How to make a budget and invest in your future without using a firm

I had another member message me and ask for my help in starting a budget and giving him some basic investing advice. Since this information seems to be in demand, I thought I'd pass it along to you. I am an Economics major that works for a major investment firm, so I have experiences in these matters. Always remember though, an investment's past performance doesn't indicate future performance. AKA, it's 2008 and housing is down. If you invested in housing a few years ago, you lose if you need to sell now. If you invest when it's down, you will likely gain in a couple of years.

Instructions

Difficulty: Moderately Easy

Things You’ll Need:

• Some starting capital
• Willingness to save and let your investment grow.
• An idea of where you want to be when you retire.

1. Americans have some of the worst savings percentages of any country in the world. We are a "buy now and pay later" society. The information I will provide in this guide is only useful to people that are out of debt. It's simple math that if you have balance on a credit card with a 20% interest rate, and a savings account earning a 5% interest rate, that you need to pay off the credit card before saving or you will be losing money!
   
   "A penny saved is a penny earned." Always pay high interest debts before attempting to save whenever possible. It's good to have a "rainy day" fund, but building a secure tomorrow often requires sacrifices today, so keep it reasonable.
2. Ok, so you've gotten your debts under control. Lets make a sample budget:
   Rent: 500
   Cable: 50
   Internet: 50
   Cell Phone: 50
   Food: 250
   Car Insurance: 100
   Car: 200
   Gas: 100
   Water/Electric: 150
   Entertainment: 100
   Other: 100
   
   Total: 1650
   
   Lets say you work an $15/hr job. $15*52*40=$31200
   $31,200 minus 20% taxes is $24,960
   $24,960 divided by 12 months = $2,080
   
   In theory, you have $430 a month to invest...
3. At this step, I just want to take a moment and congratulate anyone that makes $15/hr or over. It's honestly very very hard to find a job paying more than $11/hr for most Americans. I have a college degree, an excellent education, and it took 7 years after college for me to find a 30K a year job.
   
   If you don't make at least $15/hr, I STRONGLY suggest doing something to cut your expenses. Maybe you can find a finance to move in with, a room mate, or even your parents. You absolutely MUST start saving in your 20's if you hope to have a retirement fund.
   
   You don't need to start rich to end rich if you begin your savings early!
4. Continuing from step 2, what do you do with $430 each month? You need to save for...
   
   Issue 1: "Rainy Day"
   You need money you can access fast when emergencies pop-up. It doesn't matter what age you are, you need at least half-a-month's pay within easy-reach. Car payments, rent payments, and utility payments will screw you if you don't pay up. I've worked for collection groups, and I know all their icky tactics. Avoid calls, avoid fees, avoid loss of property by having money to cover your roof and what keeps you warm under the roof.
   
   Issue 2: "Unemployed"
   No one likes this one, but it happens all too often. You need support while you are in transition. As I stated earlier, debt really kills you, so you don't want to take pseudo loans from credit cards. As your investments build, keep a 6-month salary in easy access funds.
5. Ok, it's finally time to get down to the real money investment advise. I've shown you that even low-income folks can afford to save. If you are in a dual-income household (i.e. a couple that both works) you should have plenty of money to invest. If you are a successful individual, these tips will still apply to you. Here's the gold you've been looking for...
6. How to invest:
   
   Investing has to take many many factors into the equation. How old are you? How much money do you have to invest? How long can you allow the investment to grow? Are you comfortable letting someone else manage your money, or do you want to be responsible for the gains and losses?
   
   Generally speaking, the younger you are, the more risk you should take. This translates to mostly stock in your portfolio and few bonds/securities.
   
   Reversely, the older your investment, the less fluctuation you want since you need to plan your yearly budgets on your retirement incomes.
   
   The absolute best advice I give to all my friends, is to invest in mutual funds. Most places require at least $2,500 to gain interest in a MF. It's tough when you live paycheck to paycheck, but you should seriously save...even if it takes some months...to get that amount.
   
   Bank savings accounts are worthless. You get maybe half a %. You will never never ever get a retirement using a "savings" account. Money market funds are the best things EVER! They are like checking accounts that earn huge saving interest amounts. You are limited to writing checks a few times a month from those accounts, but that's such a small price for such a large gain!