"He that is good for making excuses is seldom good for anything else."
-- Benjamin Franklin
From "the dog ate my homework" to "I'm too tired to exercise," we humans are master procrastinators, adept at making up excuses designed to get us out of difficult tasks. But while you might be able to avoid cleaning the bathroom or mowing the lawn without lasting effects, putting off investing could have real, long-term consequences -- such as working longer, or making big changes to your intended retirement lifestyle.
You might think you're justified in neglecting your retirement nest egg, but chances are those rationalizations are flimsy at best. Let's look at three of the most common investing excuses and how to overcome them.
Excuse: I'm just lost. There are too many investing choices, and I'm afraid I'll pick the wrong funds.
Busted: When it comes to investing, we all would like to get the highest return possible and could spend months researching our options before making a decision about a particular investment. But consider this: You're saving $100 a month for retirement. Hypothetically, you have two choices:
- Quickly pick an investment that earns 6% per year on average (Portfolio A).
- Six months later, choose an investment that earns 7% per year (Portfolio B).
You might assume you'd be immediately better off in choosing Portfolio B, but how long do you think it'll be before Portfolio B catches up with Portfolio A? Answer: A little over 11 years. In this case, a six-month hesitation turned into an 11-year lag in your retirement nest egg.
Time is one of your most powerful allies when saving for retirement. You can't afford to wait, so start saving as early as you can.
Excuse: I can't afford to invest very much, so it's not worth my time.
Busted: Because of the power of compounding -- the ability of an investment's earnings to themselves earn a return -- a very small investment can eventually grow into a significant amount of money. For example, let's say you earn $50,000 annually and start by contributing 1% to an IRA or your employer-sponsored retirement savings plan. One percent of your salary is $500, which translates to saving around $41.67 per month in pre-tax income. You probably won't miss this money in your paycheck, but that $500 annual investment could grow to more than $66,200 in 30 years.
Contribute as much as you're able to, even if it's an extremely small amount. You can probably make minor changes to your budget to accommodate a 1% savings rate.
Excuse: The market is too volatile right now. I'm better off waiting until it settles down.
Busted: It's true that market volatility does little to instill confidence in investors. But you can combat this excuse by investing according to your risk tolerance, not your gut. Defining your approach to risk is, in fact, vitally important to developing a retirement plan that works. If you're not sure what your risk tolerance is, an investment advisor can help you figure it out.
Dollar-cost averaging is another way to help avoid the emotional roller coaster of the markets while continuing to work toward your investment goals. This simple practice involves putting a set amount of money each month into your investment and retirement accounts. When you set up a 401(k) account at work that automatically puts money into it directly from your paycheck, you're using dollar-cost averaging -- even if you don't know it. Dollar-cost averaging helps take the emotion out of investing, because no matter how volatile the market may become, your contributions are set, and so you won't waver from your investing plan.
Investing might seem overwhelming or even scary, but imagine waking up at age 70 and realizing you haven't saved nearly enough to retire -- that's even scarier. Don't let your fears overcome your retirement dreams.
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