“An Investment in Knowledge Pays the Best Interest” These words were true when Benjamin Franklin first uttered them and hold true now, especially in the realm of Financial Investments.
It is astonishing how we will spend hours researching and choosing for a new laptop or flat screen but we will make knee jerk decisions about long term financial planning that could mean hundreds of thousands of dollars.
This article will look into other people’s mistakes to help us learn from them and invest with confidence.
Mistake 1. Save for Retirement Without Actually Having a Plan.
We now live longer, much longer. This means the average Joe will spend around 30 years in retirement. This is such a large percentage of our life that it is worth planning for, being retired and poor is not fun. In order to make good decisions you need hard data, facts you can work with. Here are the basics:
- What age do you want to retire at? – Now be realistic please.
- How much income do you need at retirement? – Same applies.
- What is your life expectancy? This is an interesting one. Find a ballpark answer for this at www.census.gov
- What is your current situation in relation to what you need? How much do you have saved in relation to how much you want? In order to do this you are going to have to look at the current value of all your assets. Some might be hidden in pension funds, company tax-deferred saving plans and future social security benefits. Once you have this information you will know where you are and how much need to get where you want to be.
Mistake 2. Not Starting Early Enough
Albert Einstein is claimed to have said that compound interest is the most powerful force in the universe. I’m not sure if he said it or not but in financial terms he was right on the money. Compound interest makes it possible for an average earner to be a millionaire by the time he retires, and starting earlier makes a big difference.
To illustrate this ask yourself think about this financial scenario, and assume for a fixed 10% return. John starts contributing towards his saving plan a fixed amount for 8 years and then does nothing for 35 years. Jane on the other hand contributes nothing for the first 8 years and then contributes the same amount as John for 35 years. Who is going to be better off?
Amazingly, at least it was for me, John would be better off even though he contributed so much less towards his pension fund. That is the power of compound interest, the trick is to use it early.
Mistake 3. Not Taking Enough of A Risk
We are not asking you to bet the farm on your retirement fund but you are going to have to assess realistically your risk tolerance and what is the ideal level depending on your age, assets and willingness to take a chance.
The general rule is that the younger you are the more risks you should be willing to take. This means investing in stocks and mutual funds when you are starting a retirement fund and bonds when you are getting on in years.
Even when you are knocking on retirement door you still need some stocks in your portfolio in order to have a chance of outpacing inflation.
