How to Save for Retirement
Who hasn’t read, in this century (and millennium) of free-flowing information, a single article regarding investing? Most people find themselves caught between the desire of making more money, and the fear of starting their own business. Then again, not everyone is sought out to be a business owner or manager. What are the possibilities of getting rich for people in their mid-20’s or early 30’s, without starting their own business?
The answer, of course, is investing. But who has time to learn how to invest? A single Google search turns out a lot of investment companies, investment advisers, investment gurus and others who just seem to be there to take your I money. Then again, a fancy college degree in finances is still a little too much for most people. What if told you there was a simple way of investing a fourth grader would understand, and yet beat the scores of most finance pros?
It requires saving between 10% and 20% of every paycheck, as much as anyone can deal with. Then, divide this sum into three equal accounts, in three index funds. These index funds are the easiest financial instruments to understand: you are, basically, just buying shares into a company that has bought shares in hundreds or thousands of companies. Thus, your risk is spread very thin. There are 3 main types of index funds you should consider investing in: A U.S total stock market index fund (like one that tracks the S&P 500), An International total stock market index fund, and an index fund that follows U.S Government Bonds (like Vanguard’s). These options will not only give you a decent annual return (far greater than any bank would give you), but also greatly dilute the risks that you face as an investor.
Many of these indexes managed to survive the recent economic crisis. Odds are they will survive the next one too. All you have to do as an investor, after figuring out the 3 funds you want to invest in, is to put one-third of what you save in each of them, every month. They should guarantee you retire comfortably in 40 or so years. And by comfortably, I mean as a millionaire. There are, of course, a few difficulties with putting this all together; otherwise everyone would be a millionaire. There are 3 major challenges that everyone faces:
- They can’t save. Do you need the latest iPhone? Do you NEED to live in a 2 bedroom apartment by yourself? Do you NEED a Starbucks latte every morning? Chances are, you don’t. And neither does your investment account.
- They can’t learn. It sounds perfectly easy, but it still requires the least amount of learning about the financial markets. At least understanding the difference between stocks and bonds, between real income and paper income, and basic concepts of finance. Without this basic knowledge, you won’t be able to understand how your money works, which leads me to no. 3 on my list.
- They trust financial advisers. Read ex-college roommate, brother-in-law, or man you met on the bus. Everyone is an expert in stocks and finance, and can manage your money better than you do. Don’t fall into this trap. Most of them exist to make profits themselves while you are either left empty-handed or are given a very small fraction of the profit they actually make.
If you can pass these 3 challenges, you should be fine. You will still be able to go out, go on vacations, have fun and spend time with your kids, and retire without worrying that you will be living on bread crumbs for the rest of your life.