It’s easy to get in a financial rut.
The problem is your income in finite — it’s pretty much set in stone. But your expenses are unlimited.
When you are anticipating a raise or a bonus, don’t you find that your mind likes to daydream about ways to spend that money? I know I think about buying ski boots with built in warmers to keep my toes toasty even on chilly days. I think about taking a trip to see the Kentucky Derby and go bourbon tasting with a group of friends.
My cravings aren’t limited to the ‘big things.” Everyday expenses seem to whisper in my ear like this, “Nancy, you can finally get those cute Steve Madden boots. You can upgrade your skincare routine and get weekly massages to reduce stress.”
When a windfall is headed my way, my bucket list calls out to me! Does yours? What does it say?
You work hard and want to reward yourself when your bonus comes in. This is fine, of course, but within reason. The long term problem is even though your income goes up, so do your expenses. The term for this is “lifestyle creep.”
As a financial planner, I’ve seen it time and time again and it’s a real problem. Top wage earners with incomes well over $200K, are still living month to month. No matter your income, the problem is the same.
It’s disheartening to get raises and bonuses and years later have nothing to show for it. So make a change. One small change can actually make a significant difference.
One way to get out of a financial rut is to take one powerful financial action which provides multiple benefits.
Financial planners often use the analogy of an acorn — a seed that plants a tree. In fact, I called my blog, Acres of Acorns because anyone who needs to catch up on their retirement due to a late start can make with multiple steps (aka — plant a lot of acorns.)
Start an automatic investment plan from your checking account to an investment account.
Since you are setting up an automatic monthly investment, one simple action leads to 12 investments per year. If you keep it going for say, 10 years, you’ve just made 120 separate deposits from one money move.
That’s powerful.
Consider setting up the minimal viable amount you can save. Remember that you want something you can “set and forget” to become a wealth builder for you. If you start out with an amount that is a stretch, you may end up cancelling it and defeating the purpose of investing in the first place. Remember your goal is consistency.
Choose an amount you can easily do even if it seems ridiculously small. You can always increase the amount later (and when you get a raise, you should.) If your investment is in your 401(k), it will come out of your paycheck but if it’s out of your pocket, try to time the withdrawal from your bank account to when your paycheck is deposited. Then you won’t miss it!
You may have a lot of questions such as:
Should I just invest in my 401(k) instead?
What investment should I choose?
What are the tax implications?
How do I withdraw money?
What are the fees?
These are great questions and the answers are important. Just beware of procrastination caused by “analysis paralysis.” You see, if you have saved $10,000 in an investment account that normally would have just been spent on lifestyle, who cares if you pay “ordinary income tax” or “long term capital gains tax” when you sell the investment? Unless you took the first step to invest in the first place, you wouldn’t have the money and the tax questions in the first place.
Here are some places to start:
Your 401(k).
Your 401(k) or retirement plan at work is a great first step. If you aren’t saving the maximum you can at work (and obviously if you aren’t getting the matching contributions), start there. Simply increase your 401(k) contribution by an amount you can handle and are sure you won’t go back and reduce it. Try a 1% increase.
If your company offers an option called “automatic escalation,” choose it! This way your saving percentage automatically increases by 1% each year. If you start off with 6%, next year in the beginning of the year, it will bump to 7%. You’ll hardly notice it (especially if you get a raise) and pretty soon you’ll be saving the maximum.
An index fund or mutual fund outside of your retirement plan at work.
Whenever you are investing in a mutual fund or index fund, you are getting instant diversification. In other words, if it’s a stock fund, you’ll own hundreds of stocks at once. With an index fund, the management company purchases shares of stock that mirror the index. For example, the S&P 500 or Standards and Poor’s 500 index tracks the largest 500 stocks in the U.S. You can buy a fund that closely matches the index.
With an actively managed fund, the manager well.. manages it. Instead of passively investing in the index, they put together their own mix of investments within set parameters.
Guess what? I personally own both kinds. You can invest directly out of your bank account (rather than payroll deduction from a retirement account.) Consider timing your investment the day after your paycheck hits so you pay yourself first!
One thing to consider. Pay attention to management fees. According to the Investment Company Institute, the average mutual fund management fee in 2016 was 0.63% — just over half a percent. In other words, to get you 6%, the fund would need to earn 6.63%. If the fees in your fund are over 1% and you aren’t getting other services (such as financial, retirement and tax advice and strategy), look for a fund with lower fees.
Another thing to consider: You don’t have to go it alone. Talk with a financial advisor. You can find a fee-only advisor with the National Association of Personal Financial Advisors (NAPFA), a Certified Financial Planner (TM) Professional (CFP), or your tax advisor.
Do you want to get out of a financial rut to invest more and spend less? Plant an acorn. Invest in such a way that you are making one simple decision that has multiple benefits — year after year after year.
Nancy L. Anderson, CFP(™) is a financial planner in Park City, Utah. Nancy takes pride in what she calls “the pivot.” This is a point where her clients and her blog readers go from financial overwhelm to completely taking charge of their money.
Driven by the need to simplify complex financial issues, Nancy is a contributor @Forbes Retirement and a blogger at Acres of Acorns: Retirement Strategies for Late Starters.
Sign up for her free class, 5 Money Moves For Late Starters.