you're not trying to be warren buffett just consistent rate returns what i mean by being effective is getting a really good return without inviting a ton of extra risk all right let's get into the seven habits habit number one save cash for an emergency fund this means that you don't spend everything you make and you don't invest everything either this is the solid footing that we all need to build a tower of wealth on dave ramsey actually only recommends having a thousand dollars while you're paying off any high interest debt that's like debt that's other than your house i disagree i think if you've got a house or a family there's really no reason to have less than five thousand dollars in your emergency fund because life is just too expensive like if one big thing goes wrong on your house poof thousand bucks is gone probably multiple thousands of bucks so i think 5 000 is the floor if you can i'd recommend even more than that i like the rule of thumb of three to six months of living expenses saved in cash in a checking account ready for any kind of emergency how you do this is you add up your expenses for a typical month that's all the essentials things like your mortgage insurance transportation costs food maybe a little bit of other stuff and you total that up so you have one month's cost then depending on your circumstances and your preferences save between three and six times that amount if your pay is really variable maybe you'd want to save more or if it's just you if you're single and you've got like a really really steady job maybe you're comfortable saving less it's just up to you so why not just invest it all and really not have an emergency fund well there are some crazy things that happen welcome to last year welcome to 2020. a lot of people lost their jobs or were furloughed or otherwise just had a massive interruption in the routine and other things happen too like if we don't have that cash buffer we might be tempted to put that new ac unit on a credit card and then if we again somehow don't have the money then we're paying interest on that credit card and things can just snowball in a bad direction if you don't have this cash saved up the second habit of a highly effective investor is to smash high interest debt you could also smash the like button if you would like i would appreciate that very much earning money from investments is great but having to lose money because you're getting charged all this interest on the debt that you have is the worst and it's sort of the worst of the worst because we have an element of control over this for one thing we signed up for the debt but for another thing we can choose to pay it off we're in the driver's seat we can stop the bleeding and we know exactly how much we're losing we know how fast that blood loss is because we have the apr it tells us right there and we have the power to punch it in the face if we choose to my rule of thumb right now for what counts as high interest is basically everything above like 5 25 years ago that rule of thumb would have been very different and 25 years from now if this video still exists on youtube it will also be pretty different but for now i think that's a good rule of thumb the worst places that cost you the most money when it comes to debt are credit cards payday loans and buy here pay here car dealerships these places just take advantage of people they hose people and they cost us unbelievable amounts of money 15 20 25 loans are obscene but compared to some payday loans that's actually a really low rate in some states without restrictions in place these loan rates can be upwards of 600 percent per year that's downright criminal i feel a little sick just thinking about it so smash that high interest debt pay that off and stop losing money the third habit of highly effective investors is to start investing and use tax advantaged accounts first one of the ways that wealthy people become wealthy and stay wealthy is they understand taxes at least enough we don't have to be tax experts here and if we can invest without getting a bunch of money charged to us in taxes then we should the us government has set up a handful of different accounts that give you a big tax break and so i think that we should use those first because it means that we get to keep more of our money in the end i would say the most common of these kinds of accounts are the 401k ira and 457 there's a handful of others but regardless if you have access to these use them these types of accounts also sometimes tie into your job and that means that they could also tie into a match that's where your employer matches money you put in we'll talk about that more in just a little bit but free money is always awesome and almost everyone has access to an ira so even if you don't have the other kinds the ira is available to virtually everyone and if you're about to say well brendan what about locking up this money till i'm like 60 years old yes technically these accounts do put restrictions on taking your money out before the right age but it's not always hard and fast there's typically ways around it and i would say even if you don't have a way around it it's still worth it because you save so much money in taxes it is insane plus if you're investing and you're worried about being able to get your money out early because you're going hey i'm going to have so much money when i turn 44 then i need to be able to access it because i'm going to retire then well if you're smart enough to do that to make the money to invest the money and have the money you're smart enough to find ways to access that money too the other option with those if you're for sure going to retire early is to set up other accounts that can bridge that gap between where you are today and when you can access that money without penalty in your late 