Are you thinking of getting started on saving and investing in 2023? Our Savvy Ladies Helpline Volunteers answer questions from the Dress for Success community on a special Ask the Expert session. Read some of the most frequently asked questions on saving and investing below!
Savvy Volunteers Ravi Patel, Ross Krause CFP®, MBA, MSA and Evan Press, CFP® helped answer some of the top questions on catching up on saving and investing, from how much to save every day, to how to overcome the fear of investing in a volatile environment.
Read our experts’ answers below plus their top financial tips for 2023. Have more money questions? Contact our free financial helpline for free one-on-one mentoring with a volunteer financial advisor.
How much money should I put aside each day?
Ross Krause CFP®, MBA, MSA: It depends on your goals. If you would like to retire at an average age and plan on having an average expense, you should be saving 15% of your paycheck each month. If you have more aggressive goals, including retiring earlier or spending more on things like travel or philanthropy, you should increase that to at least 20-30%. Also, note that “Savings” does not mean money in the bank earning .1% interest. You need that money working for you and at the bare minimum keeping up with inflation.
Ravi Patel: I personally do not believe this should be a daily exercise. Instead, I think this should be in conjunction with your monthly budget and what your savings goals are. Aside from the 6 months of expenses I would endeavor to keep in an emergency fund, what specifically are other things you are saving for that are beyond your normal recurring budget? Does it include a vacation, car purchase, home improvement project? In those instances, you want to have a timeline of when you need those done, and prioritize what you want. For example, a $12,000 used car you want to buy 12 months from now. That’s $1,000 a month that you might want to allocate and build in a separate savings account that you don’t touch for anything else. Doing it daily is a challenge because money is usually only coming in twice a month while most of us are spending something almost everyday. Instead, just be more focused on the beginning of the month’s budget, so you can tell your money where it’s going and have a clear idea of what’s coming in.
Is there a financial literacy course to get started on saving and investing?
Ravi Patel: I would start with a couple of books. Total Money Makeover by Dame Ramsey and The Millionaire Next Door written by Thomas Stanley. The former does a very good job of giving steps on how you could start with a starter emergency fund, get out of debt, build a fully funded emergency fund, work towards paying off your mortgage, help build for kids colleges, and invest for your retirement and non-retirement accounts.
The Total Money Makeover Book by Dave Ramsey is a great guide for someone trying to get into saving and investing. Saving is a mindset of telling your money where you want it to go in an intentional manner that involves a budget and making sure your outgoes are less than your inflows. It is really quite that simple. The main thing is writing everything down and making sure you make a unique budget for the upcoming month at the end of every month. This will allow you to plan for seasonal expenses like lawn care, Christmas shopping, insurance payments, etc.
Ross Krause CFP®, MBA, MSA: There are many great courses you can take at a local community college or online to help. However, when it comes to this type of education it’s best to learn hands on. I would recommend any tutorial/app or video game that lets you run a virtual business and has real accounting/finance tracking. You can apply the same lessons you learn running a successful business to your own personal finances.
I took an introductory class as a senior in high school and it changed my life. We worked on this computer game/simulation where everyone was given $100k to invest in a portfolio of stocks and funds and then we tracked our results during the 3 months of the class. You really learn a lot about the ebbs and flows of the market when you are actively involved. Also, the game was nice because I could learn without spending real money. However, if you don’t want to wait you could always start with a simple S&P 500 fund and see how that goes for the first year.
I want to start investing but I’m afraid of picking the wrong thing and investing before a recession. How can I get past these fears?
Ravi Patel: Being afraid to invest is absolutely natural. It is a barrier we all have because the market can sometimes be painted as this complex entity that we have no control over. The reality is the market is just a reflection of commerce and how customers engage with the marketplace. And as long as we continue to believe Americans will continue to engage in spending and participate in the marketplace, the market through fluctuations will always grow over the long term. At least that is my personal belief.
