When you start to invest or begin looking at your different options of what to invest in, it is paramount that you understand what you’re investing in. This concept applies to many aspects of our lives, but here I’m focusing on investing. You’ve got to understand what you’re doing.

There are so many options available to us these days that it can be extremely tough to choose where to put your money. There are full service brokerages, self service brokerages, retirement accounts (both employer sponsored and not), mutual funds, individual stocks, real estate (residential, commercial, etc.) and so much more. If you understand how money is made in each of these investments you can do quite well for yourself. If, however, you’re not sure how they work, you can also lose a lot of money.

I’m sure most all of you have seen those late night infomercials telling you how easy it is to make money in something like real estate. And I’m sure there are all sorts of opinions on this subject as well. Well, the truth is that there is both money to be made in real estate and money to be lost. Donald Trump is a typical example of someone who knows how to make money in real estate and you probably know someone who has lost money in real estate. The difference, I submit, is that some understand the game and others don’t.

The stock market is another place where some people make money and others lose money. There are people like Warren Buffett and (once again) there are plenty of others who have lost a ton of money in the market. I don’t think anyone will dispute that Warren Buffett understands how the market works and how to profit from it. Those who continually lose money in the market probably don’t understand it like they should.

So what does all of this mean for us? What should we invest in and how? It may behoove us to step back and instead of wondering what to invest in, decide what we understand or what we want to understand better. If you’re interested in the stock market, begin by researching how one makes money in it. Just because you’ve heard that you can make a lot of money through options trading doesn’t mean that you know how to. Someone you know may have made some money by shorting a stock. Does this mean that you should all of a sudden start shorting stocks?

Now, instead of realizing all of the things that you don’t understand, take the time time to educate yourself in areas of investing that interest you. Perhaps you can find a mentor of sorts that knows how to do what you want to do. There are also a ton of books at the local library with a wealth of information on various investing topics. It may be time to invest a little time in yourself before you start investing your money.

Even though most everyone with an income pays taxes, not everyone has heard of tax brackets. And just because someone has heard of them, doesn’t mean that they understand them. Hopefully I’ll be able to clear up some of the confusion on the subject.

As explained by Wikipedia, Tax brackets are the divisions at which tax rates change in a progressive tax system. Different levels of income are taxed at different rates. This is why you may have heard people say that getting a raise has bumped them into a higher tax bracket. This, however, is the source of most confusion since people think they will be getting taxed more on their income, and this is only partially true.

The tax bracket you are in is the rate that you pay on the last dollar that you earn. It is not the rate at which all of your income is taxed. Therefore, you really shouldn’t ever be worried about moving into a higher tax bracket. In order to fully understand how it works though, it’s best to see an example. We’ll use the tax rates for the case of married filing jointly.

The first $15,650 is taxed at 10%. Any income over this amount up to $63,700 is taxed at 15%. Any income over this and up to $128,500 is taxed at 25%. It works the same as you move up through the tax brackets.

So, let’s say that you and your wife earn a combined income of $150,000. The tax that you are responsible for is $24,972.50 plus 28% of the amount over $128,500 which is $6,020 for a grand total of $30,992.50. This works out to a tax rate of approximately 20.7% which is significantly lower than the 28% tax bracket that you would be in.

As you can see, the actual tax rate that someone pays will be different than the tax bracket that they are in. Essentially everyone will pay their own effective tax rate based on their level of income. Just remember that this only applies to the Federal Income Tax rates. Their is also Social Security payments and state and local taxes which must also be factored in to determine your total tax bill.

I must say that I’m amazed at how many people sit on the sidelines when it comes to personal finance. I talk to so many people who tell me how and what to do as far as their finances are concerned, yet for some reason they don’t do it. There are so many articles out there in the mainstream financial media as well as on financial blogs such as this one that it’s easier than ever to find good advice and how to put things in order. Interestingly to note however, is how many people read all this and are still struggling financially.

If you’re struggling with debt, there is plenty of information out there showing you how to get rid of it. You can also find countless tips on frugality. None of this will help you though if you don’t put any of it into practice. Reading posts and continuing to eat out frequently won’t improve your situation. Talking about the next greatest investment with a co-worker and then only paying the minimums on your credit cards also won’t help.

Perhaps you’re looking to retire soon, or maybe a little early. I’m sure you’ve read posts about various retirement accounts including Roth IRAs, 401Ks and the like. I’ve talked with countless people who can tell me just about anything you want to know about these accounts, but they still only “have plans” to open them at some point in the future. A common phrase I hear is they’ll do it “as soon as (such and such)…”

My advice to you is to stop standing on the sidelines of your financial future. Sure you have a chance to lose if you get in the game, but you have no chance of winning if you never play. There are many aspects to the game of personal finance, and you can’t begin knowing everything about each of them. You can’t afford to wait until you have all the information or know exactly what to do. There are some things that you just need to learn by doing. It’s alright to make a mistake.

So continue to read financial articles (especially from this blog) and learn as much as you can, but more importantly, start putting some of the advice into practice. It’s a whole lot more fun (and profitable) to be in the game than it is to stand on the sidelines watching everyone else.

