So you've finally finished paying off all your debt. After celebrating that for a bit, you now need to figure out how you're going to start seriously saving for the future and not just for the here and now.
Because, as we all know, it’s not just about living debt free, but achieving some level of financial independence for ourselves. And that involves more than just continuing to budget and live carefully.
It involves some sort of investing to help our money grow.
Let me start by saying that I’m no investment expert, and I don't claim to be. But I do know what’s worked for us over the past couple of decades.
Most of us will accumulate wealth only after years of steady, consistent, and disciplined financial practices.
Which is not to say that we haven't made our fair share of mistakes along the way. Like many people, we’ve tried some investment schemes that promised instant, high returns. And we've lost money and been humbled in the process. So I recommend leaving the complicated schemes and investing strategies to the experts.
A good rule of thumb to follow is if it’s too complicated for you to understand it, or if the returns sound too good to be true, then avoid it as a place to put any money you can't afford to lose.
In truth, the good fortune of steady employment or income, combined with frugal living habits, and steady savings and investment will help you build your nest egg far more surely than a big salary or any supposed get-rich-quick strategy will.
So, here are my thoughts on on some steps you can take to get yourself started.
I put into this category any kind of money that you could possibly need within the next 5 years. That would include an emergency fund for unforeseen needs - which you should actually make a savings priority even as you're paying down debt - and any additional savings goals that you’ve set for yourself within that time frame, such as the purchase of a replacement car, or the down payment on a home.
The best way to accumulate these savings is by having the money automatically deposited to your savings account from your paycheck, or banking the same amount of money each week or month yourself if you don’t have direct savings plans at your workplace.
You may wonder how you’re going to incorporate that saving and banking routine into your life, so here’s my suggestion:
If you've just finished paying off debt, simply keep making the same dollar amount debt repayments, but write the check to yourself instead of to the company you previously owed money.
Then just deposit the check into your savings account.
That’s essentially a transfer from your checking into your savings account, and writing the check is simply a way to make it part of your bill paying routine. Or, if you do on-line banking, simply make the transfer directly from your checking to your savings when you pay your bills each month.
Or you can use any one of the many apps that are now available that allow you to automatically make deposits.
How Much to Save Short Term
Now, there are many opinions on how much money you should save in an emergency fund, but I think a sensible goal is to put aside 4-6 months of living expenses.
This is money that you can tap into for unexpected expenses, or an unexpected period of unemployment, and it should be in an account that is safe and easily accessible.
Where to Put Short-Term Savings
When it comes to that, from a practical point of view, the emergency fund and short-term savings fund will likely be in the same account, a safe, conservative one that you can tap into at any time without penalty.
That pretty much means a traditional bank savings account and its pathetically low-interest rates. You really have little choice.
By all means shop around on their websites to see which banks offer the best rates and lowest fees, but I personally recommend sticking with brick and mortar banks rather than on-line ones. The on-line banks might have higher rates, but they cannot offer the convenience of immediate access to your money on the same day you need it.
Most brick and mortar stores now also offer hours on weekends and evenings, so it's much easier than it used to be. The on-line ones can sometimes take a few days to get your money, and that can be a problem if you need it right away.
For any other longer term savings, it makes no sense to keep it in such low-interest accounts, since they lose their safety edge over time to the effects of inflation. In fact, you end up losing money when you need to grow it instead.
You need to invest your savings to get the kind of gains that will grow your money for you. And the stock market is the obvious choice for investing since it allows even small investors to participate and gives you the greatest chances of accumulating enough money to achieve any measure of financial security.
But it can be a real roller coaster in terms of investment returns, with many ups and downs. Which is precisely why you don't invest money that you need any time soon. That way your funds have a chance to bounce back after one of the inevitable market downturns.
Different Investment Management Options
Of course there are people and companies out there who want to help you manage your money who claim to make it easier for you to handle the bumps in the investment road and invest your money --- for a fee.
I advise avoiding these extra costs and the firms that charge them. Some of them are very high commission brokerage houses and investment advisors that simply are not worth the money they charge AT.ALL.
Those would be such companies as Merrill Lynch, Morgan Stanley, etc. whose fees for their advice and handling of your money can really eat into any gains your money might make in the market.
And there are also some newcomers to the investment adviser scene, called Robo Advisers.
Betterment, WiseBanyan, and Wealthfront are in this category of relatively new phenomena on the investment scene. They aim to replace high-fee investment advisors by offering the same services for a smaller fee.
