In a fluctuating market and challenging economy, investors should focus on the things they can control. Here are a few basic things people can do to take more ownership over their financial goals – regardless of the economic environment.
Create a savings and investment plan. All investors should start with a plan. If you’re saving for retirement, a primary goal for many investors, a general rule is to try and save 10-15 percent of pre-tax income in your 20s. If you have delayed savings or have had a financial setback, you may need to increase the amount as you move into your 30s and 40s. Individual Retirement Accounts (IRAs) and employer-sponsored 401(k) plans are two common vehicles for retirement savings. If your employer offers a 401(k) matching contribution, you should strive to contribute at least enough to receive the entire matching contribution.
Another basic building block of saving is to establish cash reserves, sometime called an ‘emergency fund,’ for at least three to six months of expenses to be prepared for any unexpected cash needs. Typically it makes sense to these savings where they are easily and quickly accessible, such as a bank savings account.
A critical aspect of an investment plan is a clear understanding of your financial goals. This might be a combination of things you are trying to achieve over the short, medium and long term. Short term goals could include things like purchasing a car or a house. Depending on your age, medium and long term goals could include things like paying for a child or grandchild’s college education or funding a comfortable retirement lifestyle. Determine what you want your money to do for you and develop a plan and investment portfolio you to fit those needs.
Assess your current lifestyle. It can be helpful to take a look at a full month of expenses and see how they compare to your income. Ideally, there’s enough money left over to allocate to savings. If not, try to separate essential and non-essential expenses with the goal of limiting the non-essential spending.
Revisit your plan at least annually. Tax season can be a good time to take a look at your overall financial situation and progress against your plan and goals, because you’ll need to gather and organize most of your financial information to file your taxes.
If you’re searching for motivation to create, fine-tune or revisit your financial plan, consider three things that a plan provides. First, it forces you to think about and document your financial goals and how you want to manage your money to reach them. Second, it helps you prioritize your goals and determine what is really important to you and your family. Third, having a plan helps keep you on track, especially during emotional times such as difficult market and economic conditions or significant life events.