With the new year comes a flood of resolutions — and improving finances will top lists as it does every year. Though we often make a goal to save more or spend less, we may forget about investing. This is crucial if you’re planning to retire, as well as if you’re looking to build your wealth in general.
According to Gallup, 58% of Americans say they own stock in 2022, which is a rather weak number when considering that every personal finance expert worth her salt will advise her clients to have a diverse investment portfolio.
Resolving to start investing in 2023 is a smart idea. Here’s how to get started.
Recognize the Difference Between Saving and Investing
“If you’re unsure how to start investing, understanding how it differs from saving is an excellent place to begin,” said Laura Adams, MBA, a personal finance expert with Finder.com. “It comes down to your risk tolerance and when you believe you’ll need to spend the money.
“For example, savings is for short-term emergencies and significant purchases you plan to make in a year or two, such as a new car or home,” Adams said. “Keeping your money in a bank account means you won’t earn much interest — but you won’t lose a penny of it, either. A good rule of thumb is to keep at least three to six months’ worth of your living expenses in FDIC-insured bank savings.
“Investing is for long-term goals, such as retirement, putting young kids through college or making a significant purchase in several years. While investing always comes with risk, historically, a diversified stock portfolio has earned an average of 10%. But, even if you only made 7%, by investing $400 a month for 40 years, you’d have over $1 million to spend in retirement.”
Target Investing for Retirement
“For those who are just starting out, the best approach is to invest by maximizing retirement plan contributions each year,” said Andrew Griffith, DBA, EA, CPA (NY), CMA, CIA, CFE, CRMA, associate professor of accounting at the LaPenta School of Business of Iona University.
“This approach has two immediate key benefits: (1) Taxes on gains and income in retirement accounts avoid taxation until withdrawn from the retirement account, and (2) funds invested in retirement accounts that are covered by ERISA are protected from most litigation scenarios.”
Griffith added, “For beginners, I recommend investing in either a target retirement date no-load mutual fund or investing in a low-expense, no-load mutual fund that tracks the S&P 500 index and a fixed rate guaranteed lifetime annuity.
“Option 1 is supposed to follow traditional investment theory by periodically adjusting the proportions of bonds and stocks with the intention of balancing risk with income and growth opportunities as an investor ages. Option 2 is my preferred approach because it balances income and growth opportunities while providing some level of risk management and increasing the odds that some portion of one’s retirement funds will not be lost due to mismanagement of a retirement fund administrator.”
If you don’t have the time or inclination to actively manage investments, Griffith recommends an S&P 500 index tracking no-load mutual fund.
List Your Goals
“Everyone’s financial situation is different, which is why your financial strategy should be built around your personal goals and priorities,” said Annemarie von der Goltz, wealth advisor at J.P. Morgan Wealth Management. “A great place to start is making a list of what those goals are.
“Perhaps you would like to buy a house in a few years, or you are thinking about starting a family, or you have children and want to save for education expenses. Make sure you’re also thinking about retirement as a key long-term goal. It can be helpful to outline what you are investing towards and the timeline for your goals.”
“If an investor wants to pursue other investment opportunities,” Griffith said, “I recommend that this investor spend at least two years actively studying and learning about their target investment opportunity before they actually begin investing in it. This will minimize the heartache and risk of being financially devastated because of a lack of understanding of an investment vehicle and its related risks.
“It is worth mentioning here that each investor only needs a good investment idea one time every two years to be a successful financial investor. Also, if you cannot afford to lose it, you should not invest it in anything other than FDIC- and NCUA-insured CDs.”
Don’t Be Intimidated
“Ask questions and feel empowered to take control of your financial situation,” von der Goltz said. “If you want to work with a professional, find someone you feel comfortable with and can trust. Our personal goals and financial goals are so often intertwined, and you need to be comfortable having these discussions. This goes for anyone touching your financial life, whether it be advisors, attorneys or tax professionals.”
“You don’t need a lot of money or experience with investing to plan for your future,” von der Goltz said. “You can start investing a little each month and work toward increasing your contributions over time. The sooner you can start investing, the better. Investing early on can help you take advantage of the power of compounding. The earlier you invest, the more time your money has to potentially grow.”
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