Managing and investing your money does not have to be complicated. You don’t need to know any special jargon. You don’t need an advanced degree. You don’t even need to pay close attention to you investments. Here are the three simple tips anyone can put into practice to improve your financial well-being.
Tip #1: Invest Like You Mean It
Do you want to accumulate goods or wealth? You could spend all of your free cash and buy the latest fashions, going to fancy salons, pricey gyms, buy the latest technology, or even buy shoes in every imaginable color. Joshua Mueller of Lakewood, Washington amassed the largest collection on Converse All-Star shoes. Mr. Meuller accumulated 1,546 pairs of Converse All-Star sneaked and get himself listed in the Guinness Book of Records. You could become the envy of all your friends. Alternatively, you could carve off a considerable portion of your paycheck, invest it, and be able to retire comfortably.
Ideally you would invest at least 15% of your gross pay each and every time you get paid. Yes, 15% is a significant chunk of change. Why invest for something that seems so far away, why not live for today and start saving for retirement later on when you have more disposable income? Two reasons: no one is going to be saving for retirement for you; the earlier you start, the more money you will have. Yes, 15% is a big chunk, but if you use payroll deductions, your investments will be automatic.
This investment can be invisible to you; you could have your employer withhold a portion of your salary and invest it in your company’s 401(k) plan. As a byproduct, you may also see a reduction in your taxes too as investments in traditional 401(k) accounts as pretax contributions which lowers your taxable income.
If you are lucky, your employer will match a portion of your investment providing you with free money; essentially a raise. Most employers match 4% – 6% of your 401(k) investment. So if you earn $60,000 per year and you invest 15%, you would invest $9,000 in your 401(k). If you employer matches the first 6% of your 401(k) contribution, dollar-for-dollar, you would be getting an additional $3,600. Free money, you wouldn’t turn down a free $3,600 every year, would you?
Consider yourself lucky if your employer offers a 401(k) match. They are giving you free money, but many employers provide this benefit. Fewer employers offer Roth 401(k) accounts. If your employer does, then you are really fortunate. Roth accounts, both 401(k) and Individual Retirement Accounts, provide investment growth without capital gains tax. Your money is invested using post-tax dollars, so you don’t get the reduced withholding tax advantage that a traditional 401(k) plan provides, but the money will not be taxed when you start withdrawing it later in life. This can make the Roth account huge advantage over a traditional account.
The early bird…
Here’s the best advice anyone can get: Start investing as early as possible. The earlier you start investing, the more time your money will have to compound.
Smart Sally started investing at 25. She invested just $100 every single month for the next 10 years. She stopped investing that monthly $100 when she turned 35 and did nothing else with that money; she simply allowed her money to compound until she retired.
Instead of investing early, Dumb Dan squandered his spare cash on non-essentials. He waited until he reached his 35th birthday before he started to invest. Like Smart Sally, he invested $100 every month for the next 30 years.
How to Make $50,000 more…
When both Smart Sally and Dumb Dan reached their 65th birthday, who do you think had more money? Smart Sally who invested only $12,000 in total in her late 20’s and early 30’s and then stopped adding any more money or Dumb Dan who didn’t start investing until he was 35, but then diligently $100 every month and saved up a total of $36,000. So who do you think had more money on their 65th birthday? Sally had more money. Why? Because her money had more time to compound. And Sally’s investments grew a lot more than Dan’s investments had. By the time they reached retirement age, Sally had amassed over $50,000 more many than Dan had accumulated! All because of the magic of compounding. By starting early, Sally’s investments snowballed; the interest (gains) that accrues to an amount of money in turn accrues interest itself.
If you aren’t going to closely monitor your investments, I would strongly suggest a passive investment portfolio consisting of a small handful of index funds. Investing in passively managed index funds may be a boring, but they outperform 80% of actively managed funds. You don’t need a lot of money to get started either; you can start investing with as little as $100.
So tip #1 is your investing tip. Invest as much as you can; strive for 15%. If your employer offers a match, at the very least, invest enough to secure the match, and if your employer has a Roth 401(k), take advantage of that opportunity. And most importantly, start investing as early as you possibly can.
Tip #2: Plan for the Unplanned…
Tip #3: Eliminate That 4-letter Word…
No, not that four-letter word. We’re talking about debt. Debt, especially credit card debt is one of the largest issues that most consumer face today. The average US household credit card debt stands at $15,706, counting only those households carrying debt. Based on an analysis of Federal Reserve statistics and other government data, the average household owes $7,327 on their cards.
There are other types of debt: mortgage, car loans, student loans, etc., but credit card debt it likely the biggest issue for most Americans. You need to live somewhere, so a mortgage is considered good debt. Car loans and student loans are questionable debt. While you need a car, do you really need a new $40,000 car? Probably not. You could sell that car, pay off that car loan and bu ya late model high-quality car, like a Honda Accord or a Toyota Camry. Some people consider student loans acceptable debt because your education is valuable, however unless your degree is in a technology subject (i.e. engineering, computer science), I suspect that you aren’t getting enough bang for your buck. Tech degrees result in high-paying jobs; many other degrees don’t. If you are a parent and your kids are about to enter college, you might want to consider sending them to a less expensive state school rather than having them take out loans for their education. It might sound odd, but I think it’s more important to take care of your own future rather than take care of your children’s education. Invest in yourself. Invest for your future.
Invest your money. Get out of debt. It might seem like a tug-of-war; two competing, opposing tasks. Handling both might be easier than you think. You actually can (and should) do both. You want to get out of debt, but you also want to start investing as early as possible to maximize decades of compounding.
Use a portion of your available funds to pay down your debt and the remaining portion to invest for the future. You should try to get out of debt, but your debt load may be overwhelming. One solution is to make minimum payments on all of your outstanding debts except for the debt that has the highest rate of interest. Pay as much as you can on that debt, likely your credit card, and try to pay it off as quickly as you can. Once that debt has been completely paid off, continue the process; move on to the debt with the next highest interest rate and pay as much as you can on that debt while making minimum payments on all of your other debts. Eventually, you will (hopefully) be debt free/ Once you are debt free, you can focus all of your available cash on investing.
Three Easy Tips…
There you have it; three simple tips which anyone can do: invest as much as you can; set aside an emergency fund; pay down debt.
It’s really that simple. Invest as much money as you can; ideally 15% or more of your gross wages. Keep an emergency reserve fund to cover 3-6 months’ worth of your expenses. Eliminate debt, especially credit card debt.