The holiday season and the New Year seem to make us especially sensitive to what we have, what we don't have, what we want and how we can help others. Whether family, friends or strangers seen on a newscast, the season brings out complex emotions about material things.
First, there's a frenzy of shopping, then an orgy of unwrapping and exclaiming, and then, there's a scramble to do returns to get what you really wanted. Or to spend the gift cards given by people who thought it would be easier than trying to figure out what you might want. And any week now, there will be the agony of opening the credit card bills.
Maybe there's a better way to approach the subject of money this holiday season -- and throughout the year. And maybe this is a good time to think about it. If your goal is to have enough money to spend, and give, and feel financially secure in the process -- then you'll have to start thinking about the current and future implications of what you do with money today, and in the new year. Call it a money "gift" to yourself!
Choices Have Consequences:
The money decisions you make today will have far reaching consequences -- so far reaching, in fact, that we don't typically take them into account when we make our spending or saving decisions.
For instance, if you charge $2,000 on your credit card for holiday gifts or a vacation, or a present that you deserve for yourself, you're robbing yourself -- unless you can pay off that card when the bill comes in January. If you're making only minimum monthly payments on the card, and paying 18 percent interest, it could take as long as 30 years to pay off your current gift -- and you'll pay nearly four times the amount you charged in interest!
On the other hand, if your $2,000 gift to yourself, or to your retirement plan, was invested in a diversified stock market portfolio (like the S&P 500 index fund in your company retirement plan) based on historical average returns, the money would grow to nearly $40,000 in the same period.
Whether you're concerned about your own financial security, or that of your family -- or you just want to be able to give millions to good causes you believe in, as do many of the wealthiest Americans -- it all starts with every small money decision you make.
So here are a few money basics, simple steps to keep in mind as you start out the New Year, no matter what level your financial goal.
The Simple Steps:
Luck is not a financial plan. Despite the frenzy to get in on the half billion dollar lottery in December, if you want to grow your wealth, you need to put the odds on your side. That requires a non-emotional assessment of the facts. A one dollar lottery ticket is a cheap price to pay for a life of dreams, but it is not a financial plan!
Savings matter most. Even a little bit of money saved on a regular basis -- over the long run -- is your most reliable way to a secure retirement. More important than how you invest the money, is the fact that you actually save the money in the first place! It's a process that should be automatic -- having the money taken out of your checking account or paycheck, and put into savings before you see it and spend it. That's the way the government handles FICA (Social Security) -- and you can't complain that you "can't afford it." Make your savings regular, automatic -- and out of reach!
Don't rob that piggy bank. There is always a need or an excuse to dip into your savings. But if you didn't have that money, you'd survive somehow. You'd feel the extra urgency to cut back on some spending, or to find even a part-time job doing something beneath your skill level -- just to make ends meet. Don't dip into your savings.
Invest with a plan. Some of your savings should be set aside in low-yielding bank accounts -- "chicken money" that keeps you secure. It's money you don't want to risk. But at the same time -- and as early as possible -- put a similar amount of savings to work for you in a low-cost, diversified investment plan. You can buy index mutual funds directly from Vanguard or Fidelity or T. Rowe Price on an automatic, monthly deduction plan. Yes, the stock market can be scary. But this is a regular investment program -- not a trading program. Just keep putting the money away for the future.
Trust the stock market. This is a great leap of faith for so many people. It's not about trusting the market to make you rich. And it's not about trusting a financial advisor to pick stocks that won't go down in value. It's about the simple fact that (according to Ibbotson, the market historians), there has never been a 20 year period, going back to 1926, when you would have lost money in a diversified portfolio of large-company, American stocks, with dividends reinvested -- even adjusted for inflation.
In fact, the headline this past week is that, not only did the Dow Jones Industrial Average reach another new all-time high, but that it is at a new, all-time inflation-adjusted high, beating its previous high-water mark set in 2000. Yes, it took 14 years. And yes, many of those years were very scary. But those who persevered are even. And those who kept their regular plan of investing during those 14 years, are far ahead because they stuck to their plan.
America is still the land of opportunity. Those opportunities are not limited to the wealthy. There are too many success stories today for us to believe it's just luck, or to complain that we don't have a chance. Too many people have worked hard, led disciplined financial lives and have the results to show for it. You can still start small in America and grow your good fortune. So make a small start for yourself in the New Year. You'll be glad you did -- and that's The Savage Truth.
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