A friend once asked me, “How do I start investing if I don’t have much money?”
That is a legitimate question, especially for students just out of college or working adults who have just entered the corporate world.
To answer my friend’s question, I jogged back my memory to recall out how I first started investing. I, too, didn’t have much money when I started my investing journey.
I remember all I had was the monthly allowance given to me during National Service, which I had squirrelled away diligently.
With the money I had, I invested in books on personal finance and stock market investing. I remember the first book I bought was Rich Dad, Poor Dad by Robert Kiyosaki. I also went for an investment course to help bring down the steep learning curve (I had no accounting or finance background from school).
Essentially, what I did was to invest in myself. By investing in myself and not on a broker’s hot tip, I accumulated the knowledge needed to navigate the stock market.
Warren Buffett, one of the most successful investors the world has seen, mentioned in an interview recently that the best investment you can make is one that “you can’t beat” and that is investing in yourself.
“Ultimately, there’s one investment that supersedes all others: Invest in yourself. Nobody can take away what you’ve got in yourself, and everybody has potential they haven’t used yet.”
By investing in ourselves first, we will have a proper foundation on which to build our stock portfolio. Without such knowledge, we might lose money from our investments without us knowing why.
Even after we have amassed the knowledge needed to invest in stocks, we should never stop learning.
In Tamil, there’s a saying that goes, “Known is a drop, unknown is an ocean”. There’s always something new to learn about investing every day since the stock market is very fluid.
When it comes to preparing for retirement, 50 can be a pivotal age. At that age, most people are just 10 to 15 years away from leaving the workforce, and time is relatively limited to save for retirement.
But with a decade or more of work still remaining, you have enough time to make changes to your retirement savings strategy to ensure you reach your savings goals.
"Add up all of your life savings—your 401(k), your investments, the money under the mattress—and then divide that by 25. Could you live on that amount comfortably for one year?" asks David Rae, a certified financial planner and founder of DRM Wealth Management. "If the answer is yes, then you may be on track for retirement. If its no, it's time to sit down with a fiduciary financial planner to figure out what else you can do to secure your financial future."
Rae's formula of dividing by 25 is based on the assumption that people will withdraw about 4% per year from their retirement funds to live on after leaving the workforce.
With that in mind, here's a look at what retirement and personal finance experts say you should do at age 50 to maximize the likelihood of achieving your retirement savings goals.
1. Maximize Current Retirement Contributions
Maximizing your current retirement contributions is a common tip offered by advisers. It's one of the easiest steps to take to help increase the amount of money you're saving.
You can max out contributions to both personal IRAs and company-sponsored 401(k) plans.
"Starting at age 50 you're eligible to increase your 401(k) contributions by an additional $6,000 per year, and can increase contributions to IRAs or Roth IRAs by an additional $1,000 per year," says Matt Hylland, a registered investment adviser at Hylland Capital Management. "At age 55 you're eligible to save an additional $1,000 per year in a health savings account, which is a great retirement savings vehicle."
2. Consider Limiting Your Tax Exposure
There are fewer tax breaks on the horizon as you get closer to retirement, says Wayne Fisher of Fisher Financial Tax & Insurance Solutions.
If you're saving money in a government-recommended retirement plan such as a traditional IRA, 401(k), or 403(b), you'll eventually have to pay taxes on that money—and the tax rate may be much higher than you expect.
"Per David Walker, the former US Comptroller General, we're heading to a future where we'll have to double federal taxes or cut federal spending by 60%, which makes tax-free look pretty good, right?" says Fisher.
3. Carefully Evaluate Asset Allocation
As you reach age 50 and beyond, many advisers say it's time to start reducing the risk in your investment portfolio to protect it from market declines.
"Depending on your risk tolerance, you may want to look at adding bonds, annuities, CDs, or other safer options," says Hylland. "As you go through your fifties, the chance of your portfolio having time to recover following a major decline will decrease. By having safe investments, you can ensure that your equity investments have time to grow and recover if needed."
4. Drop Unnecessary Insurance
Many people purchase insurance coverage when their children are young or if their spouse depends upon their income.
But if your children are financially independent and no one else relies on your income, consider dropping unnecessary coverage, says Ryan McPherson, a managing member of Intelligent Worth.
"There's little need to pay for policies that have outlived their purpose," says McPherson. "Saved premium dollars can be directed toward retirement savings or paying down debt."
5. Evaluate Your Health Care Coverage
Part of keeping your retirement plan on track involves preparing for big expenditures such as health care. In fact, health care can be one of the most expensive parts of retirement, says Mark Painter, founder of EverGuide Financial Group.
"Make sure you have your health care covered, both in terms of health insurance and also potentially long-term care," says Painter. "You want to spend your money enjoying retirement and not simply paying medical expenses. It will be a lot cheaper to look at coverage at age 50 than when you are 65 or 70."