In addition to getting out of debt, being frugal, and saving for retirement, you would be wise to look into various forms of alternative income. If you think about it, looking ahead towards retirement you’re going to need another form of income other than your job. Most people hope to have enough money saved in their retirement accounts that they can live comfortably off of the interest or other investment income. So the question then becomes… Why wait until retirement to develop these income streams?

In fact, the sooner you create this alternative income, the sooner you will have reached financial freedom. Once your alternative income streams are greater than your expenses, you have the freedom to do whatever you’d like. You can continue to work, quit altogether, or find some happy medium in between. The point of all this is that you don’t have to wait until age 65 to make this happen.

There are many different forms of alternative income, and you’ll need to find what you’re most comfortable with. If you put your money into a money market account, you can view the interest earned as passive income. You might decide to purchase stocks that pay nice dividends. These dividends may serve to replace some of your current job income. One of my personal favorites would be real estate investment income. Here you may have an income producing rental property that gives you a hundred or so dollars a month or even more.

You may not want to put all of your money into income producing investments, but you’d be wise not to ignore them. It’s not bad to play the asset appreciation game, but there’s a whole other playing field with cash flow. Also, the more you look into this type of investing, the more opportunities you’ll find to increase your financial position.

If you’re reading this blog, chances are good that you’re trying to get ahead financially. There are a lot of things you’re probably doing right, and some things that you need to work on. Amongst all the other fiscally responsible things that you may be doing such as building an emergency fund and living frugally, you need to be investing in order to get ahead.

The next question is most likely, what should I invest in? And this is exactly the question that you should be asking yourself. If you’re looking for someone to tell you where the best place to put your money is, you’ll have no problem finding them. You can find brokers for stocks and bonds. Turn on the TV at night and you’ll almost surely find someone willing to show you how to invest in real estate. You could also find someone to help you invest in gold, silver, or commodities.

One of these is not necessarily better than the other. You need to find out what interests you and where you’d like to invest. Warren Buffett has made a ton of money investing in stocks. Donald Trump has done likewise mainly through real estate. Bill Gates and many others have gone the entrepreneurial route and invested in their own business. The point is that there are many different ways to invest and increase your wealth. If this weren’t the case, the Forbes 400 would be a very boring list.

I’ve written before about shopping for investments, and that we should put as much effort into researching where we put our money as we do comparing the different models of cars or flat panel televisions. If you’re interested in real estate, learn all you can about the industry and how to invest there. Take a trip to the library and check out all the books you can on the subject. There’s a wealth of information out there on the subject.

Perhaps you’re drawn more to the stock market and the opportunities that are offered there. There are also plenty of books, audio books, and websites where you can learn fundamentals and strategies of the stock market.

There are a lot of opportunities out there if you’re willing to look for them and seize them. You know you need to invest, so figure out what you’re style is and what type of investing interests you the most. You don’t have to invest in just one asset class, but start with one and branch out from there. And remember that no one else cares as much about your financial future as you do.

There’s been a lot of talk recently about the recent rate cut from the Federal Reserve of 0.5 percent. It was obvious that Wall Street loved it as the market experienced a large upswing, but many others are critical of the move and view it as a Wall Street bailout. What does it mean to your average person though?

Within days of the rate cut, I was informed that the rate on my ING DIRECT money market account was being lowered to 4.3% APY from 4.5% APY. This isn’t isolated however, savings and money markets are lowering rates all over the place.

Those with ARM mortgages might benefit as their loans may reset to a lower rate after the introductory period lapses. This is nice for those that bought more house than they realistically could afford, but interestingly enough, longer term rates have actually increased. These longer term rates are what affect the traditional fixed rate mortgages. So it would seem that the financially prudent will once again be paying to bailout the unwise.

Whatever your view is on the recent rate cut, there isn’t much that the average person can do about it. What we have to be able to do is adapt as best we can to the circumstances that we’re given. If interest rates continue to drop for money market accounts, other options can be explored. The stock market usually reacts positively as interest rates fall which could be helped further as people pour more money in as their cash accounts don’t perform as well.

Most people won’t be noticeably affected by what’s going on, but for those of you who pay attention to these sorts of things, you’ll begin to notice ways that you can take advantage of the changes. It also serves as a reminder that our financial plans can’t be static. We must be willing to make changes and adapt to the changing market and financial conditions.

When I first started this site, I wrote about financial statements; in particular, the balance sheet and the income statement. People typically think of these in conjunction with companies, but they can be incredibly useful for individuals as well.

If you don’t already use these financial statements in your personal finances, you should probably start with the income statement. If you’re unfamiliar with how it works you can check out the above link and email me with questions. The reason I suggest you begin with it first is because it allows you to get a handle on all of your expenses. Most people are very aware of how much money they have coming in, but they need to do a better job of keeping track of where their money goes. Keeping a personal income statement will also tell you whether or not you’re spending more money than you’re earning, and by how much.

Once you’ve got a handle on the income statement you can move on to the balance sheet. From the balance sheet you will determine your net worth. As you continue to update your balance sheet you will be able to see the trend in your net worth. Hopefully you will see it continue to increase.

The most important aspect of these financial statements, however, is that they allow you to make informed decisions about your finances. You’ll be able to determine how certain expenditures or purchases will affect your overall financial picture. You’ll also be able to better formulate a plan that will get you where you want to be and allow you to reach your goals.