Figuring out where to put your hard earned money can be tough. Joe Duarte, author of THE EVERYTHING GUIDE TO INVESTING IN YOUR 20s & 30s, shares his advice on money management and investing 101.
Theoretically, you can start with a nickel. But in the real world, the more you have when you start investing, the better off you’ll be. What’s even more important is gauging how much you’ll need to save and invest over time and to adjust this accordingly as your financial situation changes. A rule of thumb used by some mutual fund companies is that you should save eight times your annual ending salary, the money that you have after taxes and expenses, in order to retire. It’s not likely that a young person can do that right away, so it can be done in a stepwise fashion. For example, if you start at age twenty-five and you save one time your ending salary by the time you’re thirty-five, the next goal should be to save three times your ending salary by the time you’re forty-five, five times by the time you’re fifty-five, and so on. Remember, this is just a formula. Life isn’t always this neat, but you do have a benchmark. You can modify this formula by starting to save earlier, adjusting the amounts more frequently, or changing your retirement age goal. You can also try to put more money away every chance you get as long as you stick to the goal amount. Become a savings machine. If you have a 401(k) plan as your main retirement source, max that out and start a separate IRA to add more money to your retirement.
Always Think Liquid
You’ve got some savings; you’ve got a plan; and you’re looking for ways to get things moving. One of the most useful things to do when investing is to consider the flexibility or liquidity of any investing vehicle. Liquidity is the ease of moving the money around—cash in hand is the most liquid of assets. Liquidity certainly comes in handy if something changes, such as a sudden short-term price drop in the stock market that gives you an opportunity to buy shares at lower prices. Let’s say that you get a side gig that pays quickly or you get a bonus or a raise at work. Suddenly you have extra money. That extra money could take you to your $1,000 initial investment target, letting you start your investing plan sooner than you might have intended. If your savings is locked up in an illiquid CD that won’t let you move the money around for six months or a year, you’ll be stuck and will have to wait until the CD matures before you can get started on your longer-term investment plan.
Bank Accounts versus Money Market Mutual Funds
Bank accounts and money market mutual funds are the most liquid savings and investing vehicles. And although they are similar, they are not the same. You set up a bank account with a bank and you open the money market mutual fund with a brokerage or mutual fund company. Savings accounts pay interest rates. Checking accounts sometimes pay interest. Money market
mutual funds pay interest rates and have check writing privileges, but they often require as much as between $1,000 to $2,500 minimum balance, and some may limit the number of checks that you can write from the account. Therefore, a good rule is to have a bank account for savings, a checking account for paying bills, and a separate money market mutual fund as the central holding area for investment capital.
Open a money market mutual fund account as your initial investment decision. This account will serve as your central investment account. From there you can switch money to mutual funds, stocks, and other investments with a phone call or a click of your mouse.
Next, you’ll decide how much money you’ll set aside for investing and how often you will add to your investments. A good method is to add at least a constant or nearly constant amount every month. If your goal is $100 every month, but you only have $50 this month, add the $50. Try to add $150 next month. No matter what, just keep adding to your account.
Even if you check your balances every week or month, give your accounts a thorough checkup every three months. If you’re not where you thought you should be, ask yourself why and do your best to make it right. You can adjust your timetable to conform to your circumstances. Things happen, so if you lose your job or a health emergency pops up, things may get difficult for a while. Stay patient and do your best to stay on track. But if you get a promotion and a raise, give your investment account a raise, too, and modify your addition schedule. When you reach a milestone, as in when you get to your first $10,000, see what you can do to get to $20,000 faster than what it took to get to $10,000. Then do it again when you get to $30,000. Always give yourself room for error, but always make changes and look for ways to make your returns better. Investing is a fluid process. And those who keep up with what they are doing in a systematic fashion do better.
Discover more investment secrets in THE EVERYTHING GUIDE TO INVESTING IN YOUR 20s & 30s by Joe Duarte!
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Excerpted from The Everything Guide to Investing in Your 20s & 30s by Joe Duarte. Copyright © 2019 by author. Used by permission of the publisher. All rights reserved.