December 04, 2018
Welcome to Part II of our four-part series about some of the strategies you can use to achieve your financial goals—both today and in the future.
When it comes to building your financial roadmap, both savings and investments are core components of a sound path to retirement. The good news is that the Millennial generation is already great at saving—a result of having the importance of saving ingrained at an early age. Unfortunately, investing doesn’t come as naturally for this generation: a full three in five Millennials aren’t invested in the stock market at all.
A few factors are to blame. First, our generation faces substantial headwinds that previous generations simply didn’t have to deal with. For example, the largest concentration of student loan borrowers is under the age of 30, and the average college student from the class of 2016 graduated with $37,172 in student loan debt. As a result, we are largely underinvested and blame a lack of money and know-how for not having a clear financial plan.
Fortunately, everyone can take steps to get closer to their financial goals—whether that’s creating an emergency fund, buying a home or retiring by a certain age—regardless of their current financial situation. It starts with a straightforward plan that combines both saving and investing your money.
Saving a little today is often better than trying to save a lot later in life. Why? Because compound interest is powerful. As long as you’re getting a return on your savings, your money accumulates faster and more meaningfully over time because you’re earning “interest on interest.”
Not sure how much you should be saving? The first step is to make a budget. Start by writing down your recurring expenses, such as your mortgage payment or rent, utilities, car payment and groceries. As a rule of thumb, about half of your monthly income after taxes should cover essential expenses, and up to 30% can be allocated to non-essentials like entertainment and vacations.
The remaining 20% should be used to pay down debt and save for the future—so even if you’re paying off student loans, you can carve out a portion of your income for savings. Try to increase your savings rate as your debt becomes more manageable.
Depending on your financial goals, your savings will likely be split between traditional interest-bearing accounts and higher-earning investment accounts. For example, a traditional savings account or money market fund may be better suited for your emergency fund, while a tax-deferred account like a 401(k) or IRA is a more appropriate foundation to invest and grow your retirement savings.
Your savings can grow even faster when you invest wisely, and you have several investment methods to choose from. For example, you can select-direct your accounts by choosing your own asset allocation and investments, or work with a financial advisor who can answer any initial questions you may have and help you develop a tailored investment approach to achieve your goals.
Regardless of how you choose to invest, you should be prepared to experience a few bumps along the way. This is the cost of trying to build more wealth than you would have by stashing your money in an interest-bearing savings account or by attempting to get in and out of the stock market opportunistically. The key is to stay the course, even during periods of discomfort.
Think of investment risk like turbulence—you’re likely to experience at least a little bit over the course of a long flight, but it doesn’t mean you have to jump out of the plane just because the pilot turned on the fasten seatbelt sign! The point is you’re more likely to achieve your long-term goals if you stay the course.
To illustrate this further, we need only to look at the numbers: investors who maintained their equity allocations throughout the 2008-2009 downturn had larger account balances two years later than those who dropped their equity allocations to zero during the worst part of the crisis.
A financial professional can help you determine the right mix of investments to get you started toward your goals. If you’re investing for retirement, which may be 30 to 40 years away, most of your retirement savings should be in equities or equity-like investments. Proper diversification across geographies, business sectors and companies will help smooth the ride along the way. And, as you near retirement, your advisor can help you gradually reduce your investment risk to avoid sharp losses in your savings.
A successful savings and investment plan starts with developing good habits and focusing on your long-term goals instead of short-term distractions. You can speak with your financial advisor about getting started, or visit our G2G Impact resource center for more planning tools and ideas.
Jordan Sheiner is an associate relationship manager for CIBC Private Wealth Management, where he works closely with clients and their advisors to structure and implement comprehensive investment and wealth management strategies.
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