You probably know you need to save for your future. Hopefully you even have a goal in mind. If your new year’s resolution has you putting your finances in order, here are some pointers to help you get started with saving and investing.
Solidify your strategy
Regardless of whether you’re a seasoned investor with a complex portfolio or have never owned stock, you should have a long-term strategy to guide you. It all starts with what you want to accomplish. Successful saving requires sacrifice and careful management, and knowing your goal will help keep you motivated. Are you saving for college? Financing an early retirement? Working toward a big-ticket purchase, such as a vacation home, boat, or sports car? Take the time to dream big, and then start putting some numbers on paper. Once you know the target you’re trying to hit, you can determine your action steps.
We strongly recommend putting your goals in writing. You can always adjust them as needed over time, and your priorities may even shift. Starting out with a clearly documented set of goals is a simple and well-recognized tool to support your success. We’ve created a downloadable worksheet to help you articulate your dreams, visions, and goals. Click here to get your free download.
Create a savings habit
When you set your goals, did you also set a date to accomplish them? Some goals, such as a child’s college education, have a fixed deadline. Others, such as saving for retirement or making a lifestyle change, tend to be more nebulous. How will you know the right time to pull the trigger? There’s no hard and fast rule for these types of highly personal decisions, but your savings habits will play a key role.
There are two common rules of thumb that you’ve probably heard when it comes to saving:
1. Start early.
The earlier you start, the more time you have to take advantage of compounding interest and positive stock returns. If you’re saving for retirement in a tax-advantaged plan, then you’re also facing contribution limits each year. But what if you’re past the time to start early? Although you’ve missed some opportunities, don’t wait any longer to take the first step toward your goals. It’s never too late to establish a savings habit. If you have children or grandchildren, take the opportunity to teach them about the value of starting early.
2. Pay yourself first.
A successful savings plan is a mission-critical element of your monthly budget. Many people will make the decision to save a set amount each month, but over time that amount is diminished because they’ve used the money to cover other expenses. Psychologically, it’s enormously beneficial to move your money into savings as soon as you receive it, or even automate your savings so that it never hits your spending account.
Invest your savings
Once you’ve established your savings habit, put your money to work! You don’t need to wait until you’ve amassed a set amount of money to get started. Dollar-cost averaging is a strategy many beginning investors find is a helpful complement to a consistent savings habit. In brief, it means investing the same amount of money each month, regardless of external market factors. When prices are low, you purchase more shares; as prices rise, you still invest but purchase fewer shares with your set investment amount. For example, say you commit to investing $500 per month. Here’s how that would play out over time:
In this simplified example, you’re holding 140 shares of stock at the end of six months, and you’ve paid an average of a little over $20 per share, for shares that are now worth $50 each. Of course, there’s no guarantee you’ll earn a profit with this strategy, but you’ve now disciplined yourself to purchase stocks without letting emotion drive your decisions. That mindset is commonly cited as a long-term success factor for investing.
Intimidated by the stock market?
In our simplified example above, we took market performance out of the equation in order to illustrate the technique. In reality, there can be a lot of nuance involved in selecting stocks. If you’ve never invested and are naturally risk-averse, buying stocks can feel incredibly overwhelming. There’s a lot of information online you can use to educate yourself about the market, but many people are scared off because they don’t know where to jump in.
Building a model portfolio is a simple exercise to help you get your feet wet, and you may even have some fun in the process. We like yahoo!finance’s My Portfolio tool for building sample portfolios and monitoring progress over time (you can also monitor your real portfolio when you get to that point). Most brokerage houses offer similar services. If you have children or grandchildren, encourage them to create model portfolios as well—this is a wonderful way to introduce children to investing concepts and even create a little family competition.
London Wants to be a Savvy Investor
For more about saving, investing, and instilling healthy habits in the next generation, check out our video, London Wants to be Financially Savvy. We’ve also created a worksheet that will help you calculate your net worth, which is an important piece of understanding your financial picture and planning for your future. Click here to access your free download.
There are lots of tools and resources to support your savings journey, but it’s up to you to take the first step. Do you need help? Contact us to ask questions and schedule an initial consultation.