Investing is often a stressful, emotional, and confusing topic to most. This is a topic that isn’t taught in school, but we are expected to know how much to save, where to save it, and select from a long list of funds to secure our future. I want to help bring a little clarity to this area so you may feel a little more confident the next time you are looking at your investment options (or talking to your friends).
Let me start out with a quote from Warren Buffett, one of the great investing minds of our time:
“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”
Step 1: How much to save
There aren’t any guarantees when it comes to investing, but I can promise you if you don’t save any of your income, you will not have any money to retire on. When you first start out investing, the most important aspect is your savings rate.
An absolute minimum rate to save when starting out is to make sure you are getting 100% of your employer’s retirement account match. Generally speaking, when you save to your 401(k) or other company sponsored retirement plan, your employer will match the amount you save. Most employers will match your first 3% of contributions, which means if you save 3% then your savings rate is already at 6% (doubling your money right away).
When starting out, make it a goal to increase your savings rate to your retirement account by 1% every six months. This will help smooth out any budgeting adjustments you need to make, as your take-home pay will be ever so slightly less. In just a few short years, you will see your savings rate reach upwards of 10-15%!
Max out your retirement accounts as quickly as possible. This amount varies depending on what type of retirement account your employer offers, but continue to increase your savings rate until you reach this goal. Not only will you be increasing the amount you are saving for your future, but you will also be reducing your taxes quite dramatically.
Step 2: Prioritize your savings
Let me start by saying this list may be different for everyone. I am going to assume that your primary goal is saving for retirement. For someone who’s primary goal is to start their own business or invest in real estate, your order may be entirely different. Financial goal setting is a great conversation to have with your financial planner.
401(k) or other company sponsored retirement plan, up to the employer match.
IRA or Roth IRA, up to the maximum contribution (if eligible).
Health Savings Account (HSA), which can be used as a supplemental retirement account (if eligible).
401(k) or other company sponsored retirement plan, up to the maximum contribution.
Other company sponsored investment account (like a discounted stock purchase plan).
The reason I suggest moving your savings to your IRA or Roth IRA before completely maxing out your 401(k) account is due to fees and investment options. Generally speaking, 401(k) and other company sponsored plans have high fees both inside the funds available and for administration of the plan. Your IRA allows you to select from a world of low-cost index funds with minimal account fees! Again, speaking with your financial planner will help you determine which contribution order is best for you.
Step 3: Automate your savings
The next important step is automating the amount you are saving. This helps avoid any emotional decisions on how much and when to invest (timing the market).
With your retirement account at work, this is done for you, as the amount you elect to save goes directly from your paycheck to your retirement account. If you are also saving to an IRA or taxable investment account, be sure to automate this process as well. Setup an automatic transfer from your checking account to your other investment accounts. After you have automatically transferred the funds into your account, you can setup an automatic purchase of the funds in your account on a monthly basis.
Step 4: Stick with the program
Investing can be an emotional rollercoaster. A critical aspect of reaching your retirement goals is riding the ups and downs of the market. Remember, if you are in your 20’s and just starting out, if you live into your 90’s, you have up to 70 years of investing ahead of you! Historically, the market has gone up, but there will always be short term fluctuations that can cause stress. Just remember to focus on your long-term goals and understand that your high savings rate is what will get you through the tough times.
If you are in retirement, you are a long-term investor too! Be sure to have a plan and stick to it during down markets. Remember that you may have another 20 to 30 years of retirement, which means you want to make sure you stay invested and have your money grow even while you rely on your portfolio for income.
Get to Work!
You can do this. I mean it.
By determining your initial savings rate, increasing the amount you save, prioritizing and automating your savings, and sticking with the program - you will be far better off than the majority of your peers. This is the foundation of any great savings plan and takes minimal effort once you have everything put together.
Of course, there are always going to be “sexier” or “more interesting” ways to invest, but this is all you need. Investing isn’t a game, it is your future - don’t mess around.
Keep your goals in front of you and focus on what’s most important to you in life. You’ll be better for it in the end.