You can be your own best friend to your future self. Honestly, there is no better thing you can do than invest in yourself. Your future self NEEDS you.
All this means is a small increase in intentional savings. However, HOW you save is incredibly significant. You will need gobs and gobs of cash when you retire, especially if you plan to travel or vacation in tropical paradises. And…it won’t cost you much this year (I am talking to your pre-older self).
So, WHAT investment vehicle, HOW MUCH, and WHERE?
1. WHAT VEHICLE? You need a financial way to get where you are going.
IF you are working at a company that matches your investment…this is a no-brainer. YES. IMMEDIATELY. Sign up to have them take part of your paycheck for that 401k or SIMPLE or SEP or any other plan that allows you to invest $100 and they kick in an additional $10, $25, $50, or $100. BOOM! Your investment has already grown!
IF you don’t have a company matching plan, invest in your own IRA…this is also a no-brainer. YES. IMMEDIATELY. Set up a ROTH IRA. You pay tax only on your investments. You will never pay tax (under current law) on the growth of your investments (which can be GI-normous). Although you must wait until you are at least 59 ½ to take any funds out, there is never any requirement to take any funds out starting at 70 and the IRA is inheritable by a spouse (and children).
2. HOW MUCH? This all depends on your goals.
At a modest 5% growth (unless you invest stupidly you should be able to earn at least 5%), a $100 investment will double in value every 14.4 years. After 40 years your $100 would become ~ $700. Factor into this that inflation averages 3.2% annually (not counting the most recent presidency). At 5% growth per year your spending value is still twice the original investment. This is why seeking better than 5% return is recommended. The greater the average growth rate, the more spending power you have at the other end.
So, once you know how much spending power you need at the end, and the quality (ability to consistently return profits) of your investments, you should be able to determine how much to invest. Hint: It will be more than $100 per year.
Forget much of what the “experts” tell you. First, you do not need a “balanced portfolio,” you NEED a portfolio in which every dollar invested returns CONSISTENTLY HIGH RETURN (5%, 7%, 10%, or more). “Balance” assumes you are investing for less than 10 years. You are investing for your FUTURE SELF (30…40…50 years from now). When you get much closer to retirement you can begin to think about “balance” to preserve your savings. Second, while it is true that you should not put all your eggs in one basket or even in similar baskets, you do NOT need to invest in bond funds, money market funds, or 3rd world funds IF those do not render consistently good profits. For now, stay away from anything that is likely to produce less than 3.5% profit. Third, you should follow the advice of “experts” when they say to avoid risky investments. Stay miles away from individual “get rich” stocks, penny stocks, and/or day trading as those are all “LOSE MONEY FAST” schemes. You need a tortoise vs. a hare method of growth.
How much did you invest last year? Increase it this year. If you haven’t begun to invest, then start with a modest monthly amount (like $100-250) until you get the feel of how it works…then increase where able. Several couples I know have decided to use “extra” money to boost their monthly investments. They take their tax return, money gifts, and overtime pay to increase their savings.
Final word: START by investing in your 6-month older self. You MUST have an emergency fund before you invest in your retired self. Figure the amount you earn in 3 months, subtract how much you are contributing to an IRA, and subtract the taxes you pay (roughly 25% ). The remainder is the amount you should save in an emergency fund. Why? Well…businesses lay off or fire people, the roof may need to be replaced, the furnace may die, a small accident may take away the use of a vehicle for a month or more. If any of those happen, you will have money to pay the mortgage, rent a car, replace the roof, etc. You will survive while your neighbor is eating two meals of rice and beans per week and turning down the thermostat to 55 degrees.
3. WHERE SHOULD ONE INVEST? This is perhaps a “DUH!” question??
Well, it really does not matter. You should spread risk by investing in several stock mutual funds. You can even invest in REITs, Precious metals, or Sector funds. The only thing that really matters is the long-term CONSISTENCY of returns. If you have studied the “Buggy Whip” sector and believe buggy whip companies will be selling MORE whips at much higher profits in 5-20 years…then invest. But hardly any individual business that is doing well TODAY will be as profitable 40 years from now. Every individual investment product will balloon and fade. We have seen this with Bitcoin, computer software companies, transportation, real estate, etc. So, from time to time (every couple years) you will need to re-evaluate investments. Don’t be afraid to sell something that has increased in value (ballooned). Almost never sell something that has recently lost value (although if it has continued to lose value over a long time, like 6 months, perhaps you should sell some and put it where it will stop the red numbers).
The future you needs a friend. You can be that friend.
Copyright 2023 Donald Whelpley
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