by James Copenhaver
The end of the year is approaching and our attention turns to the holidays: family and friends, New Year resolutions, losing weight, eating better, starting to save, etc. You know the drill.
In last month’s newsletter, we touched on the impact that waiting to invest can have on your portfolios and how it can rob you of opportunities.
The question we asked was about two investors, one that started early and another that waited:
| Investor 1 invests $2,500 each year between age 20 and 30 in a portfolio that yields a return of 8% and then stops adding to the portfolio but allows the portfolio to grow until age 60. Investor 2 waits till age 30 to start investing $3000 a year and keeps investing annually until age 60, and will get the same return as investor 1. Will Investor 2 catch up to investor 1 by age 60 or ever? |
The Answer: When Investor 2’s portfolio finally catches up to Investor 1, they are precisely 73 years, 10 months, and 6 days old!
As you can see, it makes sense to invest early. Although Investor 1 invested less money annually than Investor 2, those profits far outweigh Investor 2’s profits. Investor 1 is also left with a great deal more spending money during the time that Investor 2 is saving. Keep in mind, this is a hypothetical situation and does not represent any specific security; all results will differ.
So where are you spending your hard earned dollars?
Here are 5 suggestions for your Investment New Year Resolutions:
- Pay yourself first
- Look at how you spend your dollars
- Maximize Tax Advantage Investments
- Evaluate your Insurance
- If it sounds too good to be true, it probably is
 Pay yourself first
One of the most powerful and effective strategies for building wealth is to pay yourself first. Start with setting up an automatic payroll deduction with your employer.
Decide on an amount you can commit to, and immediately pay that "bill" by depositing the money into your brokerage, mutual fund, or retirement accounts. Setting up a systematic payment on those accounts is also helpful. Remember, many investments require only a commitment of $25 to $50 dollars a month to open an account.
Look at how you spend your dollars
Many of us fall into bad habits when it comes to our finances – whether it be investing or spending. We bend to the immediate desire of a latte in the morning or a can of soda and that afternoon snack, without considering the long-term impact.
What does that daily latte cost you? Assume you stop off at your local coffee shop and buy a $3.00 Mocha Latte Grande every workday for the next 25 years. To keep it simple we won’t figure in inflation. So, 3 dollars, 5 days a week, 50 weeks per year for 25 years, and you’ve spent $18,750. If you cut down to coffee just twice a week you now have an extra $60 per month to start your investment portfolio.
Maximizing Tax Advantage Investments
When it comes to paying yourself first, make sure you have at least contributed enough to your company’s 401k or 403b to get the full matching amount. Take advantage of the before-tax savings of a Traditional IRA or the tax-deferred growth and tax-free withdrawals of a Roth IRA.
Evaluate your Insurance
Are you spending too much on car insurance? If you haven’t spoken to your agent lately or shopped around you might not be getting the best deal. It’s also a good idea to update your home insurance if there have been any major purchases and to check if the policy replaces the home in today’s dollars or at the market value.
If it sounds too good to be true it probably is
Don’t believe that Hedge Funds or other types of schemes can replace old-fashion investing, even if the recent market ups and downs have you wondering if you will have enough to retire. Go meet with your wealth manager and update your financial plan. Slow and steady still wins the investment race. |
