Good Personal Finance for the Long Term with Tim Maurer
When it comes to getting your finances in order, there are a lot of different boxes you need to check…
There’s keeping your costs down through a monthly budget (check); there’s increasing your income through taking on a side gig or working for a promotion at work (check), there’s paying off your credit cards and then continuing to pay off your balances every month so that you’re not wasting hundreds—or even thousands—of precious dollars every year (check check check)!
But the box that it’s easiest to leave blank time and time again is the box marked “long-term.” When you’re living paycheck to paycheck, you’re often worrying about how much money you’ll have next week, not how much money you’ll have 20 or 30 years from now.
But if you’re serious about securing your financial future, then investing your money long-term is something you’ll need to deal with – preferably sooner rather than later. The earlier you start investing, the longer your investment will have to earn interest, and the more money you’ll have decades from now when you retire. (Remember, interest here is something that works for you, not against you.) Without investing some of your money long-term, you might as well have “win the lottery” as a retirement plan – which, by the way, that is a very bad retirement plan. Seriously.
That’s why we reached out to Tim Maurer (@TimMaurer), author of Simple Money and Director of Personal Finance for Buckingham Strategic Wealth and the BAM Alliance. If there’s anyone who knows how to break investing down to its simple building blocks, it’s Tim.
Here are 7 great pieces of advice that Tim gave us for folks who want to start investing – but just don’t know where to start.
1. Wealth management is for everyone – not just the wealthy
TM: “First, I think that the word “wealth,” in and of itself, carries a misconception. The financial services industry has conflated wealth with abundant riches, a goal that is out of reach for many people. But the original derivation of the word “wealth” has a definition that is much closer to “contentment.”
“In other words, wealth isn’t just for rich people. Investing, similarly, must not be seen as a practice reserved only for the materially wealthy. When applied as a personal discipline, it works just as well for those of more modest means.”
2. Get your high-interest debt paid down, stat!
TM: “High-interest-rate debt is financial enemy No. 1. Therefore, paying it off is a priority over investing for the future. This may feel frustrating if you’re excited to move forward–but paying off a 21 percent interest credit card can reasonably be seen as the equivalent of MAKING a guaranteed 21 percent rate of return on a long-term investment. I’ll take that!”
3. When you’re ready to invest, first figure out why
TM: “Assuming you’ve 1) mastered your cash flow with a functional budget, 2) addressed your most important risk management issues with a buffer of emergency reserves, base levels of insurance and the requisite estate planning documents, and 3) eliminated any high-interest-rate debt, the first step is to clarify WHY you’re investing.
“We don’t invest in the stock market in the hope of making a quick buck–that’s gambling. Rather, we align our long-term goals–like our desired quality of life in retirement–with an appropriate mix of investments. I recommend beginning with a simple, moderate, balanced portfolio, then calibrating it by increasing or decreasing your exposure to stocks depending on your ability, willingness and need to accept risk.
“It may make sense to begin investing with a single mutual fund designed to be an all-in-one, balanced investment, but consider only using low-cost, index-based funds that are well-diversified.”
4. You don’t have to choose between saving money and investing it
TM: “This is a challenge that most of us face. I believe that it’s imperative to get at least one month of expenses saved in pure cash so that you’re not living paycheck-to-paycheck. Beyond that, how much you dedicate to cash versus future investment will be a byproduct of your income stability and your tolerance for risk.
“One handy vehicle for those who find themselves pulled between these two worthy goals is the Roth IRA. While we’d certainly prefer NOT to touch anything we set aside in our Roths, we’re able to extract the principal we’ve invested in these accounts without fear of taxes or penalties–at any age for any reason. This may in some cases make the Roth a serviceable “hybrid” savings vehicle.”
5. Don’t bet (on) your house to get you through retirement
TM: “For a lot of people, their home is their main source of wealth. The 2008 financial crisis showed us the dangers of relying on your house to pay for your retirement. How can people balance and diversify their wealth to protect themselves and their money?
“As much as we’d all like it to be, it’s a fallacy to think of our primary residence as an investment for this simple reason: We live in it! We’re always going to need a place to live, and we’re more prone to buying-up than downsizing. Plus, for many of us, the equity in our home will be our default long-term care insurance.
“Owning rental real estate is different, and may well be considered a wealth-building tool, but this type of investment is far more complex than most expect and more financially dangerous that we’d like (because of the debt involved).”
6. In fact, think about “retirement” differently
TM: “Retirement, as a concept, also presents us with a challenge. People picture themselves working full-time until they can afford to do nothing full-time, as though they are on a permanent vacation. But both medical professionals and financial planners recommend phasing into full retirement.
“Consider working as long as you can, doing something that you (mostly) enjoy and that keeps you engaged intellectually, physically and emotionally. Doing so also helps build and extend financial security.”
7. Investing and saving 20 percent of your income is good – but do more when you can!
TM: “The grandfather-like wisdom of giving 10 percent and saving 10 percent of one’s income works, believe it or not! But life is not linear; we’re likely to have more disposable income before we have children–and then again well after.
“Therefore, in anticipation that our investing *may* dip during our highest-expense years of child rearing, it’s sensible to invest MORE than 10 percent in our early years…and then more again after the kids are out of the proverbial nest.
“Life is so much easier when you begin this practice early and learn to live off of 80 percent or less of your income. But whether 10 percent, 15 percent or 20 percent feels impossible or easy, the answer to the question ‘How much should I be putting toward investing?’ for most people is simply, ‘As much as you can.’”
If you want to hear from Tim (and we highly recommend that you do) then you should check out his website, www.TimMaurer.com, or follow him on Twitter at @TimMaurer. His book, Simple Money: A No-Nonsense Guide to Personal Finance, is available on Amazon.com.
About the Contributors:
Financial planner, speaker and author, Tim Maurer, is a wealth advisor at Buckingham Asset Management and the director of personal finance for the BAM ALLIANCE. A Certified Financial Planner™ practitioner working with individuals, families and organizations, he also educates at private events and via TV, radio, print and online media. Tim is a regular contributor to Forbes, CNBC and TIME/Money. A central theme, that “personal finance is more personal than it is finance,” drives his writing and speaking.
You can follow Tim on Twitter at @TimMaurer.
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