“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
– Warren Buffett
by Greg Morgan | Contributor
As children, most of us were probably taught to “put some of your money into savings” or “save your money for college” or “put aside some money for the future.” As a wealth advisor with over 30 years of financial planning and investment experience, I can tell you that the specifics of how to truly grow your assets are not lessons most of us have learned. There are so many options for where you can invest your hard-earned dollars, and it’s not a one-size-fits-all solution. How do you find the best fit for you?
Long-term investments aren’t necessarily the first step in your financial plan – in fact, they’re usually the last. I recommend that you follow a general strategy as you consider where to put your money after the bills are paid.
#1: Pay yourself first
I recommend to all my clients that they maximize the contributions to their 401(k) plans at work. These plans are sheltered from creditors, and contributions are often matched by employers. Even if you haven’t been taking advantage of your employer’s program, and you are 50 or older, there is a “catch up” option that will allow you to contribute an additional $6000 annually. Paying yourself is important every time your financial situation changes. If you get a bonus, I recommend that you put aside at least one-third and enjoy the rest, and if you get a promotion, put aside some of the difference. That savings can go a long way but doesn’t affect the lifestyle you’re currently living.
#2: Set aside funds for your children
The earlier you start putting away money for college, the less painful it will be in the future. College is expensive, period, but setting up a 529 plan or a uniform gift to minors (which allows assets, such as securities, to be held for the benefit of a minor) and contributing to it regularly will go a long way toward lessening the burden when your kids leave the nest.
#3: Pay your creditors
Once you have a four- to six-month “cushion,” or a liquidity fund to cover unforeseen expenses, you should begin paying off any debt and not just the minimum payment. You may wonder if you should take your money from a savings account to pay off creditors. You really have to examine the cost of return of leaving it in the bank as compared to the interest you’re paying. Usually, paying off the debt faster is better for you in the long term.
NOW you’re ready to look at long-term investments
As Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.”
Investments are really broken down into three categories: Cash/money market accounts, bonds and equities (stocks and mutual funds). I encourage my clients to really know what they own in investments and why. It’s often best to meet with a professional to help you evaluate your portfolio.
These days the economy is changing quickly. For example, since the 1980’s we’ve had the longest secular decline in interest rates but now the federal reserve is increasing interest rates to slow economic growth. As rates go up, investments in assets like bonds go down. For a long time they have been considered some of the safest places to invest, but we’re about to enter an environment where that is changing. As the market changes, you may want to consider changing the allocation of your 401(k). It’s important for you to have a good handle on where your funds are. Ask yourself “Is this the best place my money can grow for me?”
I say it seems that money is like closet space– there’s just never enough. That said, if you do plan ahead, you can sit back and watch that money grow while you’re enjoying the benefits of your hard work.