No matter what happens in the stock market, these eight rules will help you invest wisely.

29 minute read

Hey everyone, it’s Laura. With all the volatility going on in the financial markets right now, I pulled a show from the archives with some specific ad vesting advice. The show originally aired about this time in 2018 when the markets were also going through a pretty turbulent time and I want to offer some hopefully comforting words of advice about the Corona virus. While we can’t control what the financial markets or the Corona virus will do, what you can do is try to see the opportunity that it holds. For instance, maybe you’ve always wanted to work remotely, but you weren’t permitted. Well, now you got the chance to prove that it can work for your company. I want to challenge you to get comfortable with what may feel uncomfortable at first. If you’re self quarantining somewhere, how can you spend the time well, could you emerge in a couple of weeks?

Having listened to a back catalog of podcast episodes or having read a stack of books that are sitting around having created a work of art or even having brainstormed a new business idea. We’re going to get through it together. If we make good things happen in the midst of the chaos. So it’s a good time to be aware, but not to be afraid and related to your finances. No matter if you’re not sure if you’re managing your retirement account the right way right now, or if you’re hesitant about getting started investing in the first place. I want you to keep listening. I’m going to give you recommendations and answer a couple of listener questions in the show about how to invest without being too risky. And the takeaway from the show is that if you’ve got a longterm investment objective such as building wealth for retirement that is likely to happen at least five years in the future, you should not be rattled at all by what’s going on day to day with the stock market.

The fact is you really shouldn’t even be paying attention to it, and I’m not paying attention to it at all. There’s really no reason to get emotional react or even to consider selling your investments during market turbulence. Again, if you don’t need the money until many years in the future, you’ve got lots and lots of time for the markets to rise and I know that may feel counterintuitive, but when the stock market drops, that’s actually the worst time to sell your investments because you would be doing it at a loss. I’m continuing to make retirement account contributions through all of this chaos and I recommend that you do the same when the price of the funds in your retirement account or your brokerage account goes down, they’re on sale. You actually get to buy more for your money. If you’re contributing the same amount each month or each paycheck you end up buying more shares because they cost less and when the price of those shares goes up, you have more shares with higher and boom, your account value rises.

So it’s a waiting game and I know it doesn’t always seem like a fun one, but because the stock market comms with short term risk, that’s the reason that you shouldn’t have all your money invested. You also need to maintain a cash reserve or emergency money. Your emergency money and investments are two completely different buckets of money that have different purposes. As I covered in last week show the Fed’s interest rate cut and now another cut that we’ve just seen likely means that your bank savings rate is going to drop a little bit, so don’t let that fact keep you from building your cash reserve and keeping it in an FDI. See insured bank savings account, it doesn’t matter if your bank savings account pays a pittance because its purpose is to keep you safe in the short term, but money that you don’t need to spend in the next five years should stay invested for as long as you can keep it invested so you take advantage of higher average historical returns that are necessary to build a substantial nest egg. The bottom line is that staying invested for the long term has historically paid off the market, reflects the overall growth in the economy and does reward longterm investors even though temporary dips will always occur. Okay. I hope that helps a bit and I hope everyone out there is staying safe and healthy. Here’s the show, eight investing rules to follow even when the stock market drops.

Hey friends, I’m Laura Adams and this is the money girl podcast where my mission is to help you live rich and love the journey. I really appreciate you downloading the show and hope you’ll stick around by subscribing. If you haven’t done that already, you’ll find the notes for each show and the full archive of podcasts in the money girl section over@quickanddirtytips.com this is episode number 531 eight investing rules to follow even when the stock market drops after seeing last week’s huge plunge in the market, you may have wondered if you’re investing money the right way or maybe you’re still on the sidelines and now you’re really not sure how or when it will be a good time to get in the game. So this is a great show for anyone who wants to build wealth for the future and I hope that’s everyone listening and I do have a couple of listener questions that we’ll include in the show.

One of them came from cigar [inaudible]. I hope I’m saying cigar correctly. Who says I have a unique situation. I’m 35 years old from another country and I’ve never invested. I fear recession is around the corner every year and just put my money in the bank. How can people like me get started investing cigar? Thanks so much for your question. And you know what? You’re not that unique. There are actually lots of people who are in that same situation. So w we will get to that. And another question comes in from an anonymous podcast listener who says, I have about $50,000 sitting in a savings account. I haven’t put it in an IRA because I’ve been worried that I’ll need the money. But I’m also worried that I’ve waited too long to start investing because I’m in my forties how should I manage this money? Yes. In this show, I’m going to answer both of those questions with some recommendations for how to invest money wisely.