However, when investing you want to make sure you do it after you have paid off consumer debt, built up an emergency fund of six months of expenses, and have a house or mortgage payment that is a small percentage of your take home pay, and you are already contributing 10-15% of your income up to your retirement. After that, you are free to invest. But you want to make sure you are investing over the long haul. Therefore, if you need the money over the next 2-3 years, definitely keep it in money markets. Otherwise when picking mutual funds, look for a long track record, and returns over a 5-10 year period which meet or beat the index. And as long as you spread this out over 4/5 funds, you will generally be okay.
You will certainly have market exposure, but it will be generally limited to that and not situations where you will have significant tail risk or loss of 50-60% other than those twice a century scenarios where the broader market cuts in half before it recovers as it always has. But when you have a long term horizon, you are able to ride out those roller coasters as well.
Ross Krause CFP®, MBA, MSA: If this is long term money that you are not planning on touching for the next 5 or 10+ years then don’t worry about anything short term, it’s just talking heads on TV trying to scare you and increase their ratings. The market is very unpredictable in the short term but in the longer term the market is based on statistics, patterns, and data. Also, people forget that about 50% of their investment earnings come from dividends and interest that is paid monthly, quarterly, or annually on their investments and not just the growth of the stock price. Therefore, even in a flat year you still grow your money.The earlier you start, the more your money will compound over your life. Yes, it is completely possible that you invest now, and the market drops, and you lose money, but it’s just as likely the opposite happens. The worst thing you can do is wait on the sidelines and be paralyzed by fear and never get started. My best advice to beginners is to pick a few index funds that are plain vanilla, and just let the money sit in them for as long as possible. Keep it simple and don’t micromanage it. Trust me, there are better things you want to be doing with your life than watch your investments everyday and worry about the market.
How to start investing in mutual funds directly without a financial advisor?
Ravi Patel: In terms of mutual funds, you want to make sure that investments into mutual funds are done with a long time horizon. You don’t want to invest funds you believe you will need over the next few years since market fluctuations can put a damper on those plans. You want to invest in funds that have a long time horizon (5-10 years). And you want to make sure they either track or beat the market in its specific category. The prospectus of any mutual fund will tell you how that fund matches up against comps or other indexes in their category. You want to spread out investments into growth stocks, aggressive stocks, income based, etc. You don’t want to have everything in one fund. Having a mix of 4-5 will ensure you are protected from a single outlier. However, you have to accept market fluctuations and have a long time horizon so you don’t pull your money due to market shocks and panic like we’ve seen over the past 12-16 months.
I’m a single mom that can’t afford to lose money in the volatile market. How should I invest?
Evan Press, CFP®: First, you should have an emergency fund to cover a minimum of 3 months of living expenses. You can build this up over time, just like you are saving for anything else. It should be kept liquid, that is, in a bank account that you can access quickly and easily. This covers such emergencies or unexpected expenses as car repairs, doctors/dentists bills, and so on. With this, you will not be forced to borrow money on your credit card (20% interest) or sell an investment when the market is down.
Second, I would suggest a target date fund from Vanguard, Fidelity or TRowe Price. These are funds that combine investments in both stocks and bonds. The target date is the date you expect to need the money, when you retire. These are inexpensive and make the investment decisions for you. As they approach the target date, they become more conservative, that is, they move into more bonds and fewer stocks. This is for money you will not need for 10, 20 years.
Finally, the most important key to investing success is discipline. Not an MBA. Figure out how much you can save from each paycheck and put that amount on automatic transfer into your chosen fund. Make this a realistic amount that you can stick to during both good and bad markets. A good plan you can stick to will always beat a great plan that you can’t stick to when the market is “misbehaving” like now. Sit back and let it go, you can check it every so often out of curiosity. After 5-10 years you’ll be amazed at how much you have. Remember that the stock market is up about 7 out of 10 years. We just don’t know which 7 years.
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