6. Create a Get-Out-of-Debt Plan
Debt and retirement don't mix. Start developing an action plan now to eliminate credit card bills and other expenses weighing you down.
"Come up with a plan now, while you have plenty of time to execute it to get out of debt," says Hylland. "Maybe you're an empty nester and can downsize your home and mortgage, or consolidate credit card debt and pay it off, or get rid of a car with a long and expensive loan. Create a plan today to get your debt eliminated as soon as possible."
No matter your age, you still have time to create an effective retirement savings plan. Find out if you're financially prepared for retirement and put these tips into action.
Human beings are intelligent people, capable of making good decisions, weighing all options and making a rational and well thought out conclusion. However, sometimes it feels like we act irrationally without even realizing we are doing it. In some cases, our brains are hard wired or pre-dispositioned to behave in a certain way if our conscious mind does not take over and think rationally.
Luckily, because of our conscious mind, we can override our natural evolutionary desire to act irrationally in certain instances. Here are 5 biases and fallacies that make us terrible with money and how we can overcome them.
1. Recency bias
Recency bias occurs when we base on current or future behavior or outcome on what has happened in the recent past. Put differently, whatever is happening now, will also happen tomorrow and the day after. Recency bias occurs because of our flawed and selective memory. Most people’s memories are not as good as they think and much of what we do remember may be distorted based on what we focused on and our emotions at the time.
Common examples of recency bias include: house prices have been going up each month for the past 2 years, so they are bound to continue going up. This stock/mutual fund has reported a gain each day this quarter, so it must be a promising investment. I have kept a steady full time job with the same company for the last 3 years; therefore I don’t anticipate this will change in the future.
Why It Is Dangerous
Recency bias is dangerous because it assumes future investment performance is based on past performance and puts a disproportionate amount of weight on this assumption. Some ways of you can minimize recency bias include:
2. Sunk cost fallacy
Sunk cost is any cost that has been paid already and can never be recovered, no matter what the future outcome or business decision. It is a past cost that is not affected by a future decision. Sunk cost can also be the loss of time or non-monetary resources. The point is that they are not and will never be recoverable. Examples of sunk cost include: you paid $500 to get your 15 year old car fixed last week. Two weeks later, you discovered another problem that will cost you $2,000, but you have already decided last week to keep the car. The $500 would be considered a sunk cost whether you actually decide to go with your original decision to keep the car or decide to get rid of it. Another way example would be overeating at a buffet in order to get your ‘money’s worth’. Regardless of how much you eat, will not change the outcome of how much you pay.
How to Overcome Sunk Costs
Overcoming the sunk cost fallacy can be difficult because we place more pain in our losses than we do pleasures in our wins. This can cause use to continue make even more bad decisions in hopes of recouping our losses. Continually putting money into a dying business or investment is another example of the sunk cost fallacy. Here are a few tips to overcoming the sunk cost fallacy:
3. Gambler’s fallacy
The gambler’s fallacy is the mistaken belief that if something happens more frequent than normal during a period, it will happen less frequently in the future. Gambler’s fallacy is opposite to the recency bias. If things are going too good, surely they are bound to go bad soon. Alternatively, if things are going poorly, surely they are bound to turn around soon. Gambler’s fallacy is what keeps people continually losing money in the slot machines or buying lottery tickets, because surely there can only be so much bad luck that at some point, good luck will come.
Why Is It Dangerous
Gambler’s fallacy is dangerous because it gives little regard to probability or distorts how probability works in the mind of the person that is hoping for the desired outcome. For example, when you flip a coin, there is a 50/50 chance it will be heads or tails. If you flipped the coin 7 times and it always came up as heads, the 8th flip would still have a 50/50 chance of showing heads or tails. Assuming this probability would be skewed towards tails would be incorrect; the probability would still be 50/50.
Some ways to reduce gambler’s fallacy include:
4. Buyer’s remorse
Buyer’s remorse is the sense of regret after having made a purchase. It is frequently associated with making an expensive purchase. It may stem from fear of making the wrong choice, guilt over extravagance, or a suspicion of having been overly influenced by the seller. We have all experienced buyer’s remorse at some point in our lives and it is not a good feeling. Some practical ways to avoid buyer’s remorse include:
5. Confirmation bias
Confirmation bias occurs when we favor information which confirms our pre-existing beliefs and biases. Confirmation bias narrows our understanding and perspective because we fail to read, listen to or understand differing views. Examples of confirmation bias include: watching a particular news channel that only align with your political views. Reading financial information from bloggers or companies that agree with our views on spending, saving and investing.
Confirmation bias is not inherently bad, but reading and listening to information that we already agree with does not increase our learning or expand our perspective. Ways to reduce confirmation bias include:
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