Even when the market is volatile, you’re going to know exactly how much and where to put your money so that you create some financial security without taking too much risk. That’s important. And we’re going to go through eight investing rules to follow even when the stock market drops. So these are sort of like standard rules that everybody should be doing no matter what’s going on in the markets. Before we get started, I’ll just say a little bit about what’s going on in the markets and why we’re seeing so much volatility. It’s really just about cycles in the market. We’ve seen, uh, the market going up, you know, really nice, uh, returns in the market and that’s gone on for quite a while. I mean, we’ve seen years of, of pretty steady growth. What goes up must come down. So it is natural and normal for markets to have corrections.

We see a very strong economy. Uh, we’re not near a recession. Corporate profits are strong. Um, another issue is interest rates. We have a new federal reserve chair who was sworn in Jerome Powell, and we believe that he’s likely to be a little bit more aggressive with interest rate hikes or you know, there’s uncertainty amount, what will happen with interest rates. So all of that combined is a factor in the volatility that we’re seeing no matter what’s going on in the market. There are some basic rules to follow and that’s what we’re going to cover in this show. So let’s get into it. The first investing rule is number one, clarify the purpose of your money. If there’s one rule of investing that you should always remember, it’s this, never expose your money to more risk than is necessary to accomplish your goals. So first you need to be clear about what your goals are.

Take a step back and be clear about why you’re investing in the first place. And really what that comes down to is thinking about when you’re going to need to spend the money that you plan to invest. Because when you’re going to need it determines what you need to do with it. Historically, a diversified stock portfolio has earned over 10% per year, but even if you only earned an average of 7% on your investments, you’ll have over one point $3 million to spend during retirement. If you put aside $500 a month for 40 years. So if you’ve got a longterm objective 40 years and you can put away 500 bucks a month and you get just average returns, you’re going to go into retirement with over a million dollars to spend. But if you were to put that $500 a month in a bank account and that bank account earns you an average return of 0.5% half a percent over 40 years, you will only accumulate about $250,000.

So if your longterm goal is to have a nest egg that allows you to stop working and to maintain your existing lifestyle in 20 or 30 years from now, keeping your money in a safe place, like a savings account or a or a low yield CD, simply will not get you there. If there was no risk to getting a big return on your money, everybody would run to the highest yielding investments, right? But high return investments usually bring higher risks. So they need to be used carefully. So that’s why I say determine how much risk you need and never expose your money to more than that. So what I’m saying is that investing means you could possibly lose money and that risk creates a tension that keeps a lot of people from getting started investing in the first place. And another thing to consider is that over the past couple of years, the inflation rate has been more than 2% so if you’re not earning at least that much, you’re really losing money.

And if you’re earning about 2% you are just treading water. So therefore taking calculated investment risk is an important part of your financial life. Without it, your money just isn’t going to grow fast enough to achieve your longterm goals, keeping your money safe and cozy in a low interest savings account. It sounds nice, but it stunts the growth of your money and just doesn’t give it the opportunity to grow much at all. So the reality is that not taking enough investment risk can really be the riskiest move of all. You could fall short of your goals or run out of money during retirement. Whether you avoid risk intentionally or you’ve simply been procrastinating, investing, the result could be devastating to your financial future. Okay. Moving on to rule number two. No, the difference between saving and investing, we often tend to use these terms interchangeably, but I want to make the distinction here that they are two very different things and I don’t want you to confuse them.

Saving is putting money aside without exposing it to any or very little risk such as in a savings account, a money market deposit account, or a CD. A certificate of deposit investing is committing money. To an endeavor or an account with the expectation that you’re going to make a certain amount of profit or income. The risk is that you’ll receive a less than what you expect or worse yet there’s a possibility that you could lose your entire investment. As I mentioned, the timing for spending the money determines what you should do with it. Money that you might want or need and less than five years from now should not be exposed to market volatility because its value could drop at the exact moment you need it. So if your money was in the market last week and all of a sudden you needed it to pay for, I don’t know, your, your car repairs or some unexpected medical bill and then boom, the value drops, you would be very upset that you did not have that money in a very stable savings account.

So even though safe, low yield options like savings or money market deposit account are poor choices for your longterm goals like retirement, they are perfect for your short term goals and your emergency savings. That’s because that money can be tapped in an instant and you’re guaranteed that it’s not going to lose value. Or if it does, it’ll be just a tiny little bit. So before you do any investing, your first financial priority should be to accumulate emergency savings. That’s how you avoid getting into financial trouble. If you have a large unexpected expense or you lose your job or your business income, ideally everyone should have a minimum of three to six months worth of their living expenses tucked away in an FDI C insured bank savings account. Now, if that amount seems unattainable to you, start with a small amount. Start by saving a reasonable amount, maybe 500 1,002 thousand then build your emergency savings while you invest for the future.