50s early 60s number four is to know what benefits your company offers and get that company match 40 years ago it wasn't uncommon for your employer to have a pension plan for you in fact at their height in the 1980s 38 of all private sector workers had access to a pension these would have been relatively complex and pricey compared to the plans we have nowadays but it was the norm and people counted on them then the way it worked was after you met the number of requirements that they had in place like minimum time served and maybe a position and whatever else then you would be able to drift off into your golden years knowing that you would get these pension payments each month and have your retirement covered since then pensions have become less and less common and today they cover less than 15 percent of private sector workers which i was surprised to find out i thought it would be even less than that today the 401k has completely taken over as the most common employer sponsored plan thankfully you actually own the money in your 401k plan unlike a lot of the pensions from the days of yore in which case the company owned and managed the pension for you apparently right now about 79 of people work for employers that have something like a 401k style plan which is awesome but unfortunately only about 41 opt in which is not awesome don't be one of those people instead make sure to sign up for your 401k as soon as possible sometimes you have to wait like a year or some kind of other hoop will have to happen that you have to jump through for you to get access to it but as soon as it does get signed up especially if your company offers a match like i just mentioned a minute ago when a company offers to match a percentage of your investments this is like free money so what typically happens is something like three or six percent will be matched dollar for dollar so if you put in at least that amount then your company will also put in that amount and deposit it into your account so this is like a bonus it's like a raise it is literally doubling your money on the day that you do that and it is awesome effective investors don't miss out on a company match habit number five invest early often and more than is comfortable right now almost half of americans don't own any stock market investments and those who do invest on average are not investing enough the average 401k balance is about 106 000 but the median is only 25 000 the demographic of people that have the highest balances are predictably the older people and their average balance is 216 000 and the median is only 64 000. this is telling me that we are not ready for retirement people have something like one or two or three times their annual expenses saved and that's a bad plan that's not gonna work well the best way to make a killing in the stock market is to invest early and often early is more important than often but the phrase sounds better together it like rolls off the tongue all that means is that you stand to gain the most by investing over a long period of time now investing more money is good that's very helpful i'm going to talk about that in a minute but the time is your biggest ally if you want to see how crazy this is you can jump on something like bankrate.com or just type in investment calculator and play with the time frames i just did this for fun with a friend the other day and said let's pretend like you invest 300 a month so i jumped on the calculator and i looked it up and i said if you invest 300 a month for 25 years you'll end up with 372 000 it's not bad that's way more than the average 401k balance but it's also not like a ton of money either so 25 years 372k if you kept investing for five more years with the same rate you'd have 623 000 so you've gone up another 250 000 just in that next five years and if you keep going five years past that you'd be over a million dollars so you see how those first 25 years are pretty slow then those last 10 years all of a sudden triple the amount of money you had and that's really how compound interest works it's sort of a slow growth until all of a sudden it's just growing at leaps and bounds because it's compounding on itself over time so even just 300 bucks a month can make you a millionaire pretty simply pretty easily also one of the most powerful ways to see your stock market investments just skyrocket is to invest more than you're comfortable with i use 300 bucks a month as an example because it feels like something that a lot of people could do if we made the choice to set aside the money then we could totally do that but if you can invest more then you'll just see this grow even faster even if it's 20 bucks a month 50 bucks a month 150 bucks a month whatever it is just getting started and getting that ball rolling is the most essential thing and then what you can do is over time slowly ratchet that up so if you're working like a full-time job and you would expect to get a raise or a promotion or a bonus over time the really quick and easy rule of thumb is to try and invest half of that increase to me this is a lot more palatable than saying you should just always invest all of your raises because then it doesn't even feel like a raise and maybe right now you're like living really cheaply so if you invest half of every raise you still get a raise you still get extra money and you've now bumped up you're investing uh probably a pretty big chunk without feeling the pain of it at all and if you keep doing that over time what started at 100 bucks a month might snowball into like a thousand bucks a month and that's where things get really crazy but talking about the emotional side of things we get into habit number six which is know thyself and thy achilles heels heels heal some of us are deeply tempted by spending others of us are not really well versed in