Ways To Maximize Investment Earnings

Investment Earnings

Save early and automatically

It’s a sad statistic. Barely 8 percent of college students who responded to a survey regarding personal finance management could have received an A for doing it right. And in a 2014 survey among adults, only 18 percent showed top grade knowledge in personal finances.

It isn’t all that hard. One financial expert and University of Chicago professor reduced the basic elements to fit onto an index card.

To help, here are seven steps, compiled by Suzanne Woolley, to get you into the groove and keep you there:

First, save early and automatically. Some companies now enroll new hires directly into the company 401(k) so they are saving automatically. Others wait until the employee opts in on his own. If you can, save up to the maximum allowed by the employer so you get the benefit of their declared match. Many companies start to chip in when the employee savings reach 3 percent of their earnings. The benefit is that the money is withdrawn before you get a chance to see it, so you don’t miss it.

If your company does not offer a 401(k), start a savings account elsewhere, but aim for an automatic withdrawal of funds. Even a small amount, faithfully put aside, will grow over time. Try to find an option that offers the best interest. The idea is simply to make saving a habit.

Second, expect financial emergencies. It’s a rare individual who gets through life without one – or more. Almost half of those surveyed in a Federal Reserve analysis said they couldn’t cover a $400 emergency without selling something or borrowing.. However, experts caution that saving for an emergency should not come before saving for retirement. Do what you must to meet both needs, if it means eating Ramen for awhile. The older you are and the higher your salary, the larger your emergency stashes should be. Emergencies such as job loss, which often means the loss of health care coverage as well, are devastating. You should have enough savings tucked away that you could continue meeting expenses for at least six months if at all possible.

Third, set an asset allocation. It’s an investor’s most important decision. A rule of thumb is that your allocation should equal your age. Consider your risk tolerance and then be aware that you won’t really know what it is until it has been tested. The risk tolerance varies from one individual to the next. The market always holds risks, but a bad market, especially when you are already in retirement, can be disastrous.

Fourth, keep fees low. With the current expectation that future stock market returns will be dampened, the drive to keep fees low is greater than ever. If you are using an adviser who receives fees and commissions if you buy the products he or she recommends, your returns are likely to be at least 1 percentage point lower each year, according to the White House Council of Economic Advisers. The council estimated the cost of conflicted advise on IRA assets at about $17 billion per year. Keeping your investments simple and bypassing the advisers may save you money. Warren Buffet, in an annual publication, advised putting 10 percent of your money into short-term government bonds and 90 percent in a very low-cost S&P 500 index fund. The long-term results will likely be better than those attained under the advice of a high-cost manager, he says.

Fifth, if necessary, use an adviser who is a fiduciary. A clip from Last Week Tonight With John Oliver gives succinct advice: “Financial analyst is just a fancy term that doesn’t actually mean anything.” An adviser who gets a commission on an investment you make at his urging may be looking more to his own return than yours. Ask your potential adviser if he or she is fiduciary. If the answer is “no,” run, the clip advises.

Sixth, spend less than you earn. This basic, common sense advice seems unarguable. But some 23 percent of millennials and 19 percent of GenXers ignore it, spending above their earnings. No wonder they have no emergency fund. The end of every pay period is an emergency. Lifestyle creep – the tendency to spend more as we earn more – is a trap too many mid-lifers fall into. Saving really is easier than paying interest on a loan you have been forced into to take care of an emergency.

Seventh, maximize employee benefits. A career isn’t forever. The working years are when you need to build your retirement accounts. Financial Engines conducted a survey that showed only one in four employees had taken full advantage of their company’s 401(k) benefits. The survey was taken among 4.4 million participants at 533 companies. An average loss of $1,336 was experienced by those who failed to contribute the maximum their 401(k) allowed. That’s about 2.4 percent of annual income. Low salaries and budget constraints are the usual excuse given by employees who fail to make full use of the savings option, but even many employees in the upper reaches of the salary scale don’t do it. Most large companies also provide disability insurance as a benefit. If you choose to pay the premium, the tax-free provision could be big. Watch for changes in your employee benefits, such as the addition of flexible spending accounts, a health savings account or a commuter assistance program. Such perks lower the amount of salary on which you have to pay taxes.

Slow And Steady Wins Savings Race

Slow and Steady

Focus on the activity of saving itself, not on the future outcome

When you’re working on a significant financial goal such as buying a house, saving for retirement or trying to get old student loans off your plate, the progress can be discouragingly slow.

Just don’t let it sidetrack you from the ultimate object. Researchers have discovered that the longer you pursue a goal, the farther away the end seems. It’s kind of like being on hold on the telephone. The longer you wait, the more certain you become that you’ll go on waiting forever. Under that scenario, it is easy to cave in and lose sight of the ultimate end toward which you are reaching.

Counterintuitive it may be, but studies show that it is true. And if your final target seems to be receding, you will be better able to talk yourself into taking the money you were going to save and splurge on the new boots that are beckoning.

How to ensure that your end goal stays steady? Set a specific time when it will be achieved, the experts say. Make it as concrete as possible. The more specific you are in your planning, the more likely you are to stick to the details. Work with a financial planner, if necessary, to set deadlines and arrive at the method you will use to achieve your objective.

Then divide the “big picture” into manageable smaller goals. Focus on the activity of saving itself, not on the future outcome. The objective, for instance, should be on setting aside $300 per month for retirement, not on the greater total that you have decided you need for a comfortable retirement.

A study published in Psychological Science concluded that people who break their savings plan down into particular time frames, such as weeks or months, save 78 percent more than those who are focused on some far-off, unforeseeable future goal.

Checking on your progress can help. Say at six-month intervals, compare what you have with what you had. It can be satisfying to see steady progress toward the ultimate goal. If you don’t feel satisfied with the results, make a course correction. Don’t let little hiccups have a greater impact than they should.