So doing both at the same time. The ideal scenario is to invest a minimum of 10 to 15% of your gross income for retirement, plus an additional 10% for emergency savings and you want to consider these amounts monthly obligations to yourself, just like a bill with a due date that you receive from a merchant. Pay yourself each month if saving and investing a minimum of 20% of your gross income seems like more than you can afford. Start tracking your spending carefully and categorizing it. I promise that when you see exactly how you’re spending money, you’ll find opportunities to cut back and save more. So let’s go back to the anonymous question that I received about having $50,000 sitting in a savings account. Whether you should move some amount of that into investments, depends on what’s a healthy emergency fund for you. If you feel comfortable having less on hand, then you should definitely invest the difference.

So the answer is to hold back enough to a healthy emergency fund and to also get started with a retirement account. Maybe it’s an IRA or a workplace plan like a 401k if that’s an option, but if it’s not an IRA is a great place to invest for 2018 you can put in a maximum of $5,500 into either a traditional or a Roth IRA or 6,500 if you’re over age 50 or if you want to maintain all of that $50,000 in savings, you could leave that alone and then go ahead and open up a retirement account and just start fresh with new contributions into that account while you hold on to the savings. Okay. Rule number three, start early and small. What are the most important factors in how much wealth you can accumulate? Depends on when you start investing and there’s no better example of how the proverbial early bird gets the worm.

Then with investing starting early allows your money to compound and grow exponentially over time, even if you don’t have much to invest. I’m going to give you two different investors, Jennifer and Brad, who set aside the same amount of money each month and they get the same average annual return on their investments. So here’s Jennifer. She begins investing at age 35 and stops at age 65 so she’s got a full 30 years of investing, and what she does is invest $200 a month for those 30 years, and she gets an average rate of an 8% return. She’s going to end up with just under $300,000 now, Brad, on the other hand is beginning earlier. He starts at age 25 and stops at 65 so he’s got 40 years of investing under his belt and he’s doing the same thing as Jennifer putting in 200 a month, getting an 8% return.

He’s going to end up with about $700,000 so because brand gets a 10 year headstart, he has $400,000 more to spend in retirement than Jennifer. But the difference in the amount that Brad contributed, there’s only $24,000 so that’s the power that starting early can have on your financial future. Never forget to start as early as possible. It’s a huge mistake to believe that you don’t earn enough and that you’ll just catch up later. That typically doesn’t happen if you’re waiting for a wind fall or you’re waiting to earn more money. You’re burning precious time. Investing early is kind of like getting a healthy retirement on sale. It’s one of the best financial habits you can develop, even if you can only put aside small amounts on a regular basis. So even 20 bucks a month is better than nothing, and if you’re starting late, do not stress about it.

Just kept motivated to right now, for most of us, building wealth is a slow journey that involves putting small amounts of money aside on a regular basis. So set up your accounts and automate your contributions. That’s a really powerful step in the right direction. Years from now when you’ve got savings and investments to fall back on or to fund the lifestyle that you’ve been dreaming about, you’re going to be so happy that you took control of your financial future. Now rule number four, don’t try to beat the market. While it might sound boring, you should aim to be an investor who makes it average returns, and that’s because chasing high returns, reacting to short term market volatility and buying into media hype generally does not work. Investors think their choices must be right if other people are doing the same thing. So if the media says buy, buy, buy, most investors get into the market and when everyone else is in a panic and selling, that’s what most people do.

So if you invest emotionally, you could end up kind of following the herd, which is buying high and selling low. That’s what most people do, and it’s the exact opposite of how you actually make money. Yes, short term investment returns can vary dramatically from day to day and month to month, but over the longterm market returns always revert to the average. So stick to a longterm strategy. It’s called a buy and hold strategy, and this is for money that you will not need to spend for at least 10 years. So again, you’re investing the money that you want to spend in the future. Money that you need to spend in the short term should not be invested. Number five, be diversified to kind of risk. Many people are surprised to learn that it’s better to own more investments than less. This is a proven investing strategy called diversification. It allows you to earn higher average returns while reducing risk because it’s not likely that all your investments could drop in value at the same time.

For instance, if you put your life savings into one technology stock and it tanks, you’re in trouble, but if that stock only makes up a fraction of your portfolio, the loss is negligible. Having a mix of investments that respond to market conditions in different ways is the key to smoothing out risk. For most investors who don’t want to make a career out of stock, picking, buying individual stocks is a bad idea. It’s risky because stock prices can be volatile as we know and fluctuate wildly. Trying to find one or two. Winning stocks is gambling guys. It’s not smart strategic investing, but it’s really easy to afford a diversified portfolio by purchasing shares of a low cost fund or a low cost exchange traded fund or an ETF. Funds are so great because they bundle combinations of investments for you. So these might be stocks, bonds, cash, real estate or other securities.

