The most difficult aspect of smart financial planning is that the best time to save is usually when it is the hardest. A young person in her late teens or 20s has the huge advantage of a time horizon measured in decades. This means that market volatility like we’ve seen in the past weeks is not a problem for them, it is in fact a huge advantage. Persons in their 40s and 50s probably have more free cash flow to invest, but are staring down a likely 20-40 year retirement that is just around the corner.
This same young person who wants to start investing probably has a hard time putting money aside to invest. Everything we know about young adults is that their biggest expenses (rent, education) are more expensive than ever.
Still, young people ask about investments and want to get going.
Before we talk about investments, it’s important to know a few things about the process of investing.
Investing is not natural, it’s learned. As a triathlete the hardest sport for me to learn (and 15 years in, I’m still horrible) is swimming. I am a mammal: I breathe air and walk upright on two legs. I am born to run. None of that helps with my swimming!
As modern-day consumers and citizens we are born to earn money and spend money. The habits of saving and investing are learned. Just as humans can learn to swim, we can learn to be good savers and investors.
Saving and investing are most effective when they are done with the least amount of thought. Every time you force yourself to make a decision you create the opportunity to either (1) procrastinate or (2) make the wrong choice. Reduce the number of decisions to be made and you save finite brainpower for other things.
Keys to reducing decision making:
- Automate investing. This can be done at work through automatic payroll deductions into your 401k/403b plan or other savings. At home it could be automatic transfers from your checking account into savings, or (even better into your Roth IRA).
- Select a few broadly diversified, low-cost investments. In 2016, it is possible to invest in the entire stock market without paying broker commissions and with management fees of $1 per every $1000 you invest. At no other time in your investing life will costs and fees matter as much as when you’re starting out with only a small amount of money to invest.
- Set a time to look at your investments, then ignore them the rest of the time. Looking at your investments should be a twice yearly event, about as often as you go to the dentist for a cleaning and checkup. It should also be about as interesting! It’s good to check up on where you are but this should not be a source of excitement in your life.
No one knows anything (historical edition)
The most difficult aspect of smart financial planning is that the best time to save...