Sticking to a plan works better when it is simple, makes sense, and is easy to remember.
For savers and investors just getting started, here’s a six-step program to implement and follow.
- W stands for Worthwhile Goal. Begin by developing the discipline to start saving and investing and discover your “why.” If you haven’t seen it, find Simon Sinek’s book Start with Why. Then write down your worthwhile goals and reasons for investing in the first place.
- E stands for Equity Investing. Most significant investment growth comes from owning equities, stocks, and stock mutual funds. The historical evidence is clear; over decades stocks can create average annual returns in the 10% range and should be a part of a wealth accumulation plan.
- A stands for Asset Allocation. While you definitely need to consider a solid equity component, stocks aren’t always predictable in the short run. And you need to balance your stock holdings with a cash reserve and possibly some bonds for stability of principal.
- L stands for Long Term. Yes, there are people that make big money (large gains in a short period of time), but not many. You should have a perspective that looks out not for years but for decades. If you’re a 20- or 30-something, think 30 or 40 years as your future time frame.
- T stands for Tax Efficient. Two strategies come to mind. One is using a tax-favored retirement savings account such as an IRA or your employer’s 401(k) plan. Check out the tax advantages and you’ll see why this is a great, tax-efficient tool. The other approach is to invest in efficient financial investments such as a stock index fund. These funds generate little taxable distribution and allow investment to grow and create unrealized capital gains. These gains may be taxable in the future when you sell but allow you to defer taxes, potentially for many years.
- H stands for Have A Plan. Once you have written down your worthwhile goal(s) and your “why,” write out the specific actions you will take. As an example, write the specific amount you will save each month and what investments you will consistently use.
This six-point program is a great start, but there is no “one size fits all” in the financial planning world. Once you get started, you will likely find that advice from a professional is needed and desirable.
Find a Fiduciary Advisor you can work with on an ongoing basis or periodically only when you need help. Start your search at NAPFA.org.
This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. The opinions expressed are the author’s own and may not accurately reflect those of Buckingham Strategic Wealth. IRN-21-2391