They’re bundled into packages that are really convenient to buy. Diversifying doesn’t increase your investment return all by itself, but it does allow you to reduce investment risk and that gives you more safety and control without lowering your return. If you have a fund and one stock in that fund goes down, it’s no big deal because you own hundreds or even thousands of other stocks or investments inside that fund that may be holding steady or even going up. Rule number six, focus only on what you can control. Since drops in the stock market are natural and unavoidable, simply stay focused on what you can control. Remember why you’re investing in the first place to build wealth for the long term. Reaching goals like retirement. I know watching the markets go on a roller coaster ride can feel frightening, but taking extreme actions when your emotions are running high, like selling investments right?

When their value drops, that’s the opposite of what you’re trying to achieve. What happens to the financial markets in the short term only matters if you need to liquidate your investments in the short term. That’s why you should never invest money that you might need to spend within the next five years. Instead, make solid investments that will grow over the long term and don’t get rattled when you see volatility in the stock market. So my advice is stay calm, turn off the news, and just ride this volatility out. Also, put this market correction in perspective. The recent drop is pretty small compared to the huge gains that we’ve seen in the market over the past six years. So if you maintain a buy and hold strategy that’s focused on future growth, you have ample time to recover. And if you have not started investing, don’t beat yourself up about it.

The key factors you can control are opening an account and starting small. If you’re living paycheck to paycheck, you want to figure out how to ruthlessly cut your spending so you can come up with more money to invest. Squeeze your budget as tight as possible until it hurts, and then squeeze a little tighter. Cancel services you can live without, downsize your housing or sell a vehicle so you can invest as much as possible. Another option is to increase your income with a second job or a side gig to boost a low savings rate. Rule number seven, use tax advantaged accounts for faster results. One of the best ways to invest money is under the umbrella of a tax advantage account, such as a workplace, a, oneK or four Oh three B last week I talked all about Roth account, so if you miss that show, go back and take a listen.

If you don’t have a retirement plan at work or you’re self employed, you’ve got options too. You’ve got an IRA, a SEP, IRA, simple IRA or a solo 401k. I love retirement accounts because they help you build wealth and cut your tax bill at the same time, which can help you turbocharge your results. Traditional retirement accounts allow you to defer taxation until retirement and Roth retirement options require tax on your upfront contributions, but allow tax free withdrawals and retirement. Additionally, many employers offer retirement matching funds, which is free money that no eligible participants should turn down. But even if your employer does not offer matching, I’m still a fan of workplace plans because contributions become consistent, they come right out of your payroll automatically and you can take all your money with you, including your vested matching funds if you leave the company. So this is a good place to get back to the question from cigar who has not gotten started investing and is from outside of the United States.

So cigar, thanks so much for your question. Foreign nationals may be eligible to participate in a workplace retirement account like a 401k and even get matching contributions, but withdrawing money before age 59 and a half generally results in owing income tax plus a 10% penalty. And that’s the case. Regardless of your citizenship status. So if you have a retirement account at work, I would definitely encourage you to participate in it. And if you want to open up an individual retirement arrangement or IRA or a regular taxable investing account, you’re typically required to be over age 18 and have a us social security number and a U S mailing address. And since you’re working here, I would assume that you have that documentation. And if you’re not sure what your options are, I would encourage you to talk with your benefits administrator at work or talk to a account custodian for an IRA.

So going to a variety of places like Vanguard, fidelity, better men, these are all places that can help you open up an IRA or a taxable account and they will definitely have guidance for you on what’s an option. Okay. Our last rule, number eight, choose investments based on time horizon. Your horizon is the amount of time you have before you’ll need to begin spending your nest egg. For instance, if you’re 40 years old and you plan to quit working and live solely on investment income when you’re 65 you have a 25 year investment horizon, and this is important to consider because in general, the longer your horizon, the more aggressive you can afford to be. I recommend that you start by figuring out how much stock you should own and here’s an easy shortcut that I also mentioned in last week’s show. You can subtract your age from 100 and use that number as the percentage of stock funds to own in your retirement portfolio.

For example, if you’re 40 you might consider holding 60% of your portfolio in stocks. In my book, money girl’s smart moves to grow rich. I recommend a variation on this rule that’s a little more aggressive. Subtract your age from one 10 to find the percentage of stocks to own. So for a 40 year old, this method shows an asset allocation of 70% stocks and 30% bonds and cash. These investment allocation targets are not hard rules because everyone is different, but they’re a good place to start. When in doubt, if you have more than 10 years to go before retirement, choosing funds made up primarily of stocks or labeled as growth funds is definitely the best way to get an optimal return on your investment. Options vary depending on the investing company, the type of account you have, but good choices include mutual funds, index funds, and exchange traded funds or ETFs.

