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This is the fourth and final part of my series on the power of budgeting. In the first article we talked about the cash flow that is freed up when you begin budgeting. The next two parts of the series addressed the first two things you can do with excess cash. You can either have fun with it, or give it. Today I’m