The Penny For Your Thoughts

At this point your budget is in good shape and you would like to invest your hard-earned money!  Let’s start with the basics.

I’m taking a step back here, but it is worth reiterating.  Make sure you have enough saved in an “emergency fund” before investing.  A few months of expenses should do the trick.  The reason I say this is that you should try to avoid selling your investments for short-term cash needs.  This allows you to preserve your investments and maximize long-term returns.

There are several asset classes out there to invest in and I would argue they all have their merits.  Examples of these assets include stocks, bonds, real estate, commodities, precious metals…the list goes on.  For now I’m going to keep it simple and discuss stocks.

While it is important to have a diversified portfolio inclusive of several types of assets, my personal belief is that it is more important to get started earlier and adjust as you go, rather than waiting to have the “perfect portfolio”.  The main goal is to get you started on your path toward increased financial freedom.  It’s like the old saying goes, “it’s time in the market not timing the market!”.

In my own personal portfolio I invest in ETFs, which are also known as “Exchange traded funds”.  I am oversimplifying here but most ETFs (usually those that are passive) intend to track a collection of stocks.  Rather than picking specific companies, passive ETFs attempt to mirror the return on a basket of stocks.

Let’s take the S&P 500 for example.  This represents 500 of the largest companies in the United States based upon market capitalization.  If you look on any major financial news source, they will most likely report what the S&P 500 index is priced at currently.  By investing in an ETF that tracks the S&P 500, you would be able to track the performance of the 500 largest public companies in the United States.  Warren Buffet has argued on several occasions, along with the famous founder of Vanguard, Jack Bogle, that “index investing” is a phenomenal way for the typical investor to invest in equities.

I won’t go through all of the details but some of the benefits of index investing include diversification, lower costs, liquidity and a greater likelihood that you will track the returns of the market.  The goal of many asset managers is to outperform the market for their investors.  The unfortunate reality is that too often performance falls short of the “benchmark” due to costs of trading and investing in companies that do not meet expectations.  By tracking the market, you are eliminating the need to pick individual stocks and can invest at a rather low-cost.  In my view, ETFs deserve a place in every investors portfolio.

So how do you start?  My recommendation is to set up an account, taxable should be fine, with any major discount brokerage house.  Some of the major firms in the business are Vanguard, Fidelity, Charles Schwab, etc.  These firms offer great ETFs at competitive pricing that should provide you with the necessary building blocks to get your started.  If you don’t know which ETF to buy, start simple by purchasing an ETF that tracks the S&P 500.  It’s not perfect, but it’s a great place to start 🙂

Just remember, the key to long-term investing success is to not let your emotions get the best of you.  Set up a plan, stick to that plan and allow your money to grow over time; it’s that simple!

Isn’t there enough for you to think about in a day?  Whether it comes to demands from your job, family, friends, relationships or just life in general, I’m sure we can all agree that it would be nice to let go of a few things.  That, my friends, is where automating your finances comes into place.

The fact that we are in an increasingly digital age should come with no surprise.  Well, how about using that to your own benefit 🙂  I know there are several areas of my life that I could arguably incorporate more automation, however there are a few minor tasks that I automate to make sure I’m on track with where I need to be.

The first example is that I have my monthly credit cards set up for automatic payment.  Although this is a simplistic example, credit card interest rates are typically very high and just one month of forgetting to pay could be quite costly.  Instead, by automating these payments I ensure that at the end of each pay-cycle I do not have to worry about missing anything.

Now, there are some folks out there who argue for avoiding credit cards as that can encourage more spending.  Personally, I think if you have a relatively consistent budget and have the funds to always pay them off each month, a credit card can allow you to build your credit score over time.  Additionally a perk of using a credit card is the ability to use the reward points you accumulate for things like travel; I personally love points and try to utilize them whenever possible.  For example this summer I will be traveling long-distance for a wedding and will be able to pay for the round-trip flight only using points.  No complaints here 🙂

Second, I have my student loan payments automated.  Remembering to pay these each month can be quite a nuisance; I simply set it up a monthly withdrawal from my bank account.  This prevents me from accruing any unwanted fees or potentially damaging my credit score.  (This also applies to my credit cards as well).

The third example I can most readily think of is automating contributions to your retirement accounts.  Personally, I have my 401-k contributions automated so that each paycheck a fixed percentage is removed and added to my retirement accounts, ensuring that I take full advantage of the match from my employer.  This is important because any employer match is essentially FREE MONEY; you want to make sure that doesn’t go to waste!  Check with your employer to see if you are eligible for a company match.