the world of investing and that's why you're here you're watching these videos and you're learning which is great and yet others have a severely limited mindset when it comes to increasing our earnings or being able to save and amass a bunch of money one way or another in some kind of form we're likely to sabotage our own plans and even if we start off right even if we start this year we're killing it we're doing the right things we could very easily end up shish kabobing our own plans because we do something like buying and selling really often we're trying to time things out and we end up losing all this money that we thought we would gain a tip here is to remember that statistically the more you trade the worse you do so don't listen to those temptations and in my opinion the best way to combat these kinds of mistakes that we all fall into are to set things up to happen automatically you can schedule transfers to happen between accounts the day your paycheck lands then you can set up investments to happen and get transferred out of your account and into the investment accounts automatically put this stuff on autopilot the whole psychology behind this is similar to like why the subscription based model is so huge right now because once that's all happening and it's happening automatically we've made one decision to get it going it's actually more work to stop it than it is to keep doing it so we just let it ride we just have all these subscriptions now that are accumulating but you can do this with your own money you can set it up to where you don't have to do the mental heavy lifting to choose to invest again this month it's just happening it becomes the new normal you adjust to it and it is incredible habit number seven is grit angela duckworth is an author who wrote a phenomenal book in 2016 called grit since then it's really been influential for thinkers successful business people military service people and everyone else the significant first example she uses is at a u.s military academy they were trying to assess kind of preemptively before people started military training what will make this person successful how can we sift people out and figure out who will be the best is it iq is it their background is it the school they went to before now is it their physical fitness how fast can they run a mile all these different metrics and all these different indicators were used to try and predict who will go on to be the most successful turns out all that was wrong the thing that mattered the most was grit grit is the quality of being resilient hard-working and having your actions backed up by a deeply held belief as investors we have to embody these characteristics of grit don't stop stick to the fundamentals stick to the truth of what we know and stay focused on the long-term goal think about what it was that got you started investing in the first place if you've been doing it for a while and now you're kind of wavering or you're thinking about changing up approaches think about why you started this what was your dream what was that deeply held belief that motivated you to do this in the first place and re-route yourself to that and otherwise we have to choose to be resilient we have to withstand these market swings these crashes like back in 2020 when things went totally haywire over the spring and summer we have to be able to stomach those things and stick it out because whenever we react emotionally we do things that hurt us over the long term on average plus the hard-working side of it might look like the last habit before this one where you invest half of your raises or maybe three quarters of all your raises you could invest all of your bonuses you could work to get another job or a better job and keep your same lifestyle so that you can invest more the harder we work at this and the more we do as far as contributing to our accounts early often and more than we're comfortable with the better off we are along the way don't forget to be aware of your achilles heels maybe you think that you can outsmart or out think the market and buy and sell your way into a fortune odds are you're not that guy hey you're not that guy man what's that what's that mean hey you're not that guy that's part of sticking to the fundamentals and being resilient is holding fast to the plan that we have set out and just continuing to do that good hard work and honestly a big part of that resilience is just the patience because even if you're investing something like 500 bucks a month which feels like a lot of money it can take a long time to get to like a hundred thousand dollars or two hundred thousand dollars in an account because that initial stage of growth is just so slow so you have to be really patient and really persistent to keep going but if we can follow all seven steps if we can root ourselves in these strong foundations be persistent stick to our plan then we will be highly effective investors if you made it this far i appreciate it and i'm excited because you probably didn't have deep hatred welling up in your heart and if that's the case i'd really appreciate a like and if you don't want to miss any future videos uh subscribe because that helps me out a ton these videos come to you totally for free and all i ask in return is a like thanks a bunch for being here for watching and for sticking around this long and i'll catch you next time bye

Channel: Brendan Evan

Views: 801

Keywords: 7 habits of highly effective investors, investing for beginners, steps to invest, before you invest, how to invest in the stock market, Brendan fitness and money, investing, stock market investing, emergency fund, index funds, stock market trading, how to be an effective investor, How to invest as a beginner

Id: OjaT-jpkOEI

Length: 14min 48sec (888 seconds)

Published: Tue Aug 24 2021