4 Reasons You Need to Start Investing

Let’s face it, for many investing is a difficult topic. The financial services industry has done an excellent job creating lingo and products that seem overly complex. Part of it is to justify their services; ‘If this investing stuff is too complex, give me your money and I’ll handle it for you!’ Technology is changing that dynamic and people are starting to realize that investing, particularly retirement investing, doesn’t require a Ph.D. in Math or Finance. The first step is to understand why investing is important and then to develop an openness to learning over time. This is not a forum for specific investing advice, but rather to discuss why investing is essential to reach our long-term financial goals.
Before we get into the reasons to invest, let’s make sure we are all on the same page what we mean by investing.

  1. Prior to investing funds in the stock market, make sure you have at least a base level emergency fund in place (in a separate savings account). Many people make the mistake of saving for retirement without building the foundation to prepare for the present. If you have enough money to build both at the same time, by all means, do so, but top priority should be to build an emergency savings foundation to avoid using credit cards or tapping into long-term investments.
  2. For our purposes, when we discuss investing, we are talking about long-term investing. We would not invest funds in the market needed for short-term or medium-term goals (i.e. less than five years). We’re discussing investing for goals such as building a nest egg for financial freedom or retirement.
  3. We are also not referring to the purchase of individual stocks or day trading. While that may be of interest to some, it is not advisable for the vast majority of the public. Investing has different levels and complexities. The majority of adults can develop the skills to drive an automobile safely on the roads, but we can all agree that most people shouldn’t try to become NASCAR drivers.

Now that we’re all on the same page, let’s talk about why you need to be investing!

1. You Can’t Build Wealth by Spending

Money is a resource, and like fire, it can both build and destroy. In order to be financially successful, we have to learn how to use our financial resources to build. There are really only three things you can do with money and how much of each you do can make all the difference in the world.
Spend – We do it every single day. We use our money to acquire products or services that we believe are of equal or greater value. The problem with spending is that most things decrease in value over time, so after we part with our hard-earned money, we’re left with a product or service that is immediately less valuable. If you use too many of your financial resources to purchase items that decrease in value, you cannot build wealth. This is why keeping up with the Joneses is so poisonous; it’s a race to the bottom.
Give – Interestingly enough, studies have shown that giving actually brings more and longer-lasting happiness than spending. You likely still remember the feeling of joy when you gave someone a great gift they really appreciated or truly helping someone in need. Giving also forces discipline with our finances, when you give money away, you become keener on how you manage the remaining funds. Giving is a very important aspect of personal finance and is a driving force for many to build wealth.
Save – There are different types of saving, but the idea is that you are using your financial resources with an expectation or goal of increasing its value in the future. That can take the form of a savings account, investing in the stock market, buying real estate, or even lending. This is the primary way to build assets and thus build wealth.

2. We’re On Our Own

If you are under the age of 50, it’s likely you do not have a pension and the future of Social Security is very uncertain, it may not even exist by the time we would be eligible for it. We also know that advances in health and technology that we are likely to live longer lives. We will need funds to provide for ourselves for a longer period of time without the financial assistance from business or government. If that’s not scary enough, let’s say you want to retire at 65. You work from age 25-65 (40 years), during that time you need to save enough money to live without new income for potentially 25 years (ages 65-90). People are having enough trouble building 6 months of expenses for an emergency fund. How about building for 25 years (300 months) of expenses or more? Putting a few dollars in a savings account here and there isn’t going to get the job done. You need a plan and you need to start as early as possible.

3. Inflation Can Drown Your Savings

When planning for the long-term future, people often forget to account for inflation. This can be a big mistake and can have serious consequences. Inflation is the increase of prices or the decrease in purchasing power over time. For example, 20 years ago one could go to a gas station and purchase gas for less than $1/gallon. As of this writing, it’s about $2.30/gallon, so a $20 bill that was more than sufficient in 1996 would not fill the gas tank today. Inflation (typically 2-3% per year) is like an ocean tide that is continuously raising the financial sea level. If the sea level is ankle-deep today and you stand still (don’t invest or grow the value of your assets), the tide of inflation will continue to rise and eventually you will be completely submerged. Like quicksand, standing still financially is actually sinking because inflation decreases the value of yesterday’s dollar. The only way to counteract inflation is to make sure your long-term savings are earning more than inflation.

4. Compound Interest Can Save You

So far we have given you some pretty dire news, spending won’t help, you’re all alone and the winter of inflation is coming for your assets! The good news is that you have a force of nature available that can fight the good fight and help you win and reach your financial goals, her name is compound interest. However, there are two sides of compound interest coin and you have to be on the right side to win.
If you have ever paid the minimum payment on a credit card, paid student loans, car loans or a mortgage, you have experienced being on the wrong side of compound interest. When you borrow, the investment the lender made earns interest that compounds and you pay them more in the future. This is why debt can kill wealth; your financial past is stealing from your financial future.
The right side of compound interest is much more appealing. When you invest, the earnings on your investments compound such that your future earnings also earn interest for you in the future.
Let’s use a simplified example.  You save $500/month every month for 30 years. After 30 years you would have saved $180,000 cash. Now let’s say you invested the same $500/month every month for 30 years and it received 9% interest annually, it would total over $850,000.
The difference between the $180,000 and $850,000 is the power of compound interest. Compound interest is the sunlight that provides the energy to your investment seed to grow and harvest. The two major ingredients for compound interest to be effective are regular payments and time.
While saving is important, especially building the foundation of an emergency fund or short-term goals, investing is a necessity to build real wealth. Imagine a 15-year-old family member after watching a NASCAR race said to you they don’t want to learn how to drive. They explain that “It’s too technical, too dangerous and I’m not a car person!” You would probably explain to them how not learning to drive can negatively impact their quality of life. You would also likely explain to them there’s a huge difference between daily recreational driving and professional racing. The same applies to investing, excuses like, ‘I’m not good at math’, ‘it’s too complicated’, or ‘it’s too risky’ no longer hold. There is a huge difference between day-trading and retirement investing, technology has made investing accessible to many more people and because of headwinds like inflation and government uncertainty, in our opinion, it is riskier not to invest.

7 Do’s and Don’ts of Managing Your Finances

Money management can be difficult. There are lots of opinions on how to manage your money successfully, but sifting through all that can be a challenge. We have boiled down our 7 top recommendations for managing your finances.

1. Do: Plan Your Spending Before the Money Arrives

You are the CEO and CFO of You, Inc. Think about running your personal finances like a business. Companies plan their revenues and expenses well in advance. Budgeting gets a bad rep, but successful, profitable businesses formally plan their finances and make decisions in advance of their spending.

Money is like a toddler. If you don’t monitor it carefully, it will wander off and disappear quickly!

2. Do: Aggregate Your Accounts and Track Your Spending

Aggregating your accounts, allows you to see the big picture and a number we highly recommend you track regularly – your net worth. It can be difficult to make tough choices if you don’t have the bigger picture in mind. Tracking is also important. You cannot change what you do not measure. In order to make meaningful change, know exactly how much you spent last month versus the month prior. Guessing doesn’t work well with personal finances. Once you build a habit of tracking your finances, making smart decisions about your money becomes much easier.

3. Do: Understand and Deal with Your Impulse Purchases.

For some it’s the mall, for others it may be online shopping. Have you ever gone into a store planning to spend $50 and come out spending $300? Evaluate how and why that happened. Keep in mind; it is a marketer’s job to turn a “want” into a “need.” Notice on television commercials, often the product or company isn’t revealed until the very end of the commercial. Instead of selling a can of soda, they are selling happiness. Instead of a gym shoe, they are selling peak athletic performance. Instead of selling their own product, they may have a celebrity endorse it as if it is heaven-sent. Companies hire social scientists who study how to influence human behavior, emotions and decision-making to get an edge in selling their products and services. Here are some examples to protect yourself and your wallet:

  1. 24-hour rule – Wait at least 24 hours before making purchases over a certain amount
  2. Do not go grocery shopping on an empty stomach
  3. Deconstruct advertisements: what are they really selling?
  4. Use cash for non-regular expenses
  5. Don’t fall for terrible excuses (“I deserve it”, “it’s on sale”, “I’ll pay it off next month”)

4. Do: Develop a Habit of Saving and Automate It.

Even if you start small (i.e. $25/week), put systems in place that force you to save. The government understands this very well, which is why employee payroll taxes come out of your paycheck even before you are able to touch it. Apply the same strategy for your savings. Some employers will allow splitting your paycheck to different bank accounts (i.e. 75% checking, 25% savings). Another idea is to set a recurring transfer from your checking account to your savings on the same schedule as your paycheck. There are other automatic features to consider such as:

  1. Auto escalating your 401k contributions – some employers with a 401(k) offer an option to automatically increase your retirement savings by a certain percentage on a regular basis (i.e. increase 1% annually)
  2. Keep the change features in checking accounts – Some checking accounts will round up your purchases and put the change in your savings account. It is the e-version of the piggy bank. If you purchase an item for $5.60, it will round up to $6.00 and $0.40 will be deposited in your linked savings account.

5. Don’t: Ignore Your Credit Score and Credit Report

A credit score is very important to be aware of and to know how to improve. Credit scores have traditionally been used to evaluate credit-worthiness for extending loans (e.g. personal loans, mortgage, car loans, credit cards) and the higher the credit score, the more financially credit-worthy one is. The reality now is that both credit scores and credit reports are being used beyond financial transactions. Credit scores and reports are being used for employment decisions, housing, insurance premiums, and even utilities such as cell phones and cable. The challenge is credit reports often have mistakes which can negatively impact your credit. Check out our Resources Page for resources on checking both your credit report and credit score.

6. Don’t: Ignore Your Workplace Benefits

If you work for a company and do not understand the full scope of your employee benefits, it may be time to check out your HR Benefits website or set up a meeting. Particularly with larger companies, there are often benefits that go underutilized that can save you hundreds if not thousands annually. One of the largest ones is the 401k match. For most people, this is a no-brainer to at least invest as much to maximize the match as it is a 100% return on your investment. Wellness Initiatives can often mean big savings as well. Many companies are offering rebates on health insurance premiums for wellness activities, such as physicals or wearing fitness trackers. Let’s think about that for a second, companies are paying additional cash to employees to be healthier. There are several other types of benefits, and we’ve created a FREE Guide to help you maximize benefits that are offered to you.

7. Don’t: Keep up With the Joneses

Most people are familiar with the term ‘Keeping up with the Joneses,’ but just so we are all on the same page, it refers to making material comparisons to your social circle. The idea that if your neighbors or friends buy a new car, you should too. We call this the comparison trap and its one of the lessons we learned paying off our student loan debt. Part of the problem with comparing your financial status with others is that it is very difficult to know someone’s complete financial picture. Money is still a private topic and everyone has different income, expenses, debt obligations and assets. The people you are comparing yourself to could be completely up to their eyeballs in debt or fund their lifestyle through an inheritance. Making comparisons, not only could be comparing apples and oranges, but it also casts your own possessions in a negative light.

“Comparison is the thief of joy” – Mark Twain

A few reasons why keeping up with the Joneses is a bad idea:

  1. The Joneses are broke! According to a recent Bankrate survey, 76% of Americans are living paycheck to paycheck with little to no emergency savings. Why keep pace with people that are one emergency away from financial catastrophe?
  2. When you compare yourself to others, it’s much easier for wants to become needs. Wanting a car becomes needing a brand new SUV. Technology like smart phones, that didn’t exist 10 years ago, are a now a need. We have a desire to show off and have our success validated by others.
  3. Companies are spending billions of dollars to market their products and services to you. Many luxury brands are selling a temporary feeling of exclusivity in exchange for premium pricing. For example, a luxury shoe could be made in the same factory as an off brand shoe, but once they slap the logo on, they can charge five or ten times more. Luxury and quality are not the same. It is easy to get sucked into the consumerism culture. Happiness from possessions is always temporary and fleeting.

This leads us to the fundamental challenge of managing your finances. We live in a consumerism culture and an economy fueled by consumer spending. On one hand, we have many of the influences we described (social, corporate, psychological, economic) with a clear mission to separate you from your income. Those influences contend with our own goals to keep our income and grow it for the future. These recommendations will help you be better equipped to keep more of your income to reach your financial goals.

Yes, It’s Your Parents’ Fault You’re Broke!

 
If you were born after 1980, you are likely the children of one of two generations that were absolutely lousy with money. Baby Boomers and Generation X are two of the most indebted generations in the history of the U.S. The 1970’s – 1990’s saw a massive expansion of consumer credit and innovations in financial products that fundamentally changed what the middle class could ‘afford.’
Their parents (many born in the 30’s and 40’s) were children of the Great Depression. They did not have credit cards, car leases, home equity loans, adjustable rate mortgages, 0% financing, payday loans, etc. They had to save cash for what they wanted and if they couldn’t afford it, they simply went without it.
Unfortunately, we do not typically develop our money habits and behaviors from our grandparents; we typically learn money management from our parents. Whether our parents talked to us about managing money or not, we learned from their behaviors. Some studies have shown that many of our financial habits are formed by the age of seven and parents have the greatest influence. What were your early childhood experiences with money?

  • Were you spoiled as a child with seemingly endless amounts of toys?
  • When was the first time you were aware of money? The first time you went to a bank?
  • Were you aware of lack/scarcity in your childhood? Did other kids have things you wanted but your parents couldn’t afford?
  • Were you rewarded with money or toys for good grades or behavior?
  • Did you have an allowance? When did you open your first savings account?
  • When were you aware of how much your parents made and how that was different from your friends and classmates?

When you think back to those experiences, it may highlight some of the subconscious decisions you make with money.  For example, some people resented growing up without material wealth and it is a driving force for how they present themselves to others. They may purchase items to communicate to others that they can afford expensive items (even if it causes them to go into debt). They worked hard and thus they ‘deserve’ nice things. Others may have grown up with material wealth but never learned how to manage it or accumulate it so they may simply go on living the lifestyle they are accustomed to, but their finances are struggling to support it.
So yes, you can blame your parents for not teaching you positive financial habits! However, chances are if you are reading this, you’re way too old to blame your parents for anything, ever. It’s now up to you to break those habits and create better habits for yourself and the next generation.
How can you break the cycle of bad financial habits? I’m glad you asked! Here are some questions to get you started. The more honest you are with yourself, the better.

  1. Do you have memories from your childhood of feeling inadequate when it came to material things (i.e. clothes, shoes, car, home)? How does that affect how you spend money? Are you trying to prove yourself or get validation of being “successful” by spending?
  1. What are your default behaviors, values, and attitudes with money? For example, what did you do the last time you received an unexpected sum of money (bonus, tax return, student loan disbursement, birthday gift)?
  1. What are your current giving and saving habits? Do you save or give with what’s left over or do you prioritize it before spending?

Personal finance is indeed personal. It can be as much or more about your values, experiences, and emotions than dollars and cents. If you want to change your money habits, understand the why behind some of your choices. Once you understand the why you’ll be well on your way to creating better habits.

EMERGENCY: Stop What You’re Doing If You Don’t Have an Emergency Fund!

Imagine this: You spend an entire year trying to pay off your credit card debt, just to have your car break down. You don’t have the cash to cover it, so the $2000 repair goes right back on the credit card. You right back where you started, or possibly even worse.
 
One of the biggest personal finance pitfalls is a lack of solid emergency fund. Emergency funds are critical because they can be the difference between an inconvenient bad day and a financial catastrophe that can take years to escape.
Let’s start some facts to get us on the same page.

  • A recent study showed that over 60% of Americans do not have enough cash saved to pay for unexpected emergencies such as a $1000 ER visit or a $500 car repair.1

That means that the majority of us are living so close to the edge of the cliff that even the slightest nudge can tip us over.

  • The average American household has over $15K in credit card debt, over $26K in auto loans, and over $47K in student loans. The average household is paying over $6K per year in interest on their household debt.2

Let me rephrase that last sentence, the average household is paying financial institutions $6,658 just in interest per year. If we don’t financially prepare for emergencies, we end up working harder to pay more in interest to financial institutions. No thanks!

Paying off debt without emergency savings is like running a long distance race in flip flops, you may be able to get to the finish line, but your chances of falling and hurting yourself are pretty high.

Most experts recommend 3-6 months of living expenses in cash savings. The only problem with that recommendation is that can be more than most people have ever saved, so it can be overwhelming. If that’s true for you, start small. Start with a goal of at least $1000 so that if you have an emergency while paying off debt, you don’t run to credit cards and add to the debt pile. However, if you have a house, car and children, $1000 may not go very far in an emergency. Set a goal that’s appropriate for your situation and build upon that.
We’ll discuss specific saving strategies in detail in later posts, but for emergency funds, some people like to use larger sums they receive to put it away quickly. Birthday money, income tax refunds, bonuses are just a few examples of how people can stash away savings quickly.
One of the most important aspects of building savings is your perspective. Many people view saving money as a chore and painful. There’s a common belief that saving money gives us less to spend when we should view saving as giving you more financial control and independence. Change your perspective and view saving as splurging on yourself and investing in your financial goals. Focus on how much better you’ll feel when you reach your savings goal and have confidence that you can tackle debt even harder.