February Cash Challenge: Increase Your Investment

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As January and its promise of renewal and resolution fade into distant light, we are left with the darkest part of the year. In much of the country, outdoor activities have been put on hold until we are out of the way of the next polar maelstrom, while Sunday’s Super Bowl marks the end of our series of excellent food celebrations for the next few months (for many Americans at least). …

With so little to wait, why not take the time and spend your money right?

Last month, we sorted out our finances as a whole : we drew up a balance sheet, systematized our documents and made small monetary changes. In February, we tackle one of the most rewarding aspects of personal finance: investing. Whether you are a newbie or a more seasoned investor, you can level up this month.

Week 1: Define Your Investment Goal

Most of us invest in the hope that one day we will retire and have a convenient nest to pull out of. We want to accumulate wealth, and long-term investing is the most efficient way for most people to do this.

If you are a beginner investor

If you are just starting your investment career, your goal is not to get rich quick (in fact, this is true for any level of investor). As I said, invest for retirement. This means either investing through a 401 (k) at work, if offered to you, or an individual retirement account.

There are two types of IRAs: traditional IRA and Rota IRA. If you are early in your career it will probably make more sense for you to use Roth – you deposit money that is already taxed and you will not run into another tax bill if you qualify for withdrawals . On the other hand, with a traditional IRA, you deposit pre-tax money that will be taxed on withdrawals upon retirement. Traditional IRAs are better if you expect to be in a lower tax bracket when you retire , while Roths are better if you expect to be in a higher tax bracket.

Determine which account is right for you and find a broker if needed. Sites like NerdWallet offer comparisons . You will also want to calculate a monthly installment that is financially feasible. If you are offered a match with an employer, make a contribution at least up to that amount . If you can deposit at least $ 10, that’s just the beginning.

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If you are an experienced investor

For more advanced investors, your goal is to reevaluate the current situation and make the necessary corrections. Does your asset allocation match your risk tolerance? Has your risk tolerance changed at all since you started investing? Could you contribute more? When was the last time you checked the commission rate ?

Or maybe you are ready to go beyond retirement investing. Perhaps you have a long-term goal (more than five years ahead) that you would like to invest a little money on: for example, you heard about 529, but do not know how it works , or you? We’re still curious about Bitcoin (and you shouldn’t be). Maybe you just want to increase your contribution to Roth . Whatever interests you, take some time to think about your next money order and how it relates to your goals .

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Week 2: Learning the Ropes

Now that you have a goal, it’s time to figure out how to achieve it. Fortunately, you don’t need to learn complicated strategies, especially if you are investing primarily for retirement. There’s a lot of junk out there, but all you need to focus on is picking a pair of diversified low-cost index funds .

If you are a beginner investor

The key principle of investing for retirement that you will want to learn now is that you are not trying to outperform the stock market, but rather, you are trying to match it. While many financial professionals claim that only they know the secret of how to make more money, know that this simply isn’t possible, at least not for a long period of time – anyone who claims otherwise is full of bullshit. Likewise, you want to avoid any “flashy” or “trendy” investment, especially if you are a beginner. If you can’t explain it to a friend, avoid it .

However, if you pick several broad market index funds (which are baskets of many different stocks) that roughly represent the market, you are more likely to come out ahead in the long run. As I wrote, there are no guarantees , but there is research showing that this is the best investment strategy for most people. The S&P 500, based on the market capitalization of 500 large US companies, grew by an average of 10 percent between 1926 and 2014 (although individual years can differ, often significantly). Active investment, in which a person chooses stocks and funds for you, is not so good . This is why placing your investment in these accounts is the best long term strategy.

“The rate of return for each index fund is determined by the performance of the companies in it, which can counterbalance each other,” writes CNBC . “Let’s say you buy an index that contains only two companies, and one goes up 3 percent and the other falls 2 percent. In this case, your total growth will still be 1 percent. “

It is also important to choose inexpensive funds – another advantage of index funds. Both Vanguard and Fidelity offer low-cost options, as do many other finance companies. Your biggest concern is the expense ratio, which is essentially the management fee charged by your stock company to hold your investment. You should look for funds that charge less than one percent. (There are other fees to watch out for.)

So this week’s homework is to research the funds offered to you in your 401 (k), or through your IRA / Roth. When you see your options, copy the name of the fund (for example, Vanguard Total Stock Market Index Fund) and paste it into the Morningstar search bar. There, you will see performance, holdings, fees, etc.

