Most people invest willy-nilly (without any planning or order). Taking some basics from journalism may help most people get better results (expectations) when they approach investing.
Answers to questions about Who? What? When? Where? Why? and How? “…are questions whose answers are considered basic in information gathering or problem solving.” https://en.wikipedia.org/wiki/Five_Ws .
They’re very fundamental to writing, but also extremely helpful in saving/investing money for future things you wish to have money for. I’ll go briefly through each question to give you insight into how to apply them to your personal finance puzzle. Without these questions, most people simply wing it without much consideration about anything and hope for the best. Not a prudent plan, especially when it comes to money.
Here’s the bigger picture about answering the question(s) you have on your mind about everything financial, now and in the future.
Who. What. When. Where. Why. How.
Who is the money for?
This usually is answered as for yourself. However, it could also be for someone else in the future too. For example, for your children’s’ education (your own education may change some of the rest of the answers too).
Your knowing Who provides insights into answering the rest of the questions. This is the first question because it is an important question to begin with. Is it a goal for you? Or a goal you have for someone else?
Many people miss this question all together. You see this a lot when one friend asks another “What they would do?” The other typically misses the nuances of all the these questions, and answers by what they would do, most importantly usually not even considering how the others’ unique situation (as defined by answers to all these questions) may change their answer to the other too (and may even change their own answers to their own situation had they reflected a bit more deeply on the rest of the questions)!
What is the money for?
Often called a goal, or objective, this is the next important question to consider.
A near term example of saving/investing may be for a home down payment (and how much to save based on difference now between owning and renting to 1) practice ownership budget wise and 2) accumulate the savings needed for the down payment.
A far term example of investing would be for retirement.
A mid-term example of saving/investing may be for education.
People have many different saving/investing desires. Each one will generate different answers to all these questions.
Implicit in the question of What is the money for? is When is the money for?
When is the money for?
Is it for this year? Next year? 3 years? etc.? This is the crucial question because knowing when the money will be needed gives insight into what the money should be saved or invested in.
Vanguard https://investor.vanguard.com/other-savings-goals/ has some decent basic tutorials that are short with links to the next thing to think about. They’re also a good place to start for beginners. Once money invested gets over about $50k, there’s another firm I use with clients.
Notice above that I have used the term saving/investing. Saving would be for nearer term needs for the money. Investing would be for money needs farther out in time. What’s the difference between saving vs investing?*
The primary difference is how long it takes to recover a decline in value. I say decline in value, because I’m assuming, you’re investing prudently in the first place. There are investments that are more speculative and complete loss is possible without any chance of getting your principal (original amount you invested). The more risk you take, the lower the investment value may go (risk and return go hand in hand – you can NOT have one without the other). The lower the value may go, the longer it takes to recover back to the amount you used to have. And this is the time element to the question “When?” You want to have your goal arrive AFTER the investments have time to recover after any decline.
*Implicit in this When question too – as the goal gets closer, the less risk the investment should have, until this money too becomes a near term goal and should be changed from investing to savings. In other words, personal finance is NOT static! Things change over time.
Where should the money go (for each goal)?
Each goal will have a different answer. The sooner the when, the more conservative the where.
Money you have in your bank savings is for quick access into bank checking for needs that may come soon (less than a year). Money that you may not need right away, can be put into another financial institution that can then transfer money back to your bank account when it is needed. The Vanguard site has some tools that suggest where along the savings/investing spectrum money might go based on WHEN it may be needed. The key element in this question is how much risk (value goes up and down) to take (you see – this questions ties closely with the When question).
Most financial institutions have minimums when it comes to investing. As you start out, you’ll have less to invest which may limit where you go. As you accumulate more money, changing institutions may make sense if the institution with the higher minimum investment amount has a more robust management methodology (and is evidence based as well).
Note that you should have a clear idea about WHEN you need that money again, because that determines whether you look at savings instruments (near term goals) or investing (longer term goals) instruments of which these also have a spectrum of risk exposure (how far down the value may go – a more important question than how far up the value may go; because up vs down go hand in hand as I explained earlier).
A more fundamental perspective on Why? is through the recognition that money can only be spent ONCE! You spend it today. Or you invest for later. Why save and invest? For later.
Why? Is basically a summary so far of the all of the above questions to be sure you’ve considered everything so far. This is also the question to ask about what should be changed now, and why should it be changed or tweaked in some manner? How much time has gone by since the last time you went through this exercise?
Life is not static. Time is not static. Reviewing this from time to time makes sure that you update things as time goes by. What used to be far in the future eventually becomes nearer and nearer … so the where should change over time. Have the “what’s it for” changed too?
For a bigger picture on “Why?” there are some great resources to guide you:
The Richest Man in Babylon by George S Clason
The Next Millionaire Next Door: Enduring Strategies for Building Wealth by Thomas J. Stanley Ph.D. & Sarah Stanley Fallaw Ph.D
How do you actually get the money where you want to put it? And how do you get the money back when you need it? That will depend on both the financial institution you choose and the type of savings/investment tool you use. Depositing and withdrawal processes are BOTH two important questions to ask before you take any action on savings or investing.
How you title an account is also important since the title conveys not only who the owner is, but also indicates the purpose of the account as well as how that account may be taxed.
An example may be money for education. There are many types of accounts to save money for higher education, for example a 529 Plan, an UTMA, or simply in your own name. Each of these have ownership and taxation implications as well as restrictions on how the money may be used, etc.
Other titles are found in the retirement investing world such as IRAs, Roths, 401k, 403b, 457, and others meant for accumulating money for later use once one is in their 60’s or older … in other words, retirement.
Saving money using bank accounts works for near term goals, or for goals that you want to limit the amount of loss the money may experience, such as for emergency and/or reserve funds.
Personal Finance 101 wrap up
Yes, the above may be confusing or complicated for some. These are questions you should have in the back of your mind as you work through what you want your money to do for you. Finding a fee-only fiduciary adviser near you may be helpful.
A good adviser should teach you how to fish (good for a lifetime), rather than just give you a fish (good only once until you come back for more), as they help you answer these questions with you.
Photo by Raymond Sam on Stocksnap.