There’s no denying that events in 2022 have made it increasingly challenging to save and invest. Between the highest inflation rates in 40 years, the painful bear market selloff and talk of an imminent recession, creating or sticking to a long-term savings plan can be daunting.
It’s more important than ever to stay focused on your long-term savings in this unpredictable environment, though. Here are some tips to help you cut through all of the noise and start, or maintain, a long-term savings plan.
The easiest first step when it comes to building long-term savings is to start small. If you’re starting from nothing, consider putting aside $100 per week, or if that’s not feasible, even $20. The important thing is to get into the habit of investing a portion of your money rather than spending it all.
Over time, even small amounts of savings can turn into large nest eggs. Imagine you invested just $20 per week at a 10% annual return from age 20 to age 65. Even that tiny weekly investment, which you might not even notice you are making, could grow to around $800,000.
Keep Long-Term Savings Separate
In an ideal long-term savings plan, you’ll have different pools of money serving different purposes. For example, you might want to set up separate accounts for emergencies, vacations, education expenses and retirement. Once your long-term savings plan is in place, avoid the urge to dip into it or to transfer money from one use to another.
One of the best tips to keep you focused on your long-term savings is to automate your contributions. This way, money is taken out of your account every month whether you think about it or not. This can help prevent the common mistake of paying bills and other expenses first, with the intention to invest whatever is left over.
In most cases, there will never be part of your paycheck “left over” when following that strategy. Investment automation takes your long-term savings money out first and forces you to live off what remains, which is the best way to ensure that you are sticking to your investment plan.
Set Checkpoint Targets
When you first create your investment plan, chart out exactly where you want your savings to be at certain checkpoints. For example, you might set the goal to have $100,000 saved by age 30, $500,000 by age 50 and $1 million by age 65. Whatever your targets are, check to see if you are on course as the years go by so that you can make adjustments to your plan as necessary along the way.
Understand Your Goals
Knowing what you intend to use your long-term savings for is a great psychological trick to keep you on course. It can be hard to give up immediate gratification for some nebulous, long-term goal like “retirement,” but if you can attach specifics to that goal, it can give you additional motivation.
For example, you might envision how a $1 million retirement nest egg will allow you to travel the world, visit friends and family more often, buy your dream vacation home or even donate a certain amount to charity. Whatever motivates you when you close your eyes and dream of the future, attach it to your long-term savings plan to give it tangible value.
Review Your Plan, but Not Too Often
Although you shouldn’t be day trading your long-term savings account, you shouldn’t just “set and forget it” either. Generally speaking, you should review your investments at least annually, with many advisors recommending a quarterly schedule. This way you can make adjustments as needed, such as selling stocks that have a fundamental change in their long-term outlook or rebalancing your account to its original asset allocation.
Checking your accounts too often, however, can lead to overtrading, so resist the urge to tinker with your investments every day or even every month.
Keep Emotions out of the Equation
Human beings are emotional creatures by nature, and this is particularly true when it comes to money. But getting emotional about your investments can cloud your judgment.
For example, when prices are skyrocketing and it seems like they’ll never go down, it’s human nature to want to buy more. When prices are falling and it seems like the economy will never recover, it’s common to feel the urge to pull all of your money out to “protect it.” But these actions are the complete opposite of the idea that you should “buy low and sell high.”
Emotions tend to lead to bad investment decisions, so do your best to stick to your investment plan whether times are good or bad and your future savings account balance will thank you.
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