The last example of automation I will mention, though there are several more, could be setting up a separate savings/checking account that you automatically contribute to with each paycheck.  I’ll be honest, it’s not easy to remember to save extra cash when everything is combined into one account.  We all lead busy lives and often forget to “put money away”.  Instead, if you were to automate this process by allocating a percentage of each paycheck to the separate savings account, you take away the headache of carving out the budgeted cash from your main checking account; it is already done for you.

The point I’m trying to emphasize is this; make things easier for yourself!!  Automating your budget ensures you are on track for the goals you want to meet and moves you one step closer toward financial freedom 🙂

The infamous question: “Are you making any money?”  While you may have heard this potentially abrasive question in an episode on Shark Tank, read it in a financial book somewhere or watched it in a movie about Wall Street, there is a valuable lesson to be had here.  What exactly does this phrase mean?  I’ll walk you through my view.

When people ask you this question, the first inclination or tendency most people have (for the record I too fall into this trap quite often) is to talk about the revenue or in the case of our own personal finances, salary/income.  While I agree that income (salary) can be an important factor, I would also argue that costs are the most overlooked items by most people.  How do I accumulate wealth?  Some would argue to continue focusing on making more money and that therefore costs will not be an issue.  The more you make, the more you earn……right?  Not necessarily.  I’ll show you how that can be a misnomer.

Using the example above, let’s assume you solely focus on your salary/revenues, rather than your costs.  In theory, as you make more money at work, you would see that translate into real dollars in your pocket.  This would remain true only if you keep the costs of your lifestyle maintained as you were paid more. What would happen though, if your lifestyle were to change with each promotion?  What if a new title and increased paycheck equated to a larger apartment or home, a newer or more expensive car, a closet full of designer clothing; the list could go on.  The reality of this hypothetical scenario is that as your salary is increasing, so too are your costs.  The dollar that was paid to you may suddenly be going out the door to pay for an expensive new addition to your life, rather than heading straight to your bank account.  The moral of the story?  Try living within your means as this will provide you with abundance! 🙂

Now I’ll be the first to say I am not perfect; in truth nobody is.  There are times where I see something that I really want and end up buying it.  While this is not the end of the world, if I were to really look at what I was thinking of buying and evaluate whether or not I truly needed it, I like to think I would be making a better decision.  In my view, awareness is the first step toward making an informed decision, especially when it comes to your own personal finances.  I also want to be careful here and not seem like I am preaching for everyone to live a spartan lifestyle.  Everyone lives their own life as they see fit and I am in no place to tell you how to live yours.  Instead, what I invite you to do is to try and be conscious of the decisions that you are making as you spend money.  My goal is to help you bring conscious thought to your every day life!

To reiterate, I do not want you fretting and worrying over every single purchase that you make; that is not constructive or helpful for anyone.  Instead, I implore you to get motivated and excited by the idea of aligning your lifestyle into something that may move you closer toward financial freedom.  For some readers, you are well on your way and already do what works for you!  Great! Keep doing what resonates with you!

My motivation for this post, and honestly this blog, is to help; to bring some light to an area that most people either do not like talking about or an area that seems too daunting to focus on.  My advice?  Create a budget.  Get a clear picture on what is coming in the door and what is going out the door. Start there and see where that takes you.  Remember, every great journey begins with the first step! 🙂

“It is not about timing the markets, but rather time IN the markets”

In my first post, I mentioned how time is one of the most important tools available to any investor.  When you set a long-term investment goal you give yourself the ability to withstand any ups and downs that the market will throw at you.  I can’t tell you what the price of the S&P 500 will be next year, though I can say with relative certainty that it will be worth more in 30 years than it is currently worth today.

To give you a demonstration on the power of compounding interest, let’s look at an example.  If I invest $1,000 today in a financial instrument that returns, on average, 6% per year, what would that be worth in 30 years?

Based on my calculations, that would amount to $5,743.49.  The concept of compounding interest is the idea that as your money grows over time, your investment gains earn a return as well, not just the original money you invested.  Within this example, in the first year your $1,000 is invested you are able to earn $60, based on the assumed 6% return per year.  In year two, do you think you earn the same $60?  Your return for the second year is $63.60.  The reason this is higher is that you are earning 6% on the $1,060 you now have, instead of the $1,000 originally invested.  That is the magic of compounding.

Adjust this prior example slightly and assume that instead of only investing $1,000 in the first year, you continue to invest $1,000 each year.  As you can imagine this will drastically improve your results.  Enter these inputs into a simple compounding interest calculator online and you’ll soon realize the amount of wealth you’ll create is ~$89,000 after 30 years of investing $1,000 a year and earning an average return of 6%.

