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I don’t know about you, but just the idea of investing completely intimidates me. It just seems so complicated, so out of reach, so scary…..like one of those things you are supposed to understand, but too embarrassed to ask anyone about. Oh sure, many of us “invest” when the opportunity presents itself—opening a 401(k) when our company offers us one, maybe purchasing a life insurance policy or inheriting some money invested in mutual funds. But then, if you are anything like me, we conveniently forget to think about it.
Of course, deep down, there’s this nagging feeling, isn’t there? This idea that we SHOULD understand investing clearly, and we COULD be making our money work for us.
Part of finding financial peace is about getting control of your finances and your debt, then making progress by starting to save money. Understanding finances and basic investing concepts can also be part of that journey.
There’s nothing worse than feeling like we don’t have a handle or understanding on something, particularly when it comes to money. It can be uncomfortable, even embarrassing to admit lack of knowledge about something we use on a daily basis, but it is important to refuse to let yourself be intimidated. After all–you are certainly not alone! The good news is that you don’t have to become an expert. However, gaining a basic understanding of the difference between a mutual fund, a stock, a bond, an IRA or a 401(k) is a good thing. It will only serve to enrich you as a person and to help you feel more in control.
Investing: Starting Out on the Right Foot
One of the hardest parts of investing is being in the right place to do so. Before you start to think about investing, it is important to make sure you’re completely out of debt. Yes, I know that’s hard to stomach. But think about it—if you’re only earning 3% on your investments, but you’re paying 6% interest on your debts, you aren’t doing yourself any favors. (For more advice on paying down debt, check out our Debt Free Living section!)
Of course we often hear these amazing statistics about how if a person starts investing at age 25 they’ll be ready to retire with millions at 65, whereas someone starting in their 40s may not retire until 70 and still have to live on a meager income. Unfortunately, this is true—investing at a younger age will yield a much higher and better outcome. You’re getting your money to work for you right away and you’re earning interest so you can take larger risks.
We all want to be that person. Realistically, though, most of us have taken a few steps on our journey that may have lead us down the wrong financial path for a while. Perhaps you still have major student loan debt that you and your spouse are trying to pay off. Maybe you have credit card debts and car payments—and maybe you frittered away money in your twenties like it grew on trees….but that doesn’t mean it is too late!
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Hopefully by now you’ve learned a few things and you’re starting to get on the right track. If you’re still new to this “living well on a budget” thing and you’re looking for ways to get started with your finances, check out Living Well Spending Less, 12 Secrets of the Good Life or our 31 Days of Living Well & Spending Zero .
Several years ago, my husband and I attended the life-changing Financial Peace University through our church, and it really helped us get started down a better path to financial stability. In both FPU and his book, The Total Money Makeover, Dave Ramsey outlines several steps to achieving financial peace. The FIRST step is to immediately save a $1,000 emergency fund, the second is to get out of debt, and the third is to establish a larger emergency savings fund of 3 to 6 months of income.
It sounds daunting, but there are many ways you can get there. It’s a huge lifestyle change and growth experience for many of us. My husband and I are still on our journey, but it’s amazing how fast things start to come together with a little faith, prayer, dedication and reframing of your thoughts.
But once you have the first three steps covered…where do you go next?
Priority One: Retirement Planning
Before you start going for the real-estate market or start living out your philanthropic dreams, it’s important to consider your retirement. Many employers offer a 401(k) (or 403(b) if you work for a nonprofit) match or contribution. If you’re lucky enough to have such an offer—take it! These are pre-tax contributions to your retirement and your employer’s matching contribution allows you to grow your fund twice as fast!
Once you’re investing the maximum percent your employer will match, consider investing an additional 10 to 15% of your income in a traditional IRA or a Roth IRA. A traditional IRA offers a tax-free investment vehicle for your retirement. A Roth IRA offers you tax-free withdrawal upon retirement. Both have penalties (and taxes) should you choose to withdraw your money early, so it’s not recommended unless you are facing very dire circumstances.
There are a wide array of options as to “how” to invest your retirement funds. Mutual funds are typically the safest and most practical option. There are different packages that can help manage risk of investment, but the variety can get quite confusing. Work with a financial advisor (first check out this list of Dave Ramsey’s Endorsed Local Providers) to help you navigate the numerous options available.
Some investment funds offer a regular rate of growth and some are more aggressive. There are people who work very hard calculating risk factors and setting up fund packages so that they are balanced and safe. If you have a low risk tolerance because you’re getting closer to retirement and you might not have time to recover from a loss, then you’ll want to go with less aggressive funds.
Moving your invested funds around too often or too quickly is one of the biggest ways to lose money when investing. Anyone who watches the news knows the market can go way up and way down based on the latest news story, weather crisis or other outside factors. Panicking and moving money around causes investors to lose big dollars. Be wise and trust your financial advisors—they’re paid to steer you in the right direction. Plus, they do well if you do well, so they have a vested interest in your success.
You should have some form of life insurance as well. Find something with a 15-year term and a benefit of 8 to 10 times your annual income. This protects your loved ones and provides for your spouse and children in the case of an untimely death. Whole or Universal Life are “cash value” permanent policies, meaning you have the option of borrowing against them. That said, the premiums are often astronomically high. So for most people they’re not a good option, especially compared to term policies.
Priority Two: Save for College
In my What Every Mom Needs to Know about Paying for College post, I recommend you first ensure you are in a good financial place before starting to save for your child’s college education. (Think of it as securing your own oxygen mask before helping others)
Once you’ve ensured your future is secure, you’re living debt free, and your retirement money is well invested, starting a savings vehicle for your kids’ college can be a great idea. Look into an ESP (Educational Savings Plan), or if you have a larger amount to invest, try a 529 plan. Both of these vehicles are set up specifically to help parents save for their children.
Priority Three: Secure Your Future
So, once ALL of your steps are completed: you’ve paid off your debt, you’ve got a nice savings put away for emergencies, you’re contributing a healthy amount to retirement, and your children are ready for college…well, first, have a glass of wine and pat yourself on the back! This is an amazing place to be!
If you’re ready to invest, I highly recommend that you meet with a financial advisor to discuss your options. A good advisor will spend time getting to know you and your spouse in order to assess your comfort level with risk. In our assessment, for example, my husband and I discovered that while I am very comfortable with risk (more of an entrepreneur mindset) my husband doesn’t like risk at all. Our advisor very wisely helped us come up with a plan that took both those preferences into account.
As a general rule, the safest and most practical option is in mutual funds, but there are lots of are other savings vehicles and options including bonds, CDs, single stocks and annuities. Once you’re safely and comfortable invested, real estate can be a good option as well.
Financial Freedom Means Choices
The joy of financial freedom is that you have options as you continue to grow your wealth, provide for your family, and give back to others. Imagine the wonderful feeling of using your financial solvency to help those in need, leave a legacy behind, or make a difference in your community! It’s all within your grasp once you have control over your finances, and you’re committed to living within your means, no matter what your income. Good luck on your journey!