Investing For Your Future
Monthly IFYF Investment Message
October 2005
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Where do most people get the money to invest? They usually either earn it paycheck by paycheck and invest a little each bit each time (e.g., payroll deductions for a 401(k) savings plan) or they transfer money from accumulated savings in bank or credit union accounts to investment products such as stocks or growth mutual funds. A third source of money for some investors is money received from a gift, settlement, or inheritance.
How do you get started as an investor? Any way you can. First, check with your employer to determine what savings and investment opportunities exist at your workplace. Examples include credit unions, U.S. savings bond purchase plans, tax-deferred retirement savings plans, and company stock purchase plans. Next, decide how to free up money from current cash flow to set aside.
In the book Pay It Down: From Debt to Wealth on $10 a Day, author Jean Chatsky 's basic premise is that the average U.S. household with $8,000 of high-interest (16%) credit card can be debt free in three years by repaying $10 more a day. Two years after that (five years total), saving $10 a day (after the debt is repaid) will result in a "fat emergency cushion" of over $8,000. After that, investing $10 a day in an S&P 500 index fund (Chatzky used 10.7% historical earnings) will result in $64,866 in 20 years, $455,091 in 30 years, and $1,385,351 in 40 years. The book then describes dozens of strategies to pare down household expenses to free up $10 a day.
Small amounts of savings really add up, especially for young adults in their 20s and 30s. Saving money early in life enables investors to take maximum advantage of compound interest. If someone invests $2,000 per year from age 20 to age 66, they would have $975,000 accumulated after 46 years, assuming an 8% average return. Investors who wait until age 30 and save $2,000 per year for 36 years would have $440,000 and those who wait until ages 40 and 50 and save $2,000 per year for 26 and 16 years, respectively, would have $188,000 and $73,000.
The following five steps are recommended to kick-start a serious saving/investment effort:
- Commit to saving/investing regularly, preferably via payroll deduction and/or automatic deposits
- Pay down consumer debt as soon as possible (see www.powerpay.org for details) and reposition the money previously spent on debt repayment to investment deposits
- Set aside an emergency fund of at least three month's expenses prior to investing
- Do a savings need calculation for financial goals, such as the Ballpark Estimate worksheet for retirement planning at www.asec.org
- Increase savings/investments when income increases, preferably automatically if possible
Calculating what you need to invest to reach a financial goal provides a feeling of control and is much better than not knowing. Retirement savings analyses can be coordinated with the annual Social Security benefit statement that is sent to workers about three months before their birthday. Remember this quote from Yogi Berra that indicates the importance of planning: "If you don't know where you're going, you will end up somewhere else." Ten helpful online resources for savers and investors include www.choosetosave.org, www.americasaves.org, www.csrees.usda.gov/fsll, www.nefe.org/latesavers/index.html, www.investing.rutgers.edu, www.ici.org, www.mymoney.gov, www.better-investing.org, www.rce.rutgers.edu/money2000, and www.savingsbonds.gov.