Q: I’m just starting to find some financial security. I worked for a long time to pay off most of my debts and am ready to start thinking about building wealth for my financial future. How can I get started saving for it?
A: For most people, getting rich is a pipe dream. In this dream, it’s a thing that happens to you. You don’t make yourself rich; you just “get” rich.
That’s not the way it works, though. Most people with a million dollars or more got it the old-fashioned way. They worked middle-income jobs and spent well below their means. They made regular contributions to a safe retirement fund and retired to a life of leisure.
Want to be like them? Then there are a few easy steps you need to take today to build a portfolio you can feel secure about. You can build your way to a million-dollar portfolio from almost any salary.
1.) Cut down on your biggest spending places first
For most people, the difference between a 4% return and a 4.5% return is not the difference between a comfortable retirement and dying in the office. More important than what you invest in is the amount you end up investing and the length of time you let it earn. If you want to get rich, spend less.
If you stop going out to eat lunch every day, you might save $35 a week and $150 in a month. That’s great, without question. However, that $150 isn’t a majority of your spending each month. It might feel a bit like a drop in the bucket.
If your aim is to aggressively cut your spending, you need to look at your big-ticket items. According to the Bureau of Labor Statistics, 51% of household spending is on just two of those items: housing and transportation. Your house and your car are probably the two biggest investments you will make.
Instead of a sporty new car every few years, getting a well-maintained late-model equivalent car and driving it until the wheels fall off will save you a big chunk of change. Regular maintenance and careful driving will keep your transportation costs low.
You can save money on housing by considering your needs in a house. Sure, you might want more space, but do you need it? Would you really use a home office or is it more likely to be another corner of the house for storing junk? Moving into a smaller house or dealing with a less convenient location can make the difference between being buried in house payments and saving for retirement.
Of course, moves are expensive and you shouldn’t pick a house capriciously. When you’re considering where to live, though, don’t shop for as much house as you can afford. Shop for as much house as you need. Once you pay off your mortgage, roll that money right into a Certificate or IRA.
Lowering your car and house payments can help you save for retirement, but they can also reduce your financial stress. If you lose your job or have an unexpected bill, you won’t have nearly as much trouble keeping your car from being repossessed or your home foreclosed upon.
2.) Invest in low-risk, gradual return investments
A very small percentage of investors succeed by chasing big returns on risky stock ventures. Many more of them go broke trying to outfox professional investors. Remember that the people who tend to do well at picking individual securities are working with instantaneous access to the information you will never see, not to mention the years of training and experience they have. That’s not to say you will never beat the market, just that your odds of doing so are quite low.
You’re far better off investing in safer, low-return instruments like broad index funds, bond-based retirement accounts, and total stock market mutual funds. If your portfolio resembles the broader global market, you’ll be able to see the gains made across the market, regardless of their sector or location.
That’s not to say you can’t blend your portfolio to match your risk tolerance. If you’re young, you may be able to devote a portion of your savings to slightly riskier investments. Buying index funds that track mineral and energy sectors, for example, can introduce some risk while offering slightly higher returns. You might improve your portfolio growth from 3% to 3.5%. It’s not enough to make a tremendous difference, but every little bit helps.
Remember, though, that the rate of return is far less important than the amount you save. You don’t have control over the performance of the markets. You only have control over how much you spend and how much you put away.
3.) Don’t panic – but don’t celebrate too wildly
If you’re trying to actively manage your portfolio, you might see 0.5% swings in the value of your portfolio over the course of a month. These are normal market fluctuations and are rarely anything to be concerned about. Keep an eye on them, but avoid the impulse to act based upon this changing information.
Too often, individual investors see losses and sell to avoid what they perceive as a crash. They sell, and a stock loses 10% of its value. The investor thinks they have made the right decision. Then, the inevitable rally comes and the stock regains 15%. Acting on limited information means the investor loses out on a 5% gain. So it’s important not to panic.
At the same time, tremendous upswings in value usually bring about paradoxically diminishing returns. As a stock gains in value, the company issuing the stock needs to do less to attract investment. That means reducing dividends and other investor perks. As senior editor for the Wall Street Journal, Jonathan Clements tells us, “As valuations climb, expected returns fall.” It seems counter-intuitive, but every financial instrument can only grow so much.
If you want to be rich, you should take an “all of the above” approach to building wealth. Cut luxuries, lower your fixed costs on necessities, and get the best return you can for your money. Saving money today at any rate of return is better than saving nothing.
If you’re ready to get serious about your financial future, call or stop by United Texas Credit Union today. The array of quality financial products, the knowledgeable staff, and the friendly spirit of a community partner, make United Texas a natural fit for your retirement planning needs. Contact us today!
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