By Rick McKinstry – Dallas South News Contributor
We have now arrived at the fourth and final component of the Financial Compass, iNvesting. When it comes to investing, it is vitally important to start investing sooner rather than later.
The reason it is so important to get and early start is that investments have longer to benefit from the power of compound growth. Compound growth occurs when the growth that your initial investment has earned, itself starts to grow.
See previous Financial Compass Articles:
Wise Spending
Savings
Earnings (Education)
Consider this; a $200 monthly investment growing at 8% per year grows to approximately $70,000 over 15 years. Of the nearly $70,000 balance, $36,000 represents your monthly investment, the remaining $34,000 represents growth.
If you’re able to make the same monthly investment over a 30 year period, your total grows to just over $300,000 with $72,000 representing your monthly investment and a whopping $228,000 representing growth.
Another key element to consider when making investments is the tax treatment of any growth, especially when it comes to retirement funding. You should first consider investing in qualified investment vehicles, or put another way, vehicles that shield investment growth from taxes until the funds are actually distributed. For most employees we’d be considering tax qualified vehicles such as IRA’s, 401(k)’s, 403(b)’s, etc… Similar tax-qualified plans also exist for the self-employed.
Another tremendous benefit of investing in employee sponsored plans is that the investment is made automatically so once employees opt into the plan, there is nothing more you have to do to ensure the investment is being made. Through a payroll deduction, your employer will withhold the funds and invest them for you eliminating the need for you to ever handle the funds.
When investing over a period of time, it is important to be consistent. By consistently investing a fixed amount of money each month you will leverage another powerful investment tool, dollar cost averaging. One of the goals of investing is to buy low or when prices are depressed, and sell high, when prices peak.
With dollar cost averaging, you invest the same amount of money each month, for example, buying more shares of a stock or mutual fund when the prices are lower and fewer shares when prices are higher. Over an extended period of time, dollar cost averaging will allow you to reduce your average cost per share and therefore increase your average return.
Investing in stocks, bonds and mutual funds is not the only area of investment that needs to be considered. All investors should consider their most valuable resource: themselves. In one of my earlier writings I highlighted the positive impact that increased education has on average earnings. The government understands the importance of education too and included billions of dollars in the 2009 stimulus package aimed at making advanced education more affordable.
Many employers also understand the importance of education and in many cases are willing to subsidize, and in other cases pay for it in its entirety, the educational pursuits of employees. Those with advanced levels of education not only enjoy much higher levels of average earnings than those without it, they also experience much lower unemployment rates.
An often over-looked area of investment is an investment of time and resources if necessary, in social and professional networks. During times like these, with an unemployment rate hovering around 10%, a well developed and active social and professional network becomes an invaluable asset to those who become unemployed or even under-employed as more and more employees are seeing their incomes slashed.
Lastly, if you have others who are dependent upon your income for financial support, there is one other investment I’d like to mention here and that is an investment in income protection. For most of us that simply means that we need to have an adequate amount of insurance to mitigate either the total loss or significant reduction in our income. In terms of a total loss of income I am speaking of life insurance. As for a significant reduction in income, I am speaking of disability insurance.
Well, this is the last installment of writings pertaining to the Financial Compass. Thanks in advance for any feedback on this post and the comments you have offered in previous posts.
Rick McKinstry is Personal Financial Planner (PFP) and owner of RLM Financial. He has an MBA from Indiana University and can be reached via email at rlmckin79@hotmail.com or at (972) 821-8948.
Edited by Shawn Williams
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