Just like most aspects of our lives, the future takes planning! If you want to ever retire, you will need to have retirement savings to allow you to slow down, or stop working, in retirement. Traditional savings accounts can be helpful tools, but they do not help you fight high inflation rates. You will need a tool that allows you greater potential returns while saving for your future goals. While we would say that investing is a necessity for future planning, it can be confusing if you don’t know where to start. So in this episode, we’ll help you figure out how to start investing and how much to invest over time.
Check out our episodes on Biblically Responsible Investing!
Preliminary Steps before Investing:
- Your first step is to have a budget.
- Spend less than you earn.
- Cut expenses that fit into your long term goals.
- Addressing your Debt – NO More Debt! Never carry a credit card balance from month to month. If you use a credit card, pay it off each month.
- If you are under 40 years old, eliminate your debt before investing (except for mortgage).
- If you are between 40 and 50, it will depend on how much debt you have. At this point, building retirement savings is more and more important (so too is becoming debt free).
- In your 50’s, do both! Pay off your debt and invest for retirement.
- See our episode on the Debt Snowball v. Debt Avalanche to see what debt repayment method works for you.
- Then, build a emergency fund. Your goal should be to save 3-6 months of living expenses.
How To Start Investing
- If you are not sure how to start investing, Start by funding your work sponsored retirement plan (401(k), 403(b), TSP).
- Take advantage of every free dollar that they offer. Contribute up to the max employer match. At Life Financial Group, if an employee contributes 5% of their income to their retirement plan, we will match 4%. It would be foolish to pass up on the free money.
- If you don’t have access to a work sponsored retirement plan, or if there is no employer match, fund a Roth IRA (Individual Retirement Account).
- Fund your car replacement fund.
- This may not seem like an investment, but you will be thanking yourself if you save now for your next vehicle. If you expect to need a car replacement in 3+ years, you may want to consider funding a taxable (non-retirement) investment account. Pay a car payment to yourself ($300 or $400/mo) for the next few years. It would be wise to choose a “middle of the road” fund regarding risk and return (consider a balanced type fund [one with stocks and bonds]). When the time comes to purchase your next car, you can redeem some or all of your shares. Keep in mind that this sale would be subject to capital gains taxation.
- Risk – If you invest, there is alway a chance of loss. If the market goes down, you may want to delay the purchase if able or find an alternative funding source.
- Do not use an investment account if you need the car within the next 3 years.
Common Investing Questions
- What is the difference between a Traditional IRA and a Roth IRA? Pre-tax vs post tax (will go more in-depth on episode 082). Retirement savings falls into two broad categories; Pre-tax and Post-tax savings.
- Pre-Tax means that you are able to contribute money for retirement that has never been subjected to income taxation. In a 401(k) or a similar plan, these contributions are taken out of your paycheck before taxes are applied. In the case of a traditional IRA, you take income that you have already earned (and paid tax on) and contribute it to the account. You then get to deduct that contribution on your federal tax return when you file your taxes. These funds grow tax deferred. Once you retire, you are able to take funds from the account and pay income tax at your current (theoretically lower) tax rate. Once you reach age 72, you are retired to take a distribution from a traditional IRA, called a Required Minimum Distribution (RMD).
- Post-tax means that you contribute money to a retirement plan (typically a Roth account) that has already been taxed. You pay taxes at your current rate but the account is then able to grow tax free. In retirement (and after the account is opened for 5 years) you are able to take distributions from the account and pay zero tax. No RMDs required.
- How do I open an investment account?
- There are many different options. If you’re just starting out, you may not be able to find an Advisor who will work with you. However, these accounts can be opened at any of the online brokerage firms like Vanguard, Fidelity, E-trade, Schwab (and many others).
- Often when you are starting out investing, the truth us, you don’t really need to work with an advisor. The biggest hurdle is just getting started.
- What should I invest in?
- This depends on many factors. One simple option (especially for those who do not have an advisor helping them) is to choose a Target Date fund. These mutual funds are made up of several different mutual funds. A management committee oversees the risk allocation based on the potential date of retirement. As your target date nears, the risk is lowered to an appropriate level. They are often set in 5 year intervals (2025, 2030, 2035…). This allows you to “set it and forget it.”
- If you are young and financially savvy, you may want to just buy funds that are more geared toward growth. You would want to review and tweak every so often to make sure that you are still on track and that your account is growing as expected.
- If you have a larger amount of money, $250k or more, you may want to hire an advisor (such as Life Financial Group) to help you choose investments that are better suited for your needs.
How much should I invest?
- Many suggest that saving 10 to 15% of your gross pay is a good place to start. The more you save, the earlier you save, the more you’ll have invested over time.
- Don’t include the employer match. This is icing on the cake.
- Investing Tip – Make systematic monthly investments. Automate your savings as much as possible. Build it into your budget.
- See episode 027 on, “How Much Money Do I Need For Retirement?“
- Take advantage of our free personal stewardship reviews so you can learn how to start investing for yourself today!
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The topics discussed in this podcast are for general information only and are not intended to provide specific investment advice or recommendations. Investing and investment strategies involve risk including the potential loss of principal. Past performance is not a guarantee of future results.
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