Big Success Starts with Small Habits
by Allyson Hauss
In the past few months, both of my daughters have come to me with financial questions. You guessed it – they have an end goal in mind (more money) and are eager to find out the smartest and easiest way to attain it.
The youngest is 19 and a sophomore in college. Her goal is to have more money left over at the end of her sophomore year than she had at the end of her freshman year. Our agreement is that the money she earns in her part-time job during the school year goes toward her tuition, and income from her summer job can be used for extra expenses at college and savings. She found out during her freshman year how fast that money can be spent! Therefore, she wanted a plan for this year.
My first-born is 28 and a new mommy. She and myson-in-law are already planning for the education of their11-month-old boy. Her goal is to accumulate a college fund without sacrificing living now while giving to others in need.
For each of these goals and for so many more, my mantra is the same: whatever amount you can, big or small, start sooner rather than later and invest regularly.
Every person makes decisions every day that affect every part of their future. What are your needs? Whom do you want to bless? What can you do today that will bring about the tomorrow you envision? Through the power of time, discipline, and compounding interest, you can do it! No, you will not be able to do it overnight or without forgoing some wants; however, patience is not only a virtue – it pays big dividends!
So, you may ask where do I start? The best place to start is right where you are. What is your need/goal? What is your income, what are your expenses, and what is your surplus/deficit? Begin with your current budget and work toward spending less than you make. How much do you need? Maybe you can only start with $25 a month. Then save $25 a month! There are diversified investments that will allow you to begin with a small amount. No matter what amount you start with, be consistent and when you get a raise or pay off a debt, contribute more.
At $25 per month, starting at age 25 and earning an interest rate of 8% compounded monthly, in 20 years you will have $14,725; at $100 per month, $58,902; and at $750 per month, $441,765. Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
The choice is up to you. You can pay someone else the interest through high interest credit cards and consumer loans; OR you can choose to pay off credit cards, build an emergency fund, save for purchases, and pay yourself the interest while investing toward your goals.
Your goal may be paying off student loans, going back to college to pursue a new profession, building an emergency fund, starting your own business, taking that dream vacation, or saving for retirement. If you are saving for retirement or a health plan, you may be able to have it deducted from your paycheck and - BAM - enjoy tax-deferred savings in addition to compound interest! If your employer matches a portion of contributions, then time and compounding works even more in your favor with the bonus of free money! And anytime you can have the money automatically withdrawn, whether it is from a paycheck or just from your checking account, it is easier to save when you never have the chance to spend it.
If you are new to investing, a good place to start might be with a mutual fund. I recommend dollar cost averaging which is just a fancy way of saying make regular monthly contributions directly to a fund. Making it consistent builds a great habit and takes the work out of saving and investing. When you enroll in automatic investing, you avoid per transaction trade commissions. By purchasing in monthly increments, you take advantage of ups and downs in the market, buying more shares at lower prices which can give you a better return in the long run. Mutual funds can be purchased within retirement accounts, 529 plans, and many other investment vehicles. If you were to increase your monthly contributions with every pay raise you receive, this can be a painless way to accumulate more over time while achieving diversification. A qualified financial advisor can help you choose mutual funds that meet your objectives, risk tolerance and fit with your comprehensive financial life needs.
My husband and I have been surprised over the years at what small monthly investments have enabled us to do. No, we are not without financial struggles, but we have been able to take a few special family vacations, help our children with college tuition and weddings, and put some money toward retirement. So whether you are just starting out like my college student with dreams of traveling and seeing the world or a young couple starting your family developing a financial strategy for the future, you can achieve your goals by harnessing the power of regular monthly investing.