As you can see, the costs of this fund are very low: only 0.14 percent.

You don’t need to research every fund, but it will give you an idea of ​​value, exposure, and more.

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If you are an experienced investor

For experienced investors problem here is not to understand the basics and to understand what is , what you already do, probably well enough . You have fundamental knowledge, so you can look for something new and exciting to spice up your portfolio. It’s not necessarily wrong, but don’t give up on your investment principles: Your retirement egg should sit well in these cheap mutual funds.

If you think I’m exaggerating their usefulness, take this from Warren Buffett: The Omaha Oracle advised his performer to invest in inexpensive index funds:

My advice to a trustee couldn’t be simpler: invest 10 percent of the money in short-term government bonds and 90 percent in the very cheap S&P 500 index fund. (I suggest Vanguard.) I believe the long-term results of a trust from this policy will be better than most investors – whether they are pension funds, institutions, or individuals – who employ highly paid managers.

You will want to play around with several online pension and / or college calculators to figure out how much money you need for each of your goals. This will help you make better decisions and keep the goal in mind. It is difficult to save and invest if you do not know what you are doing all this for.

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Week 3: Level Up

Once you know what your goal is and how you are going to achieve it, it’s timeto level up .

If you are a beginner investor

Transfer an extra $ 100 into your IRA or Roth, or increase your 401 (k) contribution rate by one percent. It might not seem like a lot, and it isn’t, but the one percent does add up , as NerdWallet points out:

Let’s say you start by investing six percent of your salary in a retirement fund when you’re 22 (yes, it can hurt, but you have to make some sacrifices) and make $ 40,000 a year. If you continue to set aside that percentage for decades to come, you will have just over half a million dollars stashed by the age of 67. But if you increase it by one percent every year, you end up with $ 1.4. million, assuming an annual return of six percent and you will stop increasing your savings rate as soon as you hit 20 percent. And that’s not counting the pay raise you’re likely to get, or the overlap with the employer.

Unless you are in dire financial straits, you can probably afford to donate $ 100 or one percent of your next paycheck towards your investment. This is on top of the goal you set for yourself in the first week.

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If you are an experienced investor

If you’re in your 30s, 40s, or 50s, you still have plenty of time to invest before you may have to hook into your retirement accounts. This is why, as I wrote earlier , it might be a good idea to take more risk:

Consider being a little more optimistic than usual, especially at age 30 – if you retire around age 65, you still have 20-30 years to invest. This is a fairly long time horizon to bounce off any dips (but, as always, invest according to your risk tolerance ). People who fear stocks due to the financial crisis or the dot-com downturn in the early 2000s “may be missing out on the potentially higher returns that stocks will bring over the next two to three decades,” says Kevin Ta, senior wealth strategist. at PNC Wealth Management . “These more conservative investments in money market, CDs, Treasuries and bonds may not keep up with rising commodity prices over time.”

So change your asset allocation and make it more aggressive (assuming you don’t retire soon ). Reconsider the ratio of your domestic to international stocks .

And if you haven’t opened Roth yet, it might be time if you haven’t exceeded your income limit. As you approach retirement, you will need easy access to cash – your Roth will save you a tax headache much less than using another type of retirement account. You just need to keep in mind.

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Week 4: invest in the long haul

Remember that time is your most important investment asset . Setting yourself up for success this month is fine, but if you leave your investment alone and add it, it will actually create wealth.

If you are a beginner investor

Set up automatic contributions for your 401 (k) and / or IRA, and set a reminder to increase your contributions at least once a year (if you cannot automatically increase your contribution level).

Don’t worry if the market goes wrong . If you are relatively young, this is actually a good thing – if you continue to fund your account, it means that you are buying at a “low price”. When you see financial analysts talking a lot on TV about a bad day for the Dow, just turn it off and go for a walk. You will be fine. The market will go up again.

This does not mean at all the timing in the market, it just means that the timing in the market is important, including when the market is declining.

If you are an experienced investor

Set up alerts once a year to check asset allocation and calibrate if necessary. If you haven’t already, and this applies, set up a Roth IRA for your kids so they can start investing sooner. Explore ways to further diversify . If you are facing a tax refund, consider which of your goals requires the most attention and do your best to achieve it. Schedule periodic checks to make sure you are still on track to achieve your goals.

It’s a pretty full month. Stay tuned for the March challenge as we deal with our tax bill. Questions / problems? Email me: [email protected] .

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