After you begin to have some assets with which you can invest, it behooves you to start playing with your money before the big opportunities come along. This “playing in the sandbox” will assist you to develop your knowledge of and intuition for making money work.
Although I hate to borrow a line from the lottery, I want to begin this Provision with a simple truism: you can’t win if you never play. That’s as true, if not truer, for money management as for any other area of human endeavor.
Unfortunately, when it comes to money, we seldom give ourselves the permission to play. After all, money is deadly serious. If you don’t believe me, take a bill out of your pocket or purse right now and tear it up. Quite apart from that being against the law in some countries, tearing up money — even the smallest of bills • just runs counter to everything we know about those curious pieces of paper. Their power far outweighs their value.
The mystique of money has its place, since money deserves respect, but if we never get beyond the mystique we’ll forever be enslaved by money. And we’ll never have the kind of cash flow that generates and produces financial independence.
So far in this series we’ve made a few simple points: develop a vision for your life that reflects your true values, organize your life accordingly, cut your expenses, pay down your debt, save and give money regularly. Those points will take you a long way towards financial independence. But they won’t take you all the way. They are, rather, the tried and true prerequisites for financial independence. Without them, there’s no way to get in the game.
But what do we do with our money once the cash begins to accumulate? Early on, we need to set most of it aside in savings. Ideally, six months worth of living expenses in liquid assets as well as three to five years worth in low-risk investments (e.g., certificates of deposit and money market funds).
Unfortunately, most people will never know such cushions if they always play it safe with their money. That’s why I recommend setting aside a small amount to play with in the sandbox. If one never has the experience of buying and selling stock on line, for example, then one will be less than prepared for the time when real money management is required. Playing with money, even losing money, can make an invaluable contribution to our knowledge of and our instinct for making money work.
Although both knowledge and instinct are important, Suze Orman clearly believes that, when in doubt, we need to trust our gut. In other words, it’s better to be lucky than good when it comes to money. Only Orman wouldn’t call it luck. She argues in her book The 9 Steps to Financial Freedom(Click) that our instinctual response, properly cultivated, will lead us to make the right decision more often than not. When it comes to money, our money, we have the critical intuition. The voice of wisdom speaks directly to us. The trick is learning to listen for, trust, and heed that voice more than all the other voices: advisers, experts, friends, relatives, investment formulas, and programs.
To cultivate that intuition, Orman suggests that we go into a quiet room by our self • with no TV, CD player, phone, or children • in order to contemplate a variety of critical-decision scenarios to which there is no obvious right answer: getting an investment tip, cosigning a lease, inheriting stock, choosing a retirement plan, getting a new job offer, or giving your savings to your new brother-in-law, a financial adviser. By contemplating these scenarios, Orman hopes we will learn to get in touch with our inner voice as to which ones make us feel uncomfortable and which ones feel attractive.
Playing in the sandbox of the stock market is another way to learn the same lesson, first with fictitious money and then with real money.
To begin playing the market you will need to create an account at one of the many online brokerage firms. To help you select a reputable firm, visit Gomez (Click), Smart Money (Click), or Kiplinger (Click). They may well point you in the direction of E*Trade (Click), WebStreet (Click), Datek Online (Click), DLJDirect (Click), Discover Brokerage Direct (Click), National Discount Brokers (Click), or Waterhouse Securities (Click). Each has their strengths and weaknesses in terms of commissions, real-time quotes, account information, technical support, fees, online products, and research lines. Use that intuition. You decide!
From there you can set up a fictitious portfolio, from which you can begin to buy and sell both individual stocks as well as mutual funds. This serves as excellent hands-on training for both knowledge and intuition. The lessons get even more intense when you move to playing with real money. And don’t think you have to wait forever.
After you accumulate six months of living expenses in liquid assets, use the “80/20 Rule” to divide your regular savings program into working capital and play money. Set aside at least 80% in relatively safe investments such as mutual funds. Take no more than 20% in order to begin making investments based on your values and visions of life. Don’t worry about how much you make or lose. Instead, worry about doing your homework and trusting your judgment • rather than the judgment of others.
The key is to listen deeply for that inner voice. The more you know about a company or a fund the more your confidence will improve. It’s not impossible to make a difference and to make money at the same time. A few small wins will get you ready for the big opportunities as they come along.
May you be filled with goodness, peace, and joy.
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