Investing For Your Future
Monthly IFYF Investment Message
July 2005
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Investing is not an end in itself but, rather, the means to accumulating wealth to achieve future financial goals. The Finish Rich Workbook by David Bach (2003, Broadway Books) presents a 10-step action plan for goal-setting, eliminating debt, and increasing financial security. Bach's mantra throughout the book is "Learn It, Write It, Live It." In other words, figure out where you want to be in the future by applying new knowledge, write out your financial goals, and take action to make things happen. People who change their actions change their life, according to Bach, and "sometimes all it takes to get a great result is a minor change."
Below are some additional tips for investors from The Finish Rich Workbook:
- Improving your finances is not just about making money. Personal attributes are also important, such as having the confidence to take action. To boost your confidence, make a list of previous successful life experiences.
- Another key success factor is getting your finances organized. Bach advises using a collection of file folders that include the following categories:
1. Tax returns, 2. Retirement accounts, 3. Social Security, 4. Investment accounts, 5. Saving and checking accounts, 6. Household accounts, 7. Credit card debt, 8. Other liabilities, 9. Insurance, 10. Family will or trust, and 11.Children's accounts (if applicable)
Annually updated net worth and cash flow (income minus expenses) statements are also advised.
- Identify small regular expenses that drain household income and add up over time. Bach refers to this as your "Latte Factor?." "Latte" is a metaphor for all the little places where people waste money even if they personally don't drink fancy coffee. A twenty-something person who eliminates a $5 a day "Latte" (i.e., spending habit) and invests the money instead could have a million dollars in savings accumulated at age 65 for retirement.
- Automate investment deposits, such as 401(k) contributions deducted from your paycheck or automatic investment plans for mutual funds and stocks. Bach notes that becoming wealthy requires establishing and sticking to a systematic savings and investment plan.
- Bach also advises readers to "pay yourself first." This means doing exactly what these words suggest: paying yourself (preferably through automated investments) before you pay anyone else, including the government, a landlord, or the lender who gave you a mortgage or car loan. Bach notes that poor people save nothing or, worse yet, spend more than they earn. To be rich, you must save 15% to 20% of your monthly gross income and, to be super-rich, 20% or more. The sooner you get started investing, the better due to the awesome power of compound interest.
- Another way to accumulate wealth is to keep more of what you earn on investments. The best way to do this is with pre-tax dollar retirement savings accounts such as 401(k)s and 403(b)s. Instead of having to pay income tax first on invested funds, every dollar earned and placed in a pre-tax dollar retirement account can immediately start to earn interest. Contribution limits will continue to rise throughout the decade of the 2000s. In 2005, workers can contribute up to $14,000 to a pre-tax dollar retirement account ($18,000 if age 50 or over). In 2006, these figures will rise to $15,000 and $20,000, respectively.
Additional financial success tips by Bach can be found on the Web site www.finishrich.com.