Where do most people get the money to invest for their future? Some receive lump sums, such as pension distributions, settlements, and inheritances. A few lucky people win the lottery or some other big prize. Most people, however, get money to invest the old fashioned way: they earn it and then they save it and then they invest it. In other words, their savings becomes “seed money” with which to purchase investment products such as bonds and shares of stock or mutual funds.
How do you get started on the path to financial security as an investor? Follow these four steps:
• Calculate how much money you need to set aside for retirement or other goals.
• Plan how to accumulate the required amount of money.
• Act to implement your plan and save money.
• Reassess your financial needs and progress toward your goals every year
Don’t worry if it feels like you don’t have “enough money” to start investing. It’s okay to start small because every dollar counts. Unit 8 of Investing for Your Future describes investments that can be purchased with small dollar amounts. For example, some mutual funds may require $100 or less to purchase shares and U.S. savings bonds can be purchased for as little as $25 (EE bonds) or $50 (I bonds).
To “find” money to invest, try eliminating things that you can live without and changing spending habits. An example is brown bagging a lunch to work one or two days a week instead of eating out. Another is buying 12-packs of soda or bottled water on sale instead of using expensive vending machines. Avoiding credit card interest charges by paying bills promptly is also recommended. Unit 3 of Investing for Your Future has dozens of additional money-saving ideas to free up money to invest.
Setting and prioritizing goals can provide the motivation to reduce spending today in order to save and invest for a secure future tomorrow. Be sure to be specific with a date and a dollar cost. An example of a fully fleshed out financial goal is “Have $8,000 for a used car in four years.” Once you know the time deadline and dollar cost of a financial goal, you can “do the math” and calculate what you need to save. For example, in this case, to have $8,000 in four years requires saving $2,000 a year or $77 each bi-weekly paycheck.
Knowing your timeline can help you choose appropriate places to put your money (e.g., Treasury bills for short-term goals and stocks for goals that are five or more years away). Recent research, however, with respondents to Rutgers Cooperative Extension’s online Financial Fitness Quiz indicates that many people lack specific, written financial goals. It is like they are taking a road trip without a map or itinerary.
Take advantage of investment opportunities (e.g., retirement savings plans) that your employer offers. Contributions come right out of your paycheck, making it easy to save on a regular basis. Some employers also match a worker’s contribution twenty-five cents, fifty cents, or even a dollar for every dollar saved. This is “free money” that should not be missed. If you change jobs, roll your retirement accounts over into an IRA or new employer’s plan to maintain their tax-deferred status.
Remember that there is no such thing as a risk-free investment. All savings and investment products have some type of risk. An example is purchasing power risk for cash assets, such as CDs and Treasury bills. Because they earn a relatively low return, inflation can erode their value over time. Another common type of investment risk, found in fixed-income investments, is interest rate risk. This is the inverse relationship between bond prices and interest rates. When interest rates rise, bond prices usually fall, and vice versa.
Stock investors face market risk, which is the risk that the price of individual securities will be affected by the volatility of financial markets. All sorts of factors can cause market volatility including political events and the release of corporate earnings or government economic data. Generally speaking, the greater the volatility of an investment (e.g., stocks versus CDs), the greater its potential reward and the higher its risk.