Now within that example we assume an average return of 6% over the entire 30 year time horizon.  It is obvious that there will be years you far exceed that 6% average and there are years in which you will fall short of that.  In my view, the key is to remain invested through the ups and downs, without letting emotions get the best of you.  I’ve read several articles that show the implications of mistiming the market and it’s rather astounding.  Missing out on a few keys days over the course of a year can greatly impact your annual return.  The solution?  Try to remain even-keeled and calm when making decisions regarding your investment portfolio.

So what does this all mean? In short, time is your friend when it comes to investing; a small investment today could really become quite meaningful later in life.  In truth, you can do your future self quite the favor by taking your first step toward financial freedom.  I will discuss ways to invest in future blog posts.

Now I’m sure we’ve all heard the old saying, “It takes money to make money”.  While there are some exceptions to the rule, in the realm of personal finance and investing this is largely true.  I imagine your reaction to this statement may go along the lines of, “Save money?! Easier said than done!”.  While I agree in that saving is not easy, it’s not as bad as you might think when broken down into small enough pieces.

Start by thinking about your average day.  What is the typical routine that you try and follow?  Do you grab a coffee in the mornings or eat out at lunch?  Or maybe you go out with friends or family during the week for dinner.  When events become routine they are often easy to overlook; especially when trying to budget yourself.

I am a firm believer that momentum is key, especially when it comes to managing your finances.  Think of it like working out.  The first day into your new routine, you may push yourself harder than you anticipated and wake up too sore for the next day.  This may hurt your motivation causing you to skip the gym for the next few days.  Had you taken the “slow and steady” approach, you could be making small progress each day, compounding on the achievements of the previous day.  We’ll go through an example to illustrate the point.

In an attempt to start saving, you drastically start cutting back on the lifestyle you currently maintain.  You begin cutting back on things and events that you normally never thought twice about.  By the end of the week, you may feel disheartened and resort to spending more money on the weekend than you had anticipated.  To be clear, we all have those days where we spend more than we would like.  This doesn’t make you a bad person by an means – it just makes you human.  For starters, I recommend keeping things simple when you begin your new budget.  Start small.

Instead of making draconian cuts to your lifestyle, first identify the low-hanging fruit; purchases that you could replace or eliminate without necessarily giving up much.  This purchase could be as simple as your morning coffee on the way to work.  Instead of buying this on the go, try making it at home and bringing it in travel mug.  Another solution I like to use is bringing a K-Cup to work, provided where you work has a Keurig machine.  Though this may seem like a small change, mastering this one decision can build momentum in your resolve to adjust your budget & lifestyle.  Once you feel comfortable with your first change, begin to look for others that can easily be replaced.  This momentum will allow you to continually improve your budget and grow your savings.

Now to frame the savings from one morning coffee a day, we need to make certain assumptions.  Let’s say the cost of the average cup of coffee $2.50 while the average cost of your K-Cup is $1.00.  If you repeat this each morning, Monday-Friday for an entire month (4 weeks of work), the result of your savings would be $30 while if you repeated this for an entire year it would be $360.  Assuming that $360 was invested and grew at ~7% per year for the next 30 years, you would have ~$2,740 at the end of year 30.  Keep in mind, that is only assuming you drink K-cups for your first year and invest those savings in the market.  Should you continue to drink K-cups, year-over-year, consistently placing those savings in your investment account, you can imagine that nest egg over 30 years only increases.

The key factors in this hypothetical scenario include 1) The price of your cup of coffee, 2) The amount of days in the month that you stick to the plan, 3) How long the money is invested, 4) The rate of return you assume for your investments and 5) How many years you stick to this plan.

The big point here is this: small changes, if consistently practiced, can yield greater than expected results.  My question to you is simple; what will be your first change?

No matter what you pursue in life, there is one common thing that unifies us all: Personal Finance.  As you grow older, it becomes apparent that a solid financial plan and the ability to budget yourself are not only very important, but also quite challenging.  It is all too easy to put it off until tomorrow stating, “I have time”; though in reality, that’s the beauty of it.  You DO have time and you need to start using that to your advantage.

As Albert Einstein once said, “Compounding interest is the eighth wonder of the world.  He who understands it, earns it … he who doesn’t … pays it”.

Now I’m not here to tell you it is all doom and gloom if your financial situation isn’t stellar.  In fact, there are several stories of people who have had a rather difficult deck of cards, yet were able to change their lives for the better.  What I’m trying to get at is you should never underestimate the importance of today!  Little changes, if replicated consistently over time, can yield serious results!  That is the beauty of compounding interest.

My goal here is not to reinvent the wheel, but to simply remind you that it is there.  I truly believe in the power of intention.  ANYONE can change their situation for the better; all it takes is a bit of hard-work and a positive outlook.