GENERAL  -  STARTING OUT
 
 

You Can Get There from Here

How many times have you told yourself that you don't make enough money to invest, let alone save one thin dime? Chances are, within 24 hours of convincing yourself that what you say is true, you'll have spent twenty-five dollars or so on "things" you don't need. Perhaps you'll write out a check to the cable TV for all sorts of movie channels, then go out and rent a couple of videos. Sure - using that money to add to a mutual fund investment account isn't as much fun now. But it may allow you to have a little fun when retirement time rolls around. Is seeing Rambo 3 for the fifth time really a wise choice when, at age 70, you're flipping burgers in a fast-food joint just to make ends meet? I don't think so. The fact of the matter is that a little sacrifice can go a long way to achieving financial security - and a little overspending can go a long way in preventing you from achieving this goal.

Every chapter in this book offers you ways through the morass of planning for a successful financial future, but taking action is up to you. I can spur you on with tales of the consequences of bad saving habits, and I can encourage you with examples of the rewards that await those who save and invest regularly. But if you can't see the value of being happy with what you've got, then there's little that I - or anyone - can truly do for you.

Rather than spending money in pursuit of happiness, take pleasure in the security it can bring. No one needs a new car every two years. No one needs a speedboat that can outrace a jet airplane. No one needs to live in the Taj Mahal of his or her neighborhood. In fact, when you get down to it, living sensibly, beneath your means, means that you will always be able to invest some of your current earnings in your future, rather than in someone else's - for example, the guy who would love to sell you that speedboat.

What a Difference in Attitude

Evaluating where you stand financially and beginning to plan for the future is a lifelong process. So are saving and investing. In the end, you not only reap the reward of financial security by planning and taking appropriate action, you benefit along the way. For example, consider those who have to face financial uncertainty - a recession, a layoff, disability - when they're heavily in debt. At best they face a lot of sleepless nights. Contrast that feeling with the feeling of those who can confront financial uncertainly with money in the bank - or better yet, in an investment account. There's quite a difference in attitude between the two scenarios. Depending on your own circumstances, you should begin to build your savings, or regularly add to your savings, so that you will be able to look forward to a more secure financial future.

But why is it that people of seemingly identical economic circumstances – the same income, the same number of mouths to feed, the same rent or mortgage to pay – why is it that some are so much better off financially than their counterparts? Why do some people who make six-figure incomes most of their working lives end up with less money for retirement than people who earned less than a third of that amount?

Habits, attitude, and perspective.

The reason, I think, is one of habits and attitudes – developing disciplined financial habits and a positive attitude about what your money can accomplish throughout your lifetime. And, it’s a matter of perspective. If you were to boil all that’s involved in personal financial planning down to its essence, you would find that it involves taking action in the present for events in the future.

That’s why you:
 

• Buy insurance to protect against future misfortune

• Save money regularly to provide for financial emergencies and life’s big ticket items, like a home, a college education, and retirement

• Participate in tax-advantaged retirement plans that allow you to keep more of your hard-earned money and provide for a financially comfortable retirement.

• Prepare estate planning documents now to minimize the disruption to your family later and to maximize the assets you transfer to your loved ones.

Having the right perspective – taking action now to prepare for a better future – is a prerequisite to eventually achieving financial security in the long run as well as coping comfortably with life’s financial challenges along the way. And it’s this sense of perspective that causes too many people to fail to make the progress they need to make in their personal finances. It’s not easy to sacrifice today for a better tomorrow. You’ve got human nature and Madison Avenue trying to persuade you to live for the present. Make no mistake about it, though, planning your finances requires some present sacrifice to provide a better future. But not a lot. It’s a shame that so many people feel compelled to live above their means when it usually requires very little effort to spend less than you earn. It’s a habit that once developed, few people abandon later on. It just becomes a way of life – for example, having money deducted automatically from your paycheck and put in a retirement or savings account. Another way to build up your savings is to participate in dividend reinvestment plans offered by hundreds of U.S. corporations (as well as a lot of foreign corporations whose shares trade on U.S. stock exchanges). Another way is to opt for the automatic reinvestment of dividends and capital gains offered by all the mutual fund companies rather than receiving those distributions in cash.

Of course, you have to pay taxes on any reinvested dividends and capital gains if you hold the investments in a taxable account (no taxes are due on reinvestments in retirement accounts), but that’s a small price to pay for the ability to add to your investments at very little cost or no cost at all. If you’re like most investors, the dividends you receive on individual stock or mutual fund holdings don’t amount to a whole lot of money anyway, so why not just add them back to your investments. What would you do with a small dividend check anyway? Probably spend it on something frivolous. Reinvestment is like dollar cost averaging, and it’s done automatically.