Investment Planning 101: Strategies for a Strong Financial Future
While investing can involve some degree of risk, waiting to save for your future is almost always riskier. According to a Charles Schwab Modern Wealth Survey, about 58% of Americans are currently investing, beginning around ages 32 for Gen X and 35 for Baby Boomers.
You don’t need a large amount of money or a finance degree to start creating an investment plan to support your goals, but you need to know a few fundamentals and have the discipline to follow through.
Here are some basic investment concepts and simple strategies that can help you get started on building financial security.
Saving vs. Investing
While both are important, saving and investing play different roles. Think of saving as setting money safely aside in a savings or money market account for unexpected medical bills or car repairs, and eventual expenses, such as a down payment on a home or a new car. Think of investing as money to be saved and potentially grow over time to meet future expenses, such as education or retirement.
Plan Now
People are now living longer. Retirement can last 20 years or more, while programs like Social Security are expected to play a smaller role for younger generations. Investing doesn’t eliminate this risk, but not having a plan could mean not having enough for retirement.
Before investing, understand and organize your finances:
- Know your net worth – Compare what you own to what you owe.
- Understand your cash flow and expenses – Track where your money is going each month.
- Reduce high-interest debt – Every dollar saved in interest is a dollar that can go toward future goals.
- Expect the unexpected – Establish an emergency savings fund and make sure you have sufficient insurance coverage.
Use Your Tools Wisely
For many people, long-term planning is built around three major tax-advantaged accounts: the 401(k), the IRA and the Health Savings Account (HSA). According to Gallup retirement savings polling data, about six in 10 Americans report having money invested in a savings plan such as a 401(k), 403(b) or IRA.
- Employer-Sponsored Accounts – These plans are often the easiest way to begin investing. Traditional 401(k)s offer an upfront tax deduction, while Roth 401(k)s offer tax-free withdrawals in retirement. One of the biggest benefits is the employer match, so contribute at least enough to receive the full match, and consider increasing your contributions by 1% each year or whenever you receive a raise.
- IRAs – A Traditional or Roth IRA offers flexibility and a wider range of investments. Traditional IRAs allow for tax-deductible contributions, while Roth IRAs provide tax-free growth and withdrawals in retirement. Contribution limits are separate from your 401(k), making IRAs a great supplement to employer-provided plans.
- HSAs – For those enrolled in a high-deductible health plan, the HSA can be a flexible “triple-tax-advantaged” retirement tool to cover future healthcare costs. Contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. After age 65, funds can be used for any purpose, though they are taxed if not used for medical needs.
The Importance of Compounding
Compounding is the process of earning interest on your interest, and it rewards patience, meaning that even small contributions can grow significantly over decades. Early on, growth may seem slow, but as the balance increases over long periods, growth can become more significant.
Review, Adjust, and Ask a Professional
Investment planning isn’t a one-and-done task; it’s an ongoing process. Review your plan at least annually, monitor your progress and make changes as your goals or income change.
Investing isn’t a solitary pursuit either, so ask a financial advisor to review your plan to make sure it’s on track to meet your goals.
Andy Goos is a senior client advisor with Arvest Wealth Management in Greater Kansas City.
With more than $27 billion in assets, Arvest is a full-service bank that delivers financial solutions to individuals and businesses of all sizes. Since entering the Kansas City market in 2009, Arvest has grown to become a top 20 bank and the sixth-largest mortgage lender in the metro. The bank has 20 locations in the metro area. Member FDIC.
Arvest and its associates do not provide tax or legal advice. Arvest Wealth Management, Member FINRA/SIPC.
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