Investing For Your Future
Monthly IFYF Investment Message
September 2004
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Low Maintenance Investment Strategies
How much time do you have to manage your finances and make investment decisions? If you're like most people, the answer is "not enough." Between work, commuting, family and community responsibilities, exercise, and sleep, it can be difficult to find the time necessary to keep your finances on track. That's where "low-maintenance" financial planning comes in. By employing strategies to simplify financial tasks and decision-making, you can build wealth over time and still have a life. Below are 8 time-proven low-maintenance financial planning and investing strategies:
- Automate everything you possibly can including direct deposit of your paycheck or Social Security check and deposits to mutual funds or stocks with a dividend reinvestment plan (DRIP). You can also use automated deposits to purchase U.S. savings bonds. Automated investment deposits have several benefits. One is time savings...no checks to remember to write and mail. In addition, automated deposits (e.g. depositing $50 a month on the 15th of each month) take the emotion out of investing. Deposits are made regardless of market conditions and you'll buy more shares when prices are low. Making regular deposits at regular time intervals is called dollar-cost averaging.
- Another form of dollar-cost averaging is participation in a tax-deferred employer retirement plan (e.g. 401(k), 403(b), or 457 plan, depending upon where you work). Contribute as much as you can afford today and increase your contribution when you receive a raise. Some employers even allow you to authorize future savings increases that will come from future raises today so you don't procrastinate doing this later. This strategy is low-maintenance because the savings come right out of your paycheck automatically before you get a chance to spend the money.
- To simplify investment decisions and achieve diversification in a single mutual fund portfolio, consider an asset allocation fund or a lifestyle fund, both of which are described in Unit 6 of Investing For Your Future. Both types of funds contain a combination of stock, bonds, and cash. The difference is that managers of asset allocation funds shift the investment portfolio among asset classes at their own discretion while lifestyle funds typically offer 3 to 4 portfolios with asset classes in varying proportions that are planned for people at different life stages.
- Another "low maintenance" (and low expense) investment option is an index fund. Index funds are available for stocks, bonds, and international investments and invest in a portfolio of securities that mirror a major market index. Index funds are low-maintenance because you know in advance that your performance will be similar to that of the index itself. Very few actively managed mutual funds can consistently beat their benchmark index over time.
- Arrange to have as many routine periodic expenses (e.g., car loan payments and insurance premiums) as possible paid automatically by debiting your bank account. This will save time and postage. Another potentially time-saving strategy for the computer savvy is online banking.
- Invest a few hours to set up an organized filing system so you can find things when you need them and have a place to put tax receipts and important family records. Handle your mail once and file, shred, or act on financial documents as they arrive instead of laying them aside in piles.
- Create customized financial templates in Microsoft Excel to keep track of your finances or use the templates available for net worth, asset allocation, and a spending plan (budget) calculations found in the "Resources" section of the Rutgers Cooperative Extension Money and Investing Web site at http://www.rce.rutgers.edu/money2000. Simply insert your personal data in these template files.
- Consider hiring a financial planner each year for a few hours of their time to conduct an annual "financial physical." This annual review can include portfolio rebalancing, updating net worth and cash flow statements, reviewing your credit file, evaluating progress toward goals, and other important "maintenance" tasks. For further information about hiring a financial advisor, review Unit 10 of Investing For Your Future at http://www.investing.rutgers.edu.