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Your Simple Financial Plan, Part 6- Save First, Invest Next

December 10, 2013

Let’s face it. We all must learn to save before we can invest. Just like a child who needs to learn to walk before he can run.Green tree with dollars leaf on grunge background

If you don’t know how much you’re saving today, it’s time to figure it out. It’s also time to set a target and make it happen. Ten, twenty or thirty years from now, your future self will be happy you did.

Aim To Save 10% Or More

In the past, many financial experts have suggested we save 10% of our income, throughout our working life, for retirement. If you don’t belong to a pension plan, you should strive for more- ideally 15-20%. Sounds like a lot but do it if you can. It’s much easier to save more today and adjust downwards rather than save too little and be forced to adjust upwards. If you make it easy for yourself to save, you will be far more successful. An automatic transfer to your savings account on pay day is a great strategy.  But, this savings account should be untouchable- earmarked for long term investing. Accumulating money in a savings account is a “must do” first step. The next step is to put your savings to work by investing in assets that will grow in value and/or pay you income.

A strategy I have used for years is to save a higher rate of “windfall” money.  Like birthday money, year end bonuses, company stock options, even annual raises or any other money that comes to you unexpectedly. It’s easier to save this money because you never got used to having it in the first place!

Think about how hard you work for your employer; endless hours, projects, meetings and reports. Wouldn’t it be nice if your savings worked as hard as you do? With typical bank accounts paying less than 1% interest per year, you’re not even keeping up with inflation. That’s where investing comes in.

Habits and Discipline are Keys To Success

What strategies do you use when you want to lose weight, exercise more or eat healthier? Let me guess. The easier you make it for yourself, the more likely you are to be successful.  Finding the discipline to make it a habit is half the battle. Once the new behaviour becomes ingrained and a part of normal life, our goals are much more achievable.

It’s easy to feel investing is difficult and complicated. Listening to financial news can make your head spin. But, being a successful investor is all about mastering the basics and taking control of your behaviour. You don’t need a PhD or high IQ to be a great investor. Here are a few reminders to get you started and boost your investing confidence.

Investing Basics

Have a strategy & diversify- Whether you have a little or a lot to invest, you still need a strategy. As you save and invest more, you need to target where your money should go. Spread your money out among different asset classes, geographies and industries. This will help to minimize volatility during tough economic times.

Know your risk tolerance-  If your investments keep you awake at night, you are not invested wisely. Complete this risk profile quiz to identify your appetite for risk and help you understand which investments are right for you. Remember that risk and reward usually move together. If you manage your risks well, you should expect a reasonable return.

DIY vs Advisor vs Both-  One size does not fit all. Take a hard look at yourself to know what’s best for you. If you don’t have the knowledge, interest or time to devote to investing, it is smart to find a trusted advisor. I do both- partly because I love to invest and consider it a hobby. But I also recognize that I want expert advice or a second opinion to help me stay on track with my overall strategy.

Investing Behaviour

Stay invested throughout market cycles-  Studies show that investors who stay when markets decline earn more than those who sell and reinvest when conditions improve. This strategy is also far simpler to adopt and reduces the need to constantly monitor market conditions.

Watch fees- Mutual funds or other financial products with annual fees of 2% or more make it very difficult to achieve reasonable returns. Consider lower cost products such as ETF’s (exchange traded funds) or purchasing individual stocks or bonds that you can hold for years.

Minimize trading-  A good “buy and hold” strategy can easily outperform that of a frequent trader. That’s what Warren Buffet does. Unless you are trading for sport or interest, you can’t go wrong in the long run by choosing strong, profitable, well managed companies in timeless businesses at reasonable prices.

Want to learn more about successful investing? Visit two of my favourite web sites; Get Smarter About Money or Globe Investor. Investing is really not that hard. Practice a bit (using an on-line practice account) or start small. You might find you actually like it!

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One Comment
  1. Good read. All the information are top-notch and real time. Everyone must also learn to save on investment funds, that will be beneficial for their future financial plans.

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