An investment is money set aside for the future. So why make investments? When should people start planning for the future?
A current ad for an investment firm on TV shows a man asking various people how much cash they have in their wallets. Some have $15, some have $50, some have more or less, you get the picture. But the point of the ad is that even the person with the smallest amount of cash on hand has an amount that when invested steadily & regularly over time, can grow to actually make a difference in the person's financial future.
I like this ad because it shows that cash we might spend frivolously does make a difference when set aside on a monthly basis for the long run. The first thing to look at when anyone is starting out is a budget. You should budget for necessities like rent, food, utility bills (water, electricity, gas for heat & cooking), clothing, car payments & insurance, medical bills & prescriptions, basic furniture (a bed is always a nice thing to sleep on and beats a blanket on the floor by a mile), and payments on college loans. You might even budget for 'necessities' like eating out at restaurants a couple times a month, vacations, pedicures, getting a salted caramel mocha macchiatto every day at a place like Starbucks on the way to work, popcorn at the movie theater-- well, again-- you get the picture.
Necessities, in other words, are not always created equal. Some are more necessary than others, to be sure.
Now I am not saying not to have fun. Living like a miser is not exactly what I have in mind! When Lewis & I were first married, we did go out to eat on occasion, and we did take a vacation here and there. But watching what kind of impulse buys you make tells a lot about your spending habits. If you can only have fun by spending money, well, that may be a problem I cannot address here in this blog, that's a different issue all together! What I am suggesting is that you keep track of where you spend your money, keep credit card debt in check, and try to live within your means if at all possible.
Of course if you are a student and paying your own way to go to school, you may be in debt. This does not make you frivolous with money, it makes you mindful about your future. You may be spending more than you take in for the time being, but hold onto the thought that this will change! There are few better investments to make for your future than an education.
But in general, living within your means means not spending more money than you make. It means living within your own personal budget. Americans in general are not known for doing this well, at least in recent years. I think back to another TV commercial from about 6 years ago that just drove me nuts (a short trip on some days). It showed a man in a huge electronics store spotting a big screen TV from across a crowded room that he just HAD to have-- his eyes glazed over, his jaw dropped, and a chorus of angels in his head burst into song chanting "I want it NOW!" in heavenly tones. Needless to say, the ad was run by a big bank's credit card department.
"I want it NOW!" is not a problem if you're living within your means. It is a problem if you outspend your income. It is also a problem if you are not thinking about your future. I wish I could tell you that Lewis & I started investing for our future back in our 20s. The reality is that we did not, nor did we have family members helping us out financially. We lived within our means in one sense (including sharing one car for the first 4 years we were married!) but did not save much for the future. Since hindsight is a beautiful thing, I can say now what a mistake that was.
To illustrate that point, and the point that the TV commercial I talked about at the start of this article makes in its 30 seconds of airtime, do yourself a favor and go on a website with an investment calculator. They are fascinating! But just in case you don't have the time or inclination, let me share a few scenarios that knocked my socks off.
Let's say you are in your 20s and starting at ground zero. You have no initial investment to make. You are starting with no cash whatsoever. Aaagh! But you sock away $25 a month, which is roughly the price of a no-frills pedicure OR 2 bottles of affordable wine OR the price of a medium bucket of popcorn, a large Coke & a box of Junior Mints at the movie theater (actual movie tickets not included). Say you do this for 40 years at a 7% average return. Do you know what you will have at the end of those 40 years? Approximately??
$62,000.00.
Not bad, right?? So in case you are wondering WHY I decided to pick a 7% return on your investment, I'll tell you. I was born in 1959, so I picked that as my year to start tracking the average return of the S&P 500 (which is a stock index that tracks 500 of the most traded stocks in the US market). If you average out the return on these stocks from 1959 through December 2013 (or 54 years), the average return over this span of time is 7.33%.
Were there years that did better than that?? Yes, of course! Were there years that tanked?? Without a doubt! But over time, the S&P 500 increased 7%, adjusting for inflation and adding in dividends.
Of course in general people don't start investing with $25 a month without having an initial starting amount of cash to get going with. Since trading on stocks involves some expense and buying into mutual funds usually has a minimum, I suggest saving up a small chunk of untouchable change in your checking account until you are ready to make your move into the world of investing.
Where to start? A $1,000 opening investment can buy you into an account such as Vanguard's STAR fund, a relatively tame risk vs return mutual fund (actually it's a fund of funds, but more on that down the road) that has returned 9.77% since its inception in 1985. (Of course that is before taxes and sale of fund shares, but that topic is for another day entirely as well!!) That's just one example of so many available it's hard to believe the choices that are out there!
So keep reading, I'll keep writing, and maybe we'll meet up again very soon!