Don’t let retirement savings preclude an emergency fund. Having a six-month cushion in the event of an emergency has to take precedence over the future need. Maintain adequate health and disability insurance and make a concerted effort to reach zero credit card debt. Taking care of today makes it easier to ensure financial security in the future.

Saving Shouldn’t Be Hard


When to begin? Now

Too many Americans fail to save enough money to meet emergencies and prepare for retirement. But it isn’t a matter of math, according to personal finance author, radio personality and money guru Dave Ramsey. It’s a matter of priorities. People start saving when future needs become more important than current wants.

The problem is apparent. A Federal Reserve survey found that nearly half of Americans couldn’t cover a $400 emergency without borrowing or selling assets. Most Americans profess a desire to save, but it can’t compete with their immediate desire for a pizza, Ramsey says. Going into debt to fulfill those immediate desires is even worse than taking money that should go into savings to satisfy the craving.

The secret to saving is to make a zero-based budget before a new month begins and then stick with it. That is the best way to know how much you are currently spending and how you can fit savings into the plan. What’s a zero-based budget? It’s what you have when your income compared with your outgo equals zero. In other words, you are assigning every dollar you have to a category.

Start with the necessaries – housing, food, clothing, insurance and bills. Then fill in the rest of the budget, including saving, with the leftovers. Dave offers a budget app, EveryDollar, that will help. You can track transactions on the go, making budgeting easier.

Finding time to work with a budget is a challenge in our society, but a few minutes every month is worth the effort. The budget program saves time by replicating the previous month’s budget as a starting point. Then you just make adjustments for the current month.

Having a concrete copy of your money income and outgo helps you to make decisions. It doesn’t matter how much money you make. It makes a difference how you decided to divvy up what you have. Keep some goals in mind. College, a major purchase (home, car appliances, etc.), a vacation, whatever, all take money and you get that money by putting it aside. Some for emergencies, some for retirement, some for your future plans.

Starting with a zero-based budget, Ramsay says, makes a statement: “I choose to put my future needs before my current wants.” When to begin? Now.

Paying Off Debts Pays Off

Paying off Debt

Before making a choice, make an assessment

Debt is the ultimate treadmill. Sometimes it seems no matter how hard you try, the load never gets lighter. Don’t despair. If you are serious about wanting to whack down some of that debt, it can be done. Just be prepared for the fact that it doesn’t happen fast.

There are several approaches to the issue. Let’s start with the “Snowball Method.” That means you start your attack on the accounts with the smallest balances. That might give you the greatest boost as you see the accounts disappear. But the “High Rate Method” has the most potential for actually saving money. That’s when you concentrate the accounts with the highest interest rates, chewing them down a little at a time and reducing the amount of interest you pay.

Before making a choice, make an assessment. List all of your debt balances from lowest to highest so you can actually see what might be the best plan of attack. When you pay your monthly bills, pay the minimum amount on each account.

Then, if you have chosen the “Snowball” approach, take any available cash you have and apply it to the account with the smallest balance. If two accounts are close, choose the one with the highest interest rate. Even a very small amount of extra payment adds up over time and it always reduces the amount of interest you will pay. When you get one of your smaller debts paid off, the trick is not to use it again until you have the total debt under control. If you have to hide your card from yourself, freeze it in a block of ice or simply close it, resist the urge to start the process over again.

After you have paid off a debt, take the money you had spent on payments and use it to make additional payments on the next smallest account. Repeat this process and you’ll soon have a considerable amount of extra money to tackle the larger accounts. You’ll be surprised how fast that can happen. The “Snowball” effect really works.

If you have opted to start with the accounts with the highest interest, your first step is the same. List your debts, but according to the interest rate, from highest to lowest. Again, pay the monthly minimum and then use any extra cash you can muster to add to your payment on the one with the highest interest. That means that each month, you will pay interest on a smaller amount of principle.

Do the same thing with the account with the next highest interest payment. Over time – and it isn’t likely to be fast – you will find you have manageable debt. Unless, of course, you don’t resist the urge to fill up the cards again. Having them free and clear is a powerful incentive to start the process again, but resist. Make careful choices between what you really need and what you only want.

Which approach to debt reduction you choose is up to you and must fit your personal financial realities. But those who have take the steps to get control of debt will tell you that you just can’t put a price on the peace of mind that comes with freedom from debt. Get help from an accredited consumer credit counselor if necessary.

Make Financial Mistakes? Who Doesn’t?

Make Mistakes

Deal with issues as they arise

Financial mistakes are the norm. Even the most successful money-makers have a few on their records. It all adds to the anxiety, confusion and frustration that circulate around money.

Most people are doing better financially than they think they are, experts agree. Look at the bottom lines over time and see if there is a steady increase. That indicates you haven’t failed.

Money is not static. It is dynamic. So are the stock market and other investment options in which you may put your money. Plan for the future and don’t get too hung up on today, according to Lauren Lyons Cole, certified financial planner and editor of “Your Money at Business Insider.”

Individual bumps or dips in your net worth are not necessarily indicators of success or failure. One mistake doesn’t doom you to a lifetime of struggle any more than one lucky break assures that you’ll never have tough times. Enjoy the ups and don’t let the downs get you down.

Since money is dynamic, your financial goals also can fluctuate with circumstances. Long-term planning is essential, but not beyond adapting when necessary. Don’t underestimate your potential.

Deal with issues as they arise. If you lost your job, look for a new one. If you have too much debt, cut spending to the bone while you pay it down. If your progress toward the goals you have set seems too slow, don’t give up. Keep working toward them. If you can cross some off the list, set new ones. Keeping the target in view is the secret to making your personal goals come to fruition.