Many accounts now offer what are called target date funds. They invest based on the year when you plan to retire. For example, if you’re planning on retiring in the year 2040 the name of the fund would be something like target date 2040 index fund. Target date funds are very convenient because they automatically rebalance on a periodic basis to achieve growth in the early years, but then they become more conservative as you approach retirement. The saying time is money is the absolute truth when it comes to building wealth for your future, so get in the habit of investing consistently sooner rather than having to invest more money later. That’s the secret to investment success. If you have a question or a future show idea, just visit my contactPage@lauradadams.com while you’re there, you can get four free chapters of my new book debt free blueprint. I’m also offering a holiday discount of 50% off my bestselling online classes.

You get lifetime access so you can learn anytime at your own pace. If you have a resolution goal or intention to get out of debt in the new year, enroll in my debt course called get out of debt fast. A proven plan to stay debt-free forever. You simply won’t get different results, your money if you don’t take different actions. So take control of your finances by joining this super affordable class. You’ll come away with a clear debt reduction plan to eliminate credit cards, student loans, medical bills, mortgages, or any debt you owe, even if you don’t have extra money to pay them off faster to learn more, just text debt course, D, E B T C O, U R S E with no space. So text debt course two the number three three four four, four and I’ll send you an email with your discount. I hope to see you in class. Money girl is produced by the audio wizard, Steve Ricky Berg with editorial support from Joe Muska Lino. If you’ve been enjoying the podcast, please show your support by rating and reviewing in iTunes. You might also like the backlist episodes and show notes available@quickanddirtytips.com that’s all for now. I’ll talk to you next week. Until then, here’s to living a richer life.

Everyone dreams about an active life in retirement, whether it’s learning a new hobby, spending time with family or traveling. Now is the time to start thinking about covering your mug. That includes essential monthly expenses like medical utilities and groceries or your mug with an annuity. So you’re free to live the life you want. Learn more about annuities@protectedincome.org let’s take a short break so I can thank LightStream for supporting the podcast. If you’re like most of us, you carry a balance on your credit cards and if those cards come with high interest rates, you should be using LightStream. It’s so easy to lower your interest rate and save with a LightStream credit card consolidation loan. Get a rate as low as 5.95% APR with autopay. One LightStream customer said, I heard about LightStream while listening to one of my favorite podcasts and it prompted me to do some more research.

There was no one easier to work with. Plus LightStream had the best rate by far better yet no fees and I had my cash within two business days. Apply today and get a special interest rate discount and save even more. The only way to get this discount is to go to lightstream.com/money girl. It’s spelled L I G H T S T R E a m.com/money girl subject to credit approval. The rate includes a 0.5% autopay discount terms and conditions apply and offers are subject to change without notice. Visit lightstream.com/money girl for more information. The thank M M Lafluer for supporting money. Girl. When women succeed in the workplace, the world becomes a better place. That’s why M Lafluer takes the work out of dressing for work so you can focus on what you do. They offer beautiful functional clothes and complimentary personal styling. So if you hate shopping for work clothes but you want to dress well, [inaudible] Lafluer is for you.

You can schedule a free styling appointment at one of their showrooms or shop online and if you need outfit inspiration, check out their pre style capsule wardrobes online full of styling guidance. For every dress code I own several M M Lafluer pieces and can vouch for how comfortable the fabrics are and how easy they are to care for. You’ll find thoughtfully designed pieces like bra straps that stay up with snaps. Plus many styles are machine washable or naturally anti odor and shipping and returns are always free. Visit [inaudible] dot com slash money girl and use promo code money girl for 15% off your first purchase.

With all the volatility going on in the financial markets right now, I pulled a show from the archives with specific investing advice. The show originally aired at the end of 2018 when the markets were also going through a turbulent time.

No matter whether you’re not sure if you’re managing your retirement account the right way or you’re hesitant about getting started investing, keep listening. I’ll give you recommendations and answer a couple of listener questions about how to invest without being too risky.

The takeaway is that if you have a long-term investment objective, such as building wealth for a retirement that’s likely to happen at least five years in the future, you should not be rattled by what’s going on day-to-day with the stock market.

The fact is, you really shouldn’t even be paying attention to it, and I’m not. There’s no reason to get emotional, react, or even to consider selling your investments during market turbulence. I know that may feel counter-intuitive. But when the market drops, that’s the worst time to sell because you’d be doing it at a loss. I’m continuing to make retirement account contributions, and I recommend that you do the same.

When the price of funds in your retirement account or brokerage account goes down, they’re on sale. If you contribute the same amount each month or paycheck, you end up buying more shares because they cost less. When the price goes up, you have more shares with higher values, and boom, your account value rises!

But because the stock market comes with short-term risk, you shouldn’t have all your money invested. You also need to maintain a cash reserve or emergency savings. Your emergency savings and investments are two completely different buckets of money that have different purposes.

