Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
Everyone wants financial security. But only those who take positive action to improve their personal finances and are willing to make a few sacrifices now will likely achieve it. Every small step that you take makes a difference. Below are 10 tips to help you reach your financial goals by investing from the Financial Services Roundtable, a Washington, DC-based organization comprised of for-profit companies that deliver financial services:
- Just Do It (Invest) - Most Americans cannot secure their retirement through their savings accounts alone—particularly given how inflation will undermine them. While savings accounts are appropriate for amounts that you need to keep accessible for emergencies, they can seriously undermine efforts to finance retirement. If you put all your money in low-yield accounts, such as a money market fund, your retirement savings will lose purchasing power. Decide to invest some of your savings. Make your money work for you—and start right away.
- Start Early - Putting aside even a little bit of money as soon as possible, and steadily adding to it can make a significant impact on your quality of life during retirement. Here’s an example: save $50 a week starting at age 25 and you’ll have $431,490 at age 65 assuming a 6% average annual return. Wait until you’re 45 and $50 weekly savings will grow to only $100,109, a difference of $331,381!
- Go Slow and Steady - Slowly and steadily increasing is even better. The key to reaching your investment goals is to steadily increase the amount invested by investing a higher percentage of income over time. Increasing investment deposits—even by 1-3% of your salary—will significantly improve your savings.
- Don’t Leave Free Money on the Table - If your employer offers retirement savings plan matching such as through a 401(k) plan, take it! That’s free money that can greatly increase your retirement security. A 50% match (i.e., a matching employer contribution of 50 cents for ever $1 that workers save) is an automatic 50% return on your investment! No where else can you guarantee yourself a 50% return.
- Learn About Investing - In this Internet age, there’s an abundance of free information about saving, investing, and money management available. You can also go to the library, take a class, or decide to hire a certified financial planner. Becoming knowledgeable about your options and developing a clear strategy are keys to smart investing.
- Read—and Understand—the “Fine Print” - It’s your money. Make sure you know what you’re doing with it and what the risks are. Protecting your hard-earned money is worth a few minutes of reading statements or disclosures, and asking enough questions to know what you’re getting into.
- Identify Your Risk Tolerance - Higher investment returns generally come with higher risks so you must evaluate your willingness to put your assets at greater risk against your desire for higher returns. Consider getting some financial advice to determine an appropriate risk level for your age and situation.
- Understand Where You Are in the Lifecycle - A 20-something with 40-50 working years ahead can save less and tolerate more investment risk than a 50-something with only 10-20 more working years. Older adults with limited savings may need to do serious “catch up investing” to reach their financial goals and/or consider other actions such as working longer, moving, or trading down to a smaller home.
- Know What You Need - A survey by the Employee Benefit Research Institute found that only 46 percent of Americans had estimated how much money they would need to retire—and 14 percent of those had guessed. It is wise to look at some estimates of longevity for your age and gender. Particularly for women, it may be far longer than you imagine and has serious implications for investment planning.
- Start with a Goal in Mind - Thinking about why you are investing—to buy a house, to send the kids to college, or for your own retirement—will not only help to motivate you to set money aside, but should also give you a better sense of how much you need and when you need it.