Investing All-in-One For Dummies. Eric Tyson

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      Making investing decisions and determining your likes and dislikes is challenging when you consider just your own concerns. When you have to also consider someone else, dealing with these issues becomes doubly hard, given the typically different money personalities and emotions that come into play. Usually one person takes primary responsibility for managing the household finances, including investments. The couples who do the best job with their investments are those who communicate well, plan ahead, and compromise.

Couples stuck in unproductive patterns of behavior should get the issue out on the table. For these couples, the biggest step is making the time to discuss their financial management, whether as a couple or working with an advisor or counselor. The key to success is taking the time for each person to explain their different point of view and then offer compromises. So be sure to make time to discuss your points of view or hire a financial advisor or psychologist/marriage counselor to help you deal with these issues and differences.

      Assessing your savings rate

      To accomplish your financial goals, you need to save money, and you also should know your savings rate. Your savings rate is the percentage of your past year’s income that you saved and didn’t spend.

      Part of being a smart investor involves figuring out how much you need to save to reach your goals. Not knowing what you want to do a decade or more from now is perfectly normal; after all, your goals, wants, and needs evolve over the years. But that doesn’t mean you should just throw your hands in the air and not make an effort to see where you stand today and think about where you want to be in the future.

      An important benefit of knowing your savings rate is that you can better assess how much risk you need to take to accomplish your goals. Seeing the amount that you need to save to achieve your dreams may encourage you to take more risk with your investments.

      

During your working years, if you consistently save about 10 percent of your annual income, you’re probably saving enough to meet your goals (unless you want to retire at a relatively young age). On average, most people need about 75 percent of their preretirement income throughout retirement to maintain their standard of living.

      If you’re one of the many people who don’t save enough, it’s time to do some homework. To save more, you need to reduce your spending, increase your income, or both. For most people, reducing spending is the more feasible way to save.

To reduce your spending, first figure out where your money goes. You may have some general idea, but to make changes, you need to have the data and facts. Examine your bill-paying records and review your credit card bills and any other documentation that shows your spending history. Tally up how much you spend on getting food out, operating your car(s), paying your taxes, and everything else. After you have this information, you can begin to prioritize and make the necessary trade-offs to reduce your spending and increase your savings rate. Earning more income may help boost your savings rate as well. Perhaps you can get a higher-paying job or increase the number of hours you work. But if you already work a lot, reining in your spending is usually better for your emotional and economic well-being.

      If you don’t know how to evaluate and reduce your spending or haven’t thought about your retirement goals, looked into what you can expect from Social Security, or calculated how much you should save for retirement, now’s the time to do so. Pick up the latest edition of Personal Finance in Your 20s & 30s For Dummies by Eric Tyson, MBA (Wiley) to find out all the necessary details for retirement planning and much more.

      Investing regularly with dollar cost averaging

      Regularly investing money at set time intervals, such as monthly or quarterly, in volatile investments such as stocks, stock mutual funds, or exchange-traded funds is called dollar cost averaging (DCA). If you’ve ever had money regularly deducted from your paycheck and contributed to a retirement savings plan investment account, you’ve done DCA.

      Most folks invest a portion of their employment compensation as they earn it, but if you have extra cash sitting around, you can choose to invest that money in one fell swoop or to invest it gradually via DCA. The biggest appeal of gradually feeding money into the market via DCA is that you don’t dump all your money into a potentially overheated investment just before a major drop. No one has a crystal ball and can predict which direction investments will move next in the short term. DCA helps shy investors psychologically ease into riskier investments.

      DCA is made to order for skittish investors with larger lump sums of money sitting in safe investments like bank accounts. It also makes sense for investors with a large chunk of their net worth in cash who want to minimize the risk of transferring that cash to riskier investments, such as stocks.

      As with any risk-reducing investment strategy, DCA has its drawbacks. If growth investments appreciate (as they’re supposed to over time), a DCA investor misses out on earning higher returns on his money awaiting investment. Studying U.S. stock market data over seven decades, finance professors Richard E. Williams and Peter W. Bacon found that approximately two-thirds of the time, a lump-sum stock market investor earned higher first-year returns than an investor who fed the money in monthly over the first year.

However, knowing that you’ll probably be ahead most of the time if you dump a lump sum into the stock market is little consolation if you happen to invest just before a major drop in prices. For example, from late 2007 to early 2009, global stocks shed about half of their value. And how about those who invested in stocks in late 2019 and early 2020 only to see stocks slide by more than one-third in just a matter of weeks in March of 2020 due to the government-mandated economic shutdowns resulting from the COVID-19 pandemic?

      If you use DCA too quickly, you may not give the market sufficient time for a correction to unfold, during and after which some of the DCA purchases may take place. If you practice DCA over too long a period of time, you may miss a major upswing in stock prices. Consider using DCA over one to two years to strike a balance. Alternatively, if you’re comfortable with the risk, get your money invested and get on with your life!

      

When you use DCA, establish an automatic investment plan so you’re less likely to wimp out of your strategy. Your money that awaits investment in DCA should have a suitable parking place. Consider a money market fund that’s appropriate for your tax situation.

Knowing the Impact of Investing for College Costs

      Many well-intentioned parents want to save for their children’s future educational expenses. The mistake that they often make, however, is putting money in accounts in the child’s name (in so-called custodial accounts) or saving outside retirement accounts in general. The more money you accumulate outside tax-sheltered retirement accounts, the more you will generally end up paying for college costs.

      

Under the current financial needs analysis used by most colleges and universities in awarding “financial aid” (that is, how much of their very high sticker price they will charge you), the value of your retirement plan is not considered to be an asset. Money that you save outside retirement accounts, including money in the child’s name, is counted as an asset and reduces eligibility for financial aid.

Also, be aware that your family’s assets, for purposes of financial aid determination, generally include equity in real СКАЧАТЬ