How many times have you started putting money away for investments, only to withdraw it after a few months? Even if you have managed to keep adding to your investments, how sure are you that you will meet your financial goals?
Like most people, I was a financial basket case until I actually sat down and took the time to prepare myself for investing. I, along with most regular investors in the market, lost my shirt in the financial crash of 2008. I was miserable and thought investing was a fraud designed by the rich to steal my money. After spending the time to understand the markets, studying everything from stocks to bonds and real estate, I learned that I was in control of my financial future and only I was responsible for my goals.
Too many people fail to lay the groundwork before they invest their money, only to see their portfolio crumble and their hard-earned dollars disappear.
Invest? With What?
Almost everyone agrees with the need to save away for their financial goals, but who has the money? The economy is barely growing eight years after the global recession and incomes have only kept up with inflation. It is all you can do to pay the bills and hopefully have enough to treat the family to a night out every once in awhile. Besides, you’ve got social security for retirement, right?
Even if the rules on social security are not changed, and they almost certainly will have to in order to cover the massive future shortfall, the average check is just $1,230 a month. That may cover a roof over your head and something to eat but you’ll be hard pressed if you actually want to enjoy your retirement.
The best part about investing is that it matters just as much when you begin as how much you are able to invest. You really do not have to sacrifice much to build your nest egg, every dollar counts. Investing $50 a month, just over 1% of the average annual household income, for 30 years to age 65 can provide an extra $350 a month in retirement. That is the power of compounding, or earning money on top of the prior years’ profits. Saving $200 a month can more than double the amount you receive from social security.
It’s best to start small. Start with a regular contribution of what you know you can afford and then increase it if you can. I have seen too many people jump into investing and expect to put half their paycheck in an account. When bills come due, they end up selling their investments and never really enjoy the benefit of compounding.
Put a reasonable amount away each month and pretty soon, you’ll be amazed at how quickly it is growing.
The best investing you can do is before you begin investing
The question I get asked the most is, “What is the number #1 reason investors lose money?” The answer is easy, because they start investing without a plan. Without a plan, they don’t know how much money they need to meet their goals. They do not know how much risk is involved and how they will react to losses. In short, they stumble through years of investing without ever meeting their goals.
Preparing an investment plan will help you establish key points:
- What are my financial goals?
- How much do I need and how much do I need to invest?
- How much risk am I comfortable taking in my investments?
- What about emergency cash and debt?
We will be covering these points and more in future posts so a brief overview will work for now.
Establishing your financial goals is an obvious one but gets overlooked by most investors. What do you want to do with the money?! Without something to look forward to, many investors lose the motivation to invest and end up withdrawing money. Retirement is the most frequent answer for the ‘why’ of investing but there’s also the traveling that you’ve always wanted to do, money to pay for education for kids and grandkids and a ton of other reasons.
Now that you know what you want to do, you can estimate how much it will cost to do it. The standard rule is that you’ll need between 65% and 80% of your current income in retirement. Your own needs may change depending on how much traveling you want to do or your other goals. Once you have an idea of how much you will need, there are a number of calculators on the web that will help estimate how much to invest.
Investing is all about buying something, in this case a share ownership in a company, for more money in the future. That involves risk that the company will bankrupt or that it will not grow fast enough to meet your goals. Fortunately, when you know how much money you need to reach your goals, you can tailor your investments to take more or less risk. If you just need a modest and reliable return, then you can invest in companies that should grow fairly steadily like General Electric (GE) or Coca Cola (KO). Companies like these have been around for more than a century and will probably be around for another 100 years. If you need a higher return, and can bear the risk, then you may need to invest in faster growing companies like Facebook (FB). Don’t think that you will need to figure this all out on your own. The next post covers risk and how much you will need to take.
You’ll never meet your goals if you constantly withdraw money from investments. Besides money for everyday expenses, it is also smart to keep some aside for emergencies. Most people try keeping at least three months’ worth of expenses in a savings account to pay for life’s little roadblocks. If this seems impossible, start with a month’s worth of expenses and add to it a little each month. The important point is to not touch your investment account. Trust me; you’ll thank me for it when you are sipping pina coladas in retirement on some island beach!
What to do with debt is another question I get frequently. You should try to reduce the amount you owe on credit cards and other debt but I have seen too many people put off investing indefinitely because they never get their debt down to where they want it. A good rule is to pay off the debt that charges interest rates above 10% and make payments on other debt while you begin your investing plan. This will help ensure that you use your money wisely now and still meet your long-term goals.
In investing, it’s better to be the tortoise than the hare
That’s a lot to think about for one post. Do not worry about getting everything neatly laid out all at once. We will cover everything in detail in future posts. Think about the points above and get a good idea of what you need to go forward. Put together a quick budget to understand where your money is going on a monthly basis. If you’re like me, you will be surprised at what you see.
Planning for your financial future can be fun. Make achievable goals but ones that you can look forward to reaching. Whether you invest for a vacation getaway or for the retirement you deserve, understanding where you are going makes getting there all the easier.