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Your home is worth what it's worth — its value has nothing to do with your debt load. Unless you're willing to walk away from your home and send the keys to the bank, (also known as default), you suffer the full effect of a price decline, regardless of your mortgage size, if real estate prices collapse. And the simple fact is that in terms of an after-tax return, paying down a mortgage in many cases offers a very attractive combination of a healthy after-tax return and zero risk.
Establish Financial Goats
Although you may save money only because Mom and Dad told you it was the right thing to do, or because it makes you feel good, odds are that you save money with some purpose in mind. Common financial goals include saving for retirement, purchasing a home, starting your own business, and so on.
You may want to invest money for different purposes simultaneously. For example, when Eric was in his 20s, he put some money away toward retirement, but he also saved a stash so that he could hit the eject button from his job in management consulting. He knew that he wanted to pursue an entrepreneurial path and that in the early years of starting his own business, he couldn't count on as stable or as large an income as he had in consulting.
Chapter 3: Investing Prerequisites
Eric invested his two "pots" of money — one for retirement, the other for his small-business cushion — quite differently. As we discuss later in this chapter, you can afford to take more risk with the money that you don't plan on using in the near term. So, he invested the bulk of his retirement nest egg in stock mutual funds.
With the money he saved for the start-up of his small business, he took an entirely different track. He had zero desire to put this money in risky stocks
— what if the market plummeted just as he was ready to leave the security of his full-time job? Thus, he kept this money safely invested in a money market fund that paid a healthy rate of interest but didn't fluctuate in value.
Are your savings on track)
In order to accomplish your financial and some personal goals, you need to save money. However, many people haven't a clue what their savings rate is. Your savings rate is the percentage of your past year's income that you saved and didn't spend. You may already know that your rate of savings is low, non-existent, or negative, and that you need to save more.
Part of being a smart investor involves figuring out how much you need to save to reach your goals. You're better able to make the most of your money after you figure out how much you should save and set some goals. Not knowing what you want to do a decade or more from now is perfectly normal — after all, your goals and needs evolve over the years. But that doesn't mean that you should just throw your hands in the air and not make an effort to see where you stand today and think about where you want to be in the future.
An important benefit of knowing your savings rate is that you'll know better how much risk you need to take to accomplish your goals. Seeing the amount that you need to save to achieve your dreams may encourage you to take more risk with your investments.
If you consistently save about 10 percent of your income during your working years, you're probably saving enough to meet your goals, unless you want to retire at a tender young age. On average, most people need about 75 percent of their pre-retirement income throughout retirement to maintain their standard
If you're one of the many people who don't save enough, you need to do some homework. To save more, you need to reduce your spending, increase your income, or both.
Part I: Investing Fundamentals
For most people, reducing their spending is the more feasible method to save more. But where do you begin? First, figure out where your money goes. You may have some general idea, but you need to have facts. Get out your chequebook register, credit-card bills, and any other documentation that you have of your spending history and tally up how much you spend on dining out, operating your car(s). paying your taxes, and everything else. After you have this information, you can begin to prioritize and make the necessary tradeoffs to reduce your spending and increase your savings rate.
Earning more income may help boost your savings rate as well. Perhaps you can get a higher-paying job or increase the number of hours that you work. But if you already work a lot, reining in your spending is better for your emotional and economic well-being.
If you don't know how to evaluate and reduce your spending or haven't thought about your retirement goals, looked into what you can expect from government social programs, or calculated how much you should save for retirement, now's the time to do it. Pick up our first book, Personal Finance For Dummies For Canadians, from CDG Books Canada, Inc., and find out all the necessary details for retirement planning and much more.
Determine your investment tikes and dislikes