Many people have savings and investing problems. They are looking for simple solutions to saving and investing. While many people are fantastic spenders, they are not great investors. Why is it that we don’t seem to be able to save more and spend less? The reason is that we lack an understanding. We know we need to save. Start with $1,000 in an Emergency Fund.
Then, save 5%, then 10%, and finally 15% of our income. However, we do not do it. Many have not stopped and thought about what 15% means.
Saving 15% of your income does not mean putting away whatever money is left over after you’ve paid all your bills. No, 15% represents 15% of your salary. Earning $15,000 per year represents $2,250 a year you need to save or $188 per month. If you earn $20,000, then you’ll have to save $3,000 per year or $250 per month. If you earn $40,000 a year, then it’s $6,000 a year or $500 a month. To calculate the amounts:
- Take your total gross salary;
- Multiply it by 15%;
- Divide that total by 12 to get your monthly amount.
I hear many of you saying, but I get paid twice a month (semi-monthly) or I get paid biweekly. How do I calculate that per paycheck? If you want to do it by semi-monthly, follow steps one and two. At step three, divide by 24. This is how much you have to save per paycheck. If you get paid biweekly, follow steps one and two. At step three, divide by 26. This is your biweekly savings amount
If you don’t do the next thing, you will most like blow that money that was intended for saving. You’ll keep it in your checking account and apply it to all your needs and wants. You’ll go out for lunch with your co-workers; you’ll use it buy that new outfit or shoes you’ve been wanting; you’ll buy the electronic gadget you want. Before you know it, you get to the end of the month and the money you were going to save is gone. You had good intentions, but you did not follow through.
Don’t feel bad. People always underestimate how much they spend by 10% to 15% on any given month. So, what’s the next thing you must do? Are you ready? The solution is simple save first and do it automatically. This is the most vital step if you want to get ahead financially. Remember good intentions will leave you wondering where your money went. You WILL spend the money if you don’t take it out first.
Set up a mutual fund or a ROTH IRA and have the money direct deposited into that account. If you don’t do this, you’ll leave the money in your checking account and you will spend it. You must treat your savings like a bill and pay yourself first. Trust me on this one. It will only take you a few minutes to set up a transfer. You only have to do it once. Then, you are done for good. If you do this, you will spend only what you have in your checking account and nothing more.
If you are just starting out in savings (your Emergency Fund), set up your auto savings to go into a money market account or a ROTH IRA. You don’t want to put your Emergency Fund money into a mutual fund or stocks, bonds, CD’s, etc. because these are not liquid instruments and you cannot quickly withdraw them without a penalty being charged. However, money going into a ROTH IRA has already been taxed. You can withdraw the money you have put in without interest or penalty. However, you cannot withdraw the earnings. This only applies to a ROTH IRA and not to a traditional IRA. Withdrawing money from a traditional IRA will cost you a 10% penalty and the money withdrawn will be taxed as ordinary income. This means it is added to your total income and taxed.
We tend to make investing complicated. Investing is simple. The most important thing you need to know about investing is that the stock market is cyclical. Understand this, and you can start investing confidently. Cyclical means that it goes through periods of boom and periods of bust. A boom period is referred to as a bull market. A bust period is referred to as a bear market. The market is constantly in one of these two cycles. It goes up and it goes down. Don’t ever assume that because it’s up, it’ll stay up or that when it’s down, it’ll always be down. It never stays in either cycle for the same amount of time or the same amount.
The market could go up 30% in one bull market or go 50%. There’s no way predict how long it’ll stay up or high up it will go down. The same is true in a bear market. We don’t know how low it drop and how long the drop will last. Just remember that over the short term, the market is always going through these cycles.
As humans we are emotional about money. We experience fear and even greed as we make decisions about money. We experience fear when the market is falling and run. When the market is rising, we often experience greed and buy more. We can learn to deal with these emotions and become better investors.
In order to do this, we need to:
- Control your emotions;
- Invest for the long-term.
If you understand that the stock market works in cycles, you can better control your emotions when fear and greed began to creep into the picture. Don’t worry when the market is going through a bear cycle. Instead, focus on the long-term. In time, everything will work out. Stick with it during its many cycles. Control your emotions and you will set yourself up for investing success.
Start using dollar-cost-averaging to invest. This means that you invest regularly, You invest 15% of your income during the year and you do it every month. You’ll have compounding interest working for you. You’ll invest when the market is falling and when it’s rising.
Remember not to overcomplicate investing. Control your spending and your emotions. Always, remember that the stock market is cyclical. You cannot predict the cycles, but you can take advantage of them when you use dollar-cost-averaging. Stay in it for the long haul.
