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Getting Started - Now is a Good Time!

OK, so you have come to the conclusion that you have to take control of your financial life and you are ready to do it. Now is as good a time as any and this will be easier than you think.

Step 1. Forget about the Past*

* Past performance is not a guarantee of future results.

Whatever happened in the past, bad investments, failure to save, stock market crashes or mountains of debt, aren’t going to help you to feel good about yourself.  So, say goodbye and think about this as a fresh new start.  If you have had some past successes, congratulate yourself and think about this as stretching for new heights.  If you’ve had some ups and downs, congratulate yourself for getting started and consider the lumps to have been a valuable lesson.

Step 2 – Create a Financial Plan

OK, I know that I’m about to lose some of you right here.  Don’t panic! Creating a financial plan is way easier than you may think.  For those who are “financially-challenged” I will provide a template:

  1. Save 10% of your Net Income. (Yes, you can do this.)
  2. Pay 20% Toward Reducing your Debt. (You can do this too.)
  3. Live Well on 70% of your Net Income.  (Of course, you can.)

Note: If you don’t like my financial plan, please feel free to create your own.  Just make sure that it doesn’t include winning the lottery or refinancing your house to buy an H2. Be realistic with your self.  If you make a lot more money than you used to and you still can’t afford to save 10%, then you should to consider modest lifestyle changes. If your debt is so severe that you can’t pay it down with 20%, then you need to stop accumulating debt immediately.  If you don’t think that it is acceptable to live on 70% of your income, then try to visualize living on 30% in your retirement.

Step 3 – Make Investment Goals

Once again, this is pretty easy.  But, everybody’s situation is different. For most people, who are just starting out, here are a couple of goals that I used in my planning:

  • Retirement (At least 50% of your savings)
  • Purchase a House (Your best investment)
  • Emergency / Rainy Day Fund
  • College Funds for your Children
  • Accumulate Wealth

Notes: If you are getting up there in age and you haven’t properly funded your retirement, skip the rest of the goals and put 100% away toward retirement. Don’t try to support your adult children, in college or otherwise, if you aren’t prepared for retirement.  I know this sounds cruel.  But, your children can always take out student loans and they will have decades of income to pay them off.  You, on the other hand, may only have a few years left to get prepared.  Trust me. Your children will understand, as long as they don’t have to help support you in retirement.

Step 4 – Start Investing Now

If you are new to investing and you have no idea where to start, here are some great ideas:

Retirement – Do you have a company-sponsored 401K plan ? Take advantage of the immediate tax savings of a 401K.  If your company matches your contributions, then you are truly lucky.  I strongly recommend investing to the maximum of the matching.  Matching funds are free, tax-deferred money. It doesn’t get any better.  If your company doesn’t offer a retirement plan or you are self-employed, consider starting an IRA (Individual Retirement Account).

The bottom line for retirement planning is that you need to save a substantial amount of money to support yourself.  Start as soon as possible and save as much as possible. Never take the money out of retirement accounts, unless absolutely necessary.  Not only will you be taxed and penalized, but you will lose all of the potential future income from that investment.  The small amount of money you pocket now, after taxes and penalties, could be worth a lot of future money in retirement.

This is an extremely simplified conversation on retirement planning.  Whole books have been written on this subject and you should consider reading a few if you are confused or unsure of what to do.  This is your future, take it seriously.  I will elaborate more on this subject in future posts.

Mutual Funds – If you are new to investing, I recommend considering a good no-load mutual fund.  This is a great first investment for most people. It’s about as simple and convenient as a bank account, almost anyone can afford to invest in them and you can track their progress on a daily basis. On top of all that, you can choose the type of account that meets your investment objectives. Once again, this is a very complex subject. I will fill in the details in a future post.

 Step 5 – Track your Progress

Now that all of the hard work has been done, don’t go to sleep on your investments.  You will need to review your investments carefully at least once a year. Here is what you need to watch for:

  • Make sure that your investments are performing well.
  • Make sure that your investments haven’t changed on you.
  • Make sure that your investments still match your goals.
  • Make sure that you are saving enough to meet your goals.

Notes: Be very wary if your mutual fund dramatically underperforms the market, changes it’s investment objectives, consolidates with other mutual funds, is under SEC review or changes it’s fund manager.  These are all good signs that you should be finding a new fund.

Well, that’s about all there is to it.  Just kidding!!! It takes a lot of time and energy to invest wisely and obtain consistent results.  But, it’s well worth it. If you think that it’s too much of a headache, just consider the alternative.

Start simple. Start small.  Then, work your way up from there.

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