Image: Wikimedia Commons user Moritz Wickendorf.
Millions of Americans struggle to get by, living paycheck to paycheck with few apparent prospects for getting ahead. In order to set yourself up for financial success, the vital first step is to start thinking about ways to spend less than you make and save the difference. Yet long before you choose the latest fad stock or hot investment opportunity, there's one thing you have to do in order to boost your chances of becoming rich. That one thing is coming up with a broad-based saving and investing strategy, and it's a key step that many people skip over, thereby leaving themselves open to big mistakes during their investing careers. Let's take a closer look at how having a set financial strategic plan can dramatically improve the likelihood of accumulating the nest egg you want and need.
The big mistake that over 100 million Americans have made
The value of having a financial and investing plan is that it helps you guide your long-term behavior even in the face of short-term events that could otherwise derail your plans. By sticking with the plan, you can ensure that market psychology won't cause you to make a big mistake.
One great example is the behavior of investors since the financial crisis in 2008. Following the market's plunge, there was a big drop in the number of U.S. adults who had money in the stock market, either through individual stocks or indirectly through ETFs or mutual funds. Even after the market started to recover, Americans still didn't trust the market, with the percentage of investors owning stocks falling to a low of 52% in 2013. As a result of the fear generated by the financial crisis, almost half the U.S. population -- well over 100 million people -- haven't benefited at all from the stock market's tripling since early 2009. Even worse, many who were invested before the crisis suffered all of the losses associated with the decline without recovering at all.
Having a set strategy for your saving and investing can keep you on track even during chaotic times in the market and the economy. But many people don't know what a financial plan should include. Below, you'll find some of the key elements that your investing strategy should include.
1. Have at least a simple budget.
Many people think of budgeting as having to count every penny they earn and spend. Yet the real purpose of a budget is to monitor your expenses to see what you actually spend money on, giving you information about whether your actual practices are in line with your wishes. Many people find that just by doing a simple check of broad categories on which they're spending, they can see if there are areas to cut back on or areas that need more money devoted to them. Having that information is useful in setting saving and investing goals, especially in that you'll have a better sense of exactly how much you can save.
2. Put money aside for immediate needs and for long-term goals.
Ideally, no matter how much you can save, everyone should direct their savings toward two separate pots. First, an emergency fund can help you cover unexpected expenses without having to go into debt or sell off long-term investments. Second, investment accounts for money you won't need for five years or longer can take maximum advantage of higher returns on riskier investments. By keeping these two separate, you'll gain the peace of mind of knowing that a broken furnace or an urgent car repair won't stop you from making a monthly contribution to your retirement account, and that'll keep you on track to meet long-term financial goals.
3. Keep your investing simple, at least at first.
One key reason why many Americans never start investing is that they have the mistaken impression that it's too complicated. Yet even with tens of thousands of investment options out there, sticking to simple investing strategies will get you most of the way toward the most successful possible outcome.
In particular, simply using index mutual funds or exchange-traded funds is a great way to get started. Using an ETF like the SPDR S&P 500 (SPY 0.11%) is cost-effective and gives you exposure to the S&P 500 index, which includes hundreds of the largest and best-known companies in the nation. Similar funds give you one-stop shopping in small-company or international stocks as well as other types of investments such as bonds and commodities. By using these building blocks to come up with a basic asset allocation that matches your risk level, you can simply but effectively invest even modest amounts of money rather than falling prey to more expensive, less lucrative alternatives. Later on, as you feel more comfortable, adding more sophisticated investments can become a more suitable decision.
Saving and investing can be challenging. Having a roadmap to guide you, though, can be invaluable. That's why taking the time to set up a strategic plan for your saving and investing is the one thing that everyone should do.