As I covered in last week’s show, the Fed’s interest rate cut means that earnings on your bank savings will likely drop a bit. Don’t let that fact keep you from building your cash reserve and keeping it in an FDIC-insured bank savings account.

It doesn’t matter if your bank savings account pays a pittance because its purpose is to keep you safe in the short-term. But the money you intend to spend in retirement is for the long-term. Money that you don’t need to spend in the next five years should stay invested for as long as possible, so you take advantage of higher average historical returns that are necessary to build a substantial nest egg.

The bottom line is that staying invested for the long-term has historically paid off. The market reflects the overall growth in the economy and rewards long-term investors, even though temporary dips will always occur.

8 Investing Rules to Follow Even When the Stock Market Drops

After seeing huge stock market drops, you may have wondered if you’re investing money the right way. Or you may still be on the sidelines, not sure how or when it will be a good time to get in the game.

I received a question from Sagar R. who says:

I have a unique situation. I’m 35 years old, from another country, and have never invested. I fear recession is around the corner every year and just put my money in the bank. How can people like me get started investing?

Another question comes from an anonymous Money Girl Podcast listener who says:

I have about $50,000 sitting in a savings account. I haven’t put it in an IRA because I’ve been worried that I’ll need the money. But I’m also worried that I’ve waited too long to start investing because I’m in my 40s. How should I manage this money?

In this post, I’ll answer these questions with recommendations for how to invest money wisely, even when the market is volatile. You’ll know exactly how much to invest and where to put your money so you create financial security without taking too much risk.

Here’s what to know about each investing rule.

1. Clarify the purpose of your money

There’s one rule of investing that you should always remember: Never expose money to more risk than is necessary to accomplish your goals. So, take a step back and be clear about why you’re investing in the first place. Determine when you’ll need to spend the money you plan to invest, because that determines what you should do with it.

Historically, a diversified stock portfolio has earned an average of 10%. But even if you only earned an average of 7% on your investments, you’d have over $1.3 million to spend during retirement if you invested $500 a month for 40 years.

But if you save $500 a month in a bank account with an average return of 0.5% over 40 years, you’ll only accumulate about $250,000. So, if your long-term goal is to have a nest egg that allows you to pay for retirement, keeping money in a safe place—like a savings account or a low-yield CD—simply won’t get you there.

If there was no risk to getting a big return on your money, everyone would run to the highest-yielding investments. But high return investments usually bring higher risks, so they need to be used carefully.

In other words, investing means that you could possibly lose money. This risk creates a tension that keeps many people from getting started investing in the first place.

Also, consider that in the past couple of years, the inflation rate has been more than 2%. So, if you’re not earning at least that much, you’re really losing money.

Therefore, taking calculated investment risk is an important part of your financial life. Without it, your money won’t grow fast enough to achieve your long-term goals. Keeping money safe and cozy in a low-interest savings account stunts its potential and doesn’t give it the opportunity to grow.

The reality is that not taking enough investment risk can be the riskiest move of all! You could fall short of your goals or run out of money during retirement. Whether you avoid risk intentionally or have simply been procrastinating investing, the result could be devastating to your financial future.

2. Know the difference between saving and investing

Though we tend to use the terms saving and investing interchangeably, don’t confuse them. Here are the major distinctions between the two:

  • Saving is putting money aside without exposing it to any or little risk, such as in a savings account, money market deposit account, or a certificate of deposit (CD).
  • Investing is committing money to an endeavor or account with the expectation that you’ll make a certain amount of profit or income. The risk is that you’ll receive less than what you expect. Or worse yet, there’s a possibility that you could lose your entire investment.

As I mentioned, the timing for spending money determines what you should do with it. Money that you want or might need in less than five years should not be exposed to market volatility because it’s value could drop at the exact moment you need it.

So, even though safe, low-yield options—such as a bank savings or a money market deposit account—are poor choices for your long-term goals, such as retirement, they’re perfect for your short-term goals and emergency savings.

Before you do any investing, your first financial priority should be to accumulate emergency savings. That’s how you avoid getting into financial trouble if you have a large, unexpected expense or lose your job or business income.

Ideally, everyone should have a minimum of three to six months’ worth of their living expenses tucked away in an FDIC-insured bank savings account. If that amount seems unattainable, start by saving a reasonable amount, such as $500 or $1,000. Then build it while you invest for the future at the same time.

The ideal scenario is to invest a minimum of 10% to 15% of your gross income for retirement, plus an additional 10% for emergency savings. Consider these amounts monthly obligations to yourself, just like a bill with a due date you receive from a merchant.

If saving and investing a minimum of 20% of your gross income seems like more than you can afford, start tracking your spending carefully and categorizing it. I promise that when you see exactly how you’re spending money, you’ll find opportunities to cut back and save more.