In essence, for that fee, they will move your money around and customize your accounts in a wide range of mutual funds and exchange-traded funds in keeping with your target investment goals. They claim to earn you higher returns than you could get on your own.
The DIY Route to Investing - Save Yourself Hundreds and Thousands in Fees
Yes, I’ve already established that I’m no investment expert. But I also know that paying any kind of middle man for something that’s essentially available for free just strikes me as foolish.
Those fees can cost you thousands of dollars over a 40 year investment span. Additionally, we all know that there are risks in investing, and there are no guarantees whatsoever in the stock market. So anyone who claims to have a sure thing is promising something they cannot deliver.
There’s simply no reason to pay an advisor to do your investing for you – whatever their fees are.
Given that fees can eat up or into returns over the years of investing, it should come as no surprise that I strongly recommend the DIY approach.
It's really much easier than you think. I recommend getting a book or two, reading up on the topic of personal finance and investing, and then making your investment decisions yourself.
There are many excellent books out there on both topics. I recommend anything by Suze Orman, such as her book The Money Book for the Young, Fabulous and Broke on basic money management. To find out more books on this topic, this is a very good article.
And for investing, I recommend The Bogleheads’ Guide to Investing to start, and if you’re interested in reading up more on the topic, try this article.
Investment Strategies for the DIY Investor
In your reading you will discover that the best strategy is to think long-term, and avoid trying to time the market by buying and selling stocks often or quickly.
You also want to hedge your bets as much as possible to try to shield yourself from the worst of the market’s downturns, so investing over a range of companies and industries (sectors) is the best approach
The only way for a small investor or a new investor to achieve that kind of diversity in their investment holdings is to buy what are called index mutual funds. These funds own shares in hundreds of companies.
For a very small initial investment, sometimes as low as $250, you can buy shares in this type of fund and get yourself started on trying to grow your money.
There are plenty of these low-cost mutual funds available through consumer-and user-friendly companies such as Vanguard and T. Rowe Price. I mention them as two companies we actually use that have stellar reputations and low fees.
Two more companies that I have not used but are also cheaper than most and also highly regarded are Fidelity and Schwab.
These companies offer all the diversity you need in your investing to weather the stock market’s ups and downs about as well, or even better, than the Robo Advisors can.
They also offer funds that automatically adjust to meet your investment goals, or according to the amount of risk you feel comfortable with. These funds are given names, such as Target Funds, Portfolio Funds, Life Strategy Funds, etc.
And they do this for a much lower cost than other companies, including Robo Advisors.
So here’s an approach to initial investing for some of your long-term savings that we've followed over the years. It's worked for us and can work for others, as well.
- Open an index fund account, such as Vanguard 500 Index, or T. Rowe Price Equity Index 500. (Over time, as you accumulate savings, you can add additional broad-based mutual funds to your portfolio, such as international funds, value (dividend paying) funds, emerging market funds, etc., to provide greater diversity to your investments and somewhat of a protection against a crash in one sector, geographic area, or another.)
- In addition, or instead, buy one that offers automatic adjustments and diversification, such as Vanguard Life Strategy or Vanguard Target funds, or T. Rowe Price Retirement
- Arrange for automatic investments from your paycheck or your checking or savings account every month into these investment accounts. You can see that the key word here is automatic. The idea is for you to invest without having to think about it.
With this steady, automatic investing into funds that spread out the risk, you will end up buying sometimes when the stocks are low, and sometimes when they are high. This is called dollar cost averaging.
Over time, you typically will come out ahead with this steady and consistent approach. Sometimes far ahead of the advisors who try to time the market and deduct their hefty fees from the returns before you see any of it.
We have used this strategy of making regular deposits into investment accounts for a long time now, and it has enabled us to accumulate a very solid nest egg. Whenever we got a raise, we also increased our investment savings before we increased our expenditures, and that has undoubtedly helped build our accounts.
But my basic point is this: as with all things that I discuss here, look for the deals wherever you can.
- Vanguard and T. Rowe Price are investment companies with stellar reputations.
- Their fees are a fraction of what many other companies charge, including these so-called Robo Advisors.
- They offer a huge range of different, diverse funds to choose from.
- They offer automatic investing.
- They offer funds that adjust their holdings automatically to meet targets.
With all that, why would you need to pay high --or even low -- fees to a middleman? Trust me when I say that if I can do this on my own, so can you.
Go for it. And happy investing!