A Beginner’s Guide to Securing Your Financial Future and Retirement

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Avoiding the emotional roller coaster

I recently posted a comment on Wise bread dealing with Do You Love Money or Hate It? Either Way, You’re Sick. And I agree. People generally get fed up with their money, but it doesn’t mean that’s a good thing. They will obsess over it or just plain ignore it. Either action will not necessarily get us any closer to securing financial success. In fact, playing mental tennis is usually evidence of not having a specific course of action when it comes to handling your money.

Personal finance shouldn’t be as emotionally draining or complicated as you think. What makes it so overwhelming is the choices involved. This is why popular gurus, like David Bach, encourage followers to automate the process. By doing this, you take control out of your hands. By taking control out of your hands, you are now taking your emotions out of the picture. It sounds simple, but it can also lead you down the wrong path unless you have first covered all the bases.

Covering all the bases

Just like in baseball, we have 4 bases to cover in order to build long term financial success:

The financial goal – the where
Income – the why
Expenses – the when
Investing – the how

The Where - Financial Goals: Financial goal setting is a core ingredient to the process. Whether we want to sail around the world, RV around North America, or do something in a new field, goal setting incentivizes us to make it happen – “Where” do we want to go.

Just by saying we want to retire to Florida someday is not good enough. We need to create more a specific, non-monetary purpose that we would actually do when we have the money to do it with. Otherwise, vague goals or nearly impossible wishes will not give us that reason in the morning to push us toward that goal. Science confirms having a goal is crucial to making our dreams come true, and by having those steps to get to our dreams is how we make it happen!

The Why – Income: To get to our financial goals, we need the means. This is “the why” in why we work. Unfortunately, income is overlooked by many because they think if they are not earning $100k, there is no reason to save. As I have shown in How to Build a Million Dollar Portfolio, you don’t need as much as you think. The biggest thing you can do now is to reframe the way you see your income. Your income is a tool to get you to your financial goals.

The When – Expenses: - How much we spend a month is directly proportional to how much we can save to get to our goals. It’s hard, I know. We create financial bubbles for ourselves as we end up spending what we earn. Unfortunately, the financial bubble grows as we grow. So if we get a raise, we tend to use 100% of that additional income towards new expenses. The temptation of the growing financial bubble impedes any progress to retiring.

Choosing between buying things now or saving for a future determines “When” we get to our financial goals. If you want to make it happen sooner, focus on putting more of your income towards investments, so you can reduce your time frame. I have also written a post on Ways to Save to help you can get there faster.

The How – Investing: This is perhaps the most confusing part of the equation. There are so many choices out there. How do I invest? Do I want to be conservative or aggressive, do I want mutual funds, stocks or bonds, and should I set it and forget it or take a more active role? These are excellent questions, but may be irrelevant until you draw a map from where you are today to where you want to be.

Why you need the map, first…

By using MSN.com’s financial calculator, we can draw a map of where we are today and where we want to be in 10, 20 or 30 years time. This simple activity will better tell where you should put your money and what interest you need to earn to get there. For instance, if you want to save $1 million dollars by putting away only $200 a month in a conservative investment paying only 3% with $10,000 to start, it will take you 83 years. This is why a map is important. It says that, all else being equal, we can’t make it happen by putting away $200 a month and earning 3%. Conservative investing will lead to conservative returns.

Now if you include other assets, like the value of a house, then you can change what you have to save. On the other side of the coin, I mention in my guide how going from one red hot investment to another red hot investments also produces inadequate results. So what can you do?

Once you have the map, get the right shovel

Awhile ago, I discussed some Words of Wisdom from Warren Buffet, where author Tim Ferriss asked where should the small investor to put their money. Buffett said. “I’d put it all in a low-cost index fund that tracks the S+P 500 [which is a basket of 500 large cap stocks] and get back to work…” And he is right (to an extent). Stocks have outperformed bonds, real estate and other investments for one simple reason. Stock prices are (usually) reflective of a company’s growth. The more an individual company grows, the better the stock prices perform. And if more companies do well, the more the economy grows as a whole. The best way to reap the benefits of the economy doing well is the stock market, or more specifically to invest in a fund that tracks a basket of stocks, such as an index or what investors call an Exchange Traded Fund (or ETF for short).

But before you jump in…

The one caveat is if the market doesn’t grow like it had in the past, we may expect lower returns on our investment. So this is why we shouldn’t only consider just investing in an ETF like S+P index fund. There are other considerations, like long term past performance or future potential growth or even geographic diversity. While an ETF may be the right vehicle, choosing a specific ETF to match your expectations is critical, whether it’s a small cap ETF, a foreign ETF or an “actively managed” ETF. There are also other techniques we can use to increase returns, such as avoiding volatile markets or timing better in into buying our positions, all of which is covered in my guide.

While using ETFs sound exciting, you can’t make it to home plate until you have first run around the bases. Even though we have the right tools to outperform the market, it’s not going to help unless we save. And we can’t save if we don’t see our income as a tool to get where we want to go. And if we don’t have a goal or know where we want to go, we are not incentivized to get there. Knowing all four parts of the equation and then making them work for us is necessary to take our emotions out of the equation and build a successful financial path.

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