Let’s get back to the anonymous question about having $50,000 sitting in a savings account. Whether you should move some amount into investments depends on how much emergency money you need.

If you feel comfortable having less on hand, you could use some of it to max out an IRA. For 2018, you can invest up to $5,500, or $6,500 if you’re over age 50, in a traditional or a Roth IRA. Or you could leave the savings alone and begin making contributions to a retirement account now.

3. Start early and small

One of the most important factors in how much wealth you can accumulate depends on when you start investing. There’s no better example of how the proverbial early bird gets the worm than with investing.

Starting early allows your money to compound and grow exponentially over time—even if you don’t have much to invest. Compare these two investors, Jennifer and Brad, who set aside the same amount of money each month and get the same average annual return on their investments:

Jennifer

  • Begins investing at age 35 and stops at age 65
  • Invests $200 a month
  • Gets an average return of 8%
  • Ends up with just under $300,000

Brad

  • Begins investing at age 25 and stops at age 65
  • Invests $200 a month
  • Gets an average return of 8%
  • Ends up with just under $700,000

Because Brad got a 10-year head start, he has $400,000 more to spend in retirement than Jennifer! But the difference in the amount Brad contributed was only $24,000 ($200 x 12 months x 10 years).

So never forget to start investing as early as possible. It’s a huge mistake to believe that you don’t earn enough to invest and can catch up later. If you wait for a windfall, you’re burning precious time.

Remember that investing early is like getting a healthy retirement nest egg on sale! It’s one of the best financial habits you can develop, even if you can only put aside small amounts on a regular basis.

Even saving or investing just $20 a month is better than nothing. And if you’re starting late, don’t stress about it—just get motivated to start right now. For most of us, building wealth is a slow journey that involves putting small amounts of money aside on a regular basis.

Setting up your accounts and automating contributions is a powerful step in the right direction. Years from now when you’ve got savings and investments to fall back on or to fund the lifestyle of your dreams, you’ll be so happy that you took control of your financial future.

4. Don’t try to beat the market

While it might sound boring, you should aim to be an investor who makes average returns. That’s because chasing high returns, reacting to short-term market volatility, and buying into media hype generally doesn’t work.

Investors think their choices must be right if other people are doing the same thing. The media says buy, so most investors get in the market. And when everyone else is in a panic and selling, that’s what most people do. When you invest emotionally you could end up buying high and selling low, which is the exact opposite of how you make money.

Yes, short-term investment returns can vary dramatically from day to day and month to month. But over the long term, market returns always revert to the average. So, stick to a long-term, buy and hold investment strategy for funds you won’t need to spend for at least 10 years.

5. Be diversified to cut risk

Many people are surprised to learn that it’s better to own more investments than less. This is a proven investing strategy called diversification. It allows you to earn higher average returns while reducing risk, because it’s not likely that all your investments could drop in value at the same time.

For instance, if you put your life’s savings into one technology stock and it tanks, you’re in trouble. But if that stock only makes up a fraction of your portfolio, the loss is negligible. Having a mix of investments that respond to market conditions in different ways is the key to smoothing out risk.

For most investors, who don’t want to make a career out of stock picking, buying individual stocks is a bad idea. It’s risky because stock prices can be volatile and fluctuate wildly. Trying to find one or two winning stocks is gambling, not smart, strategic investing.

But it’s easy and affordable to build a diversified portfolio by purchasing shares of a low-cost mutual fund or an exchange-traded fund (ETF). Funds bundle combinations of investments in stocks, bonds, assets, and other securities into packages that are convenient to buy because they’re made up of many underlying investments.

Diversifying doesn’t increase investment returns all by itself. But it does allow you to reduce investment risk, and give you more safety and control, without lowering your return. If the price of one stock in a fund takes a dive, it’s no big deal because you own hundreds or thousands of other stocks that may be holding steady or going up.

6. Focus only on what you can control

Since drops in the stock market are natural and unavoidable, simply stay focused on what you can control. Remember why you’re investing in the first place: to build wealth for long-term goals, such as retirement.

I know watching the markets go on a roller coaster ride can feel frightening. But taking extreme actions when your emotions are running high, like selling investments right when their value drops, is the opposite of what you’re trying to achieve.

What happens to the financial markets in the short-term only matters if you need to liquidate your investments in the short-term. That’s why you should never invest money that you might need to spend within the next 5 years.

Instead, make solid investments that will grow over the long-term, and never get rattled when you see volatility in the stock market. So, stay calm, turn off the news, and ride it out.

Also, put this market correction in perspective. The recent drop is small compared to the huge gains we’ve seen in the market over the past six years. If you maintain a buy and hold strategy that’s focused on future growth, you have ample time to recover.

And if you haven’t started investing, don’t beat yourself up about it. The key factors you can control are opening an account and starting small. If you’re living paycheck to paycheck, figure out how to ruthlessly cut your spending so you can come up with more money to invest.

Squeeze your budget as tight as possible until it hurts and then squeeze a little tighter. Cancel services you can live without, downsize your housing, or sell a vehicle so you can invest as much as possible. Another option is to increase your income with a second job or side gig to boost a low savings rate.

7. Use tax-advantaged accounts for faster results

One of the best ways to invest money is under the umbrella of a tax-advantaged account, such as a workplace 401(k) or 403(b). If you don’t have a retirement plan at work or are self-employed, you have options too, such as an IRA, SEP-IRA, SIMPLE IRA or a Solo 401k.

Retirement accounts help you build wealth and cut your tax bill at the same time, which can turbo charge results. Traditional accounts allow you to defer taxation until retirement. Roth options require tax on contributions, but allow tax-free withdrawals in retirement.

Additionally, many employers offer additional retirement matching funds, which is free money that no eligible participant should turn down. But even if your employer doesn’t offer matching, I’m still a fan because contributions come from consistent, automatic payroll deductions. And you can take all your money with you—including your vested matching funds—if you leave the company.

Let’s get back to the question from Sagar R. who hasn’t gotten started investing and is from outside of the U.S. Foreign nationals may be eligible to participate in a workplace retirement account, such as a 401(k), and even get matching contributions. But withdrawing money before age 59½ generally results in owing income tax plus a 10% early withdrawal penalty regardless of your citizenship status.

If you want to open an IRA or a regular investing account, you’re required to be over age 18 with a U.S. Social Security number and a U.S. mailing address.

Free Resource: Retirement Account Comparison Chart (PDF download)

8. Choose investments based on time horizon

Your “horizon” is the amount of time you have before you’ll need to begin spending your nest egg. For instance, if you’re 40 years old and plan to quit working and live solely on investment income when you’re 65, you have a 25-year investment horizon. This is important to consider because, in general, the longer your horizon the more aggressive you can afford to be.

Start by figuring out how much stock you should own because that’s typically the riskiest type of investment. Here’s an easy shortcut: Subtract your age from 100 and use that number as the percentage of stock funds to own in your retirement portfolio.

For example, if you’re 40, you might consider holding 60% of your portfolio in stocks. In my book, Money Girl’s Smart Moves to Grow Rich, I recommend a variation on this rule that’s a little more aggressive: Subtract your age from 110 to find the percentage of stocks to own. For a 40-year-old, this method shows asset allocation of 70% stocks and 30% bonds and cash.

These investment allocation targets are not hard rules because everyone is different. If you have more than 10 years before retirement, choosing funds made up primarily of stocks, or labeled as growth funds, is the best way to get an optimal return on your investment. Options vary depending on the investing company and type of account, but good choices include mutual funds, index funds, and exchange-traded funds (ETFs).

Many accounts offer target date funds that invest based on the year when you plan to retire. For example, if you want to retire in 2040, the name of the fund would be something like “Target Date 2040 Index Fund.”

Target date funds are very convenient because they automatically rebalance on a periodic basis to achieve growth in the early years, but then become more conservative as you approach retirement.

The saying time is money is the absolute truth when it comes to building wealth for your future. Investors who start late usually have to make huge financial sacrifices to accumulate enough money to reach their goals—or they’re forced to work much longer than they want to.

Getting in the habit of investing consistently sooner, rather than having to invest more money later, is the secret to investment success.

Did we provide the information you needed? If not let us know and we’ll improve this page.
Let us know if you liked the post. That’s the only way we can improve.
Yes
No

About the Author

Laura Adams, Quick and Dirty Tips

Laura Adams, Quick and Dirty Tips

Laura Adams is an award-winning author of multiple books, including Money Girl’s Smart Moves to Grow Rich. Her newest title, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, is an Amazon No. 1 New Release. Laura’s been the writer and host of the popular Money Girl Podcast, a top weekly audio show in Apple Podcasts, since 2008. She’s a frequent source for the national media and has been featured on most major news outlets including NBC, CBS, ABC FOX, Bloomberg, NPR, The New York Times, The Wall Street Journal, The Washington Post, Money, Time, Kiplinger’s, USA Today, U.S News, Huffington Post, Marketplace, Forbes, Fortune, Consumer Reports, MSN, and many other radio, print, and online publications. Millions of readers and listeners benefit from her practical financial advice. Her mission is to empower consumers to live richer lives through her podcasting, speaking, spokesperson, teaching, and advocacy work. Laura received an MBA from the University of Florida. Visit LauraDAdams.com to learn more and connect with her.

Published by Debt.com, LLC