It’s never too soon to become an investor. If you have a long-term goal, such as a comfortable retirement, a college education or buying your first home, then what you need is a solid game plan and the discipline to start saving for the future.
Since April is Financial Literacy Month in Florida, here is a step-by-step approach to crafting a long-term savings and investment strategy.
First, you should set aside a significant percentage of your current earnings. While it’s always tempting to spend your paycheck on things that you want today, you should get in the habit of paying yourself first, and limiting your monthly spending as much as possible.
Follow the maxim, “pay yourself first,” and put 10 percent or more of your paycheck into some type of savings plan. Even though bank and money market accounts pay very low interest, you can start to build up a financial reserve in case of an unexpected emergency.
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At the same time you should start contributing to a qualified retirement plan, like a 401(k) or a self-employed individual retirement account (SEP-IRA). Those contributions are subtracted from your gross earnings, reducing your current income tax payments. In addition, your funds can grow tax-free through the decades until you start withdrawing the money in retirement.
Once you start making contributions to a retirement account or some other type of investment fund, the next question is how to invest your money in a way that generates positive returns while reducing potential risks. An experienced financial advisor can help you examine the issues you face and provide professional guidance for your individual situation. If you have a high salary or commissions, an accountant or attorney can also provide advice on managing any tax issues.
Whether you have a steady paycheck or an unpredictable flow of income, protecting your money is one of the most important themes for most people. In other words, don't throw away your money on high-risk investments that could leave you penniless in a few years.
The next issue to consider is your lifestyle. How does your monthly spending compare with your current earnings? If you just received a substantial raise, are you spending that extra money or adding it to your savings and investment accounts? Remember that it’s not how much you earn — it’s how much you can save each month that's essential to your long-term financial health.
Along with managing your spending, you should look carefully at whether your investments will need to produce income. If you are nearing retirement, that can be a very important consideration. Some types of assets, such as corporate or municipal bonds, can provide a steady stream of income, while other types of assets, such as stocks, may play a different role in your investment portfolio.
In fact, having a balanced portfolio is important for most investors, because different types of assets can offer protection against different risks. While no one wants to see a drop in the value of their assets, many investors fail to consider the impact of inflation, which raises the price of goods and services, and reduces the buying power of each dollar.
Another issue to consider in constructing your portfolio is how long your money will need to last. A successful entrepreneur who retires at age 30 might need her portfolio to generate income for the next 70 years, roughly twice as long as an executive who leaves the company at age 65.
That longevity issue can be addressed in several ways, including the possibility of going back to work in some capacity, even at a lower income level.
Depending on your own situation, a portion of your investment portfolio should be dedicated to low-risk assets that can preserve your capital for the future. You can use other assets to generate income, grow the value of your portfolio and guard against inflation. Finally, insurance can also play a key role in your long-term financial strategy by protecting against other types of risks.
In all these cases, the advice of an objective professional can help you design a financial game plan that may help you make well-informed investment decisions and provide comfort for the future.
Andrew Menachem, CIMA, is a Wealth Advisor at the Menachem Wealth Management Group at Morgan Stanley in Aventura. Views expressed are those of the author, not necessarily Morgan Stanley, and are not a solicitation to buy or sell any security. The strategies and/or investments referenced may not be suitable for all investors. Follow Menachem on Twitter @AMenachemMS
Financial planning resources
▪ United Way Center for Financial Stability has two offices, at 11500 NW 12th Ave., Miami, 305-688-3551; and 129 SW 5th Ave., Florida City; 305-688-3551. www.miamifinancialstability.org.
▪ www.MyMoney.gov: Website of the Federal Financial Literacy and Education Commission, with links to tips and tools.
▪ www.Financiallit.org/resources/budgeting-tools: The nonprofit Institute for Financial Literacy promotes financial education and counseling; its website includes tools helpful for creating budgets, tracking spending and creating an action plan.
▪ Mint.com: Free money management tools that integrate your financial information in one place.
▪ Nerdwallet.com: Free advice on a wide range of financial topics.
▪ The website for Broward’s Family Central Inc. includes useful links for financial planning and literacy tools. www.familycentral.org/resourcesfinances.
Accountants, lawyers, estate planners, investment advisors and stockbrokers can all be financial advisors. To learn more about the differences between them, see www.letsmakeaplan.org. Professionals specializing in the field undergo rigorous testing to obtain a designation of Certified Financial Planner.
Some financial advisors charge a flat or per-hour fee to help you look over your savings, investments and plans. If you’re a beginner or need one-time help, this is probably your best option.
Other investment advisors charge a percentage of your total portfolio. These often include wealth management firms and private banks. It’s important to always review fees in advance.
Stockbrokers typically charge a percentage of each trade.
If you have a company 401(k) plan, the investment company may offer online resources and inexpensive advice to help you plan for retirement.
The website for the professional organization Financial Planning Association of Miami, fpamiamidade.org, includes links to help you find a financial planner.