With all of the work pressures and stress I’m under every day I give retirement a lot of thought. Because I’m only 34 years old, married to a 30 year old, and in the attempts of starting a family, I know that retirement is more than a long ways off. Regardless, I’m going to do everything I can to make sure I’m as financially stable as I can be by age 53. Why 53 you ask? Because last year I told myself (any my wife) that I was going to retire in 20 years one way or another. Maybe that means I still blog and earn some extra side income, or maybe I take up a part time job somewhere, but whatever it is it will be on my own terms…out of choice instead out of need. So the first thing I did was refinance my house to a 20 year mortgage. After all, chances are I won’t be able to afford a mortgage payment in retirement so I figured I’d better do away with that first. Next I just need to figure out how to save money, invest money, and pay down all remaining debt so that I optimize my total net worth by that age. I think this is where people often struggle the most. I watch people work hard and scrimp and save money and then throw it all in a bank account over their entire lives. Inflation is silent, but still very real, and it kills your money. It is effectively a negative savings rate, and while I advocate having some easily liquidated funds earmarked for an emergency you should really be investing or paying down debt. Let me explain.
I’m by no means an investment and financial professional, so take my advice for what it’s worth. However, I do a pretty good job of saving money and maximizing my returns, at least when compared to national averages. My strategy is actually quite simple, I do the opposite of what most everyone else does.
I have two different savings accounts. One of my accounts is an online account that earns a 1.00% APR. Pitiful but about the best you can do for a risk free shelter for your money. You will be hard pressed to find a brick and mortar bank that can offer a rate anywhere near that. I keep 6 months worth of monthly payments stored up in this account. This is my emergency / rainy day fund should I ever lose my job and I still want to pay my mortgage. My second account is with a credit union. I like having an actual bank location near me that I can walk into when desired. Also, they have desirable loan rates and it’s easy to walk in and fill out paperwork. In fact, I own a pontoon boat that I financed through my local credit union at a 1.99% interest rate…try finding that anywhere else! Normally I don’t like to take on consumer debt, but I enjoy boating, and I can easily invest and get a higher rate of return than 1.99%.
This is how you will truly achieve financial independence. It’s amazing how few people understand that investing your money is the only way to secure a comfortable retirement in a reasonable amount of time, at least without winning millions in the lottery. I have close friends who are afraid to put their money into anything other than money market funds and CD’s. They tie up money for years in a market that has been sky rocketing. These are gains that you will never get back. Compounded interest that you will never earn. Years of your life that could’ve been spent building your asset base. Stop being afraid of the market and start investing in it. I’m not talking about penny stocks, I’m talking about a balanced and diversified portfolio that is comprised of fixed income assets and proven equity stocks. I hold several blue chip stocks that pay healthy dividends, and thus a source of income that I can build for retirement. However, it’s my method of investing that I’m most proud of, and I feel has helped me leverage my savings the most. First, I utilize dollar cost averaging. Every month I take $500 and have it automatically deposited into an online brokerage account that only charges me $6 a trade. I then evenly distribute that $500 among the investments I hold. Because I do this with the same amount at the same time each month I am utilizing dollar cost averaging. Meaning, sometimes I buy a stock for higher and sometimes for lower, but in the end it all averages out. I don’t concern myself with the daily ups and downs, rather I built my investments over a lifetime, and because they are safe investment my net overall return will surely be positive. My second investing method is also quite simple, I literally do the opposite of every one else. I always keep a stash of money in my brokerage account that sits there as cash holdings. It’s just as easily liquidated as a bank account if I need the money, yet it is able to be invested on the drop of a dime when desired. On those days that you read about the DOW losing 200+ points is when I immediately rush to a computer to invest that cash! I love when the market panics over stupid media concerns and healthy reliable stocks like ADP or JNJ lose 5% in one day. Does anyone really think these tried and true companies are going bankrupt? Then why are you selling? And more importantly, why aren’t you investing? A stock either goes up or down, and if daily drops in stock price are merely an opportunity to buy at a bargain price. When stocks like that drop 5% I know that EVENTUALLY they will increase, and that 5% is a built in return that I know I will eventually get.
Other than saving and investing money the only other thing you can really do to shore up your finances is to reduce debt. Most of us have some form of debt or another, some of us are just conditioned to classify debt into separate categories. Most people view credit cards and auto loans as expensive and wasteful debt. However, those same people view student loans as an investment, and mortgages as a healthy debt on an appreciating asset. Truth be told, any debt that you pay interest on is deterring you from a life of financial freedom, and most likely hurting your net worth. I want to be as debt free as quickly as possible, and certainly prior to retiring. But at what cost? If I have a 1.99% loan and I have enough money to either invest or pay down debt, I generally choose to invest. That is unless the market is going up…sounds crazy, huh? I told you before, I utilize dollar cost averaging and I take advantage of every downswing in the market. However, when the market is thriving I know eventually there will be pull back and losses will occur. Why buy the stocks after they become more expensive, I’m no predictor of the market, I only react. So when stocks appreciate and become more expensive I sit back and am happy with my current appreciating investments and I take my excess money and throw it down on my debt. I put extra on my mortgage or my boat. Those extra debt payments have built in savings as well, whatever the interest rate I have would be on the principal I just paid off.
Keep in mind that the above happens AFTER I utilize every last tax sheltered account available to me. 401k, IRA, 403b, etc. I like to pay as little in taxes as possible, then I put my plan into effect. So far it’s provided me a life time of double digit returns, so I can’t complain. Go against the grain, happy finances!