Think of someone you know who is rich. How did they get there? Well, one day they had a hundred dollars and decided not to spend it, but to invest it instead! Over the decades I have spoken to hundreds of people who simply feel lost regarding how and where to invest. They don’t know what to do so they do little or nothing. Today, I’m going to eliminate that excuse!
How to invest $100 or more
The single most important step to investing is the first step…getting started! And no, it doesn’t take a lot of money to set up an investment program. Here are two simple alternatives:
- The Obama Plan– Recently, President Obama launched a new savings plan called MyRA. Under this plan, you can begin by investing as little as one dollar per month so there’s no excuse for not getting started. The money goes into the Government Securities Fund which invests in government bonds and there is no risk of loss. Interest rates change monthly but have averaged 3.2%. Contributions are limited to $5,500 per year plus an additional $1,000 (catch-up) if you are age fifty or older this year. . To qualify for the full $5,500 contribution, your income must be under $116,000 for single filers or $183,000 for joint filers. You can withdraw the money anytime but must pay taxes on the interest earned if withdrawn before age 59½. Once the account reaches $15,000, you must roll it over to a Roth IRA. For more information visit MyRA.gov.
- The Welch Plan– The Obama Plan offers an investment strategy that has no risks of loss but also pays only modest returns. Most people will need a higher rate of return in order to have a chance of meeting their retirement goals…which I’ll help you calculate in next week’s column. This means taking on the inherent volatility of the stock market. Seasoned stock market investors know that the market is impossible to predict in the short term but historically has earned seven to nine percent over the long term (ten years plus). While there are a number of low-cost, no-load choices, a great choice is Charles Schwab’s One Source Funds. A large number of these fund options allow you to invest as little as $100 initially plus add as little as $1 per month. Two choices worth considering are Schwab’s S&P 500 Index fund (symbol: SWPPX; 5-year annualized returns: 10.5%) and their Dividend Equity Fund (symbol: SWDSX; 5-year annualized returns: 7.97%). The S&P 500 Index fund invests in 500 of the largest companies in America while the Dividend Equity Fund focuses on the slice of the large U.S. companies that have a history of paying dividends. This dividend-paying strategy generally makes them a more conservative choice. If you invest in either of these funds, you should plan to remain invested for a minimum of seven to ten years.
How much should you invest?
My wife likes to use the phrase, “Bloom where you are planted!” This phrase can be used in many contexts, but here it means start investing an amount of money that you can afford to invest even if it’s $1 per month! Creating a habit of saving is vital to your ultimate success.
Clearly you should invest where your money has the greatest potential such as your company matching 401k plan, deductible IRAs or Roth IRAs. Take a look at all of the places you could invest and then prioritize them in order of most powerful. For example, if your company offers a 50% matching contribution on a portion of your own 401k contribution, start there. Then, when you get a raise (or bonus), commit one-half of the amount to your retirement savings program. That way, you receive a boost in spendable income while also stepping up funding for your retirement. It’s a painless strategy. Ok, no excuses for not starting your investment program!