The world of investing can be daunting and there is so much to learn that the average person could never expect to fully understand it. Plus, if you watch any of the talking heads on the news, you’ll be scared to death to even begin putting your money away in the market. This is why the advice you’ll hear ranges from those who tell you to buy “hot stocks” to those who are so scared the only option they’ll put forth is to “hide the money under your mattress”. But when it comes to retirement, you can’t afford to do nothing. So rather than making this whole process confusing and difficult, let’s go through some simple, straightforward starting steps that can help you get a start on retirement savings.
If you want to save for retirement (or any other long-term goal), you have to make it important. Retirement plans that you start today will always be worth more than those you start five years from now because compounding interest in any sort of savings plan will work to your advantage. It is not enough to say you want to save, you must actually start doing it!
Retirement planning is just that – planning. The best way I can tell you to live on a plan is to start that today as well. What does that mean? Live on a budget. I know you hear that from me all the time, but I can’t say it too many times or loudly enough. A budget does a better job of helping you plan and prioritize than any other tool and puts you in control.
Once you’ve gotten a handle on those first two items, you need to decide how much risk you’re willing to take. If you put your money in a simple bank savings account, you’ll earn almost no interest, but the money is safe. If you invest your money into some against-the-odds business idea, you may earn a huge return, but you may also lose your entire investment because you’ve obviously taken a much bigger risk.
You also need to learn some basic terms and equations. For example, you need to understand the difference in a company stock and a company bond. You need to know what a dividend is. If you see the initials DJIA, S&P, etc., you need to know what you’re looking at. You need to know the difference in a 401k and an Individual Retirement Account (sometimes called an Individual Retirement Arrangement or IRA). You don’t need to become an expert, but spending a little time focused on learning some common terms and basic information will be very valuable. As far as equations, be able to understand how to read an earnings statement and calculate basic returns on investment, etc. If you want to know how a number was calculated, sit down and figure it out or ask someone. Be informed!
Don’t forget that once you start investing; be sure to spread things around. Don’t just invest in a single company or single mutual fund. Doing that, you’re putting all your eggs in a single basket. Spread your money around into different types/styles of investments to help ward off some of the bigger ups and downs that may come.
Don’t go too fast and don’t outpace your knowledge. Should you save a lot for retirement income – YES. The way to do this is to learn a bit then invest a bit. Learn a bit more then invest a bit more. You don’t need to be an expert, but you do need to clearly understand what you’re investing in. If all you know are savings accounts and some certificates of deposit, great! Start there and grow from there as you learn better ways to make your money work for you. Don’t get caught up in the hype – understand, then invest. Understand, then invest. Understand, then invest.
What tips would you add? I’d love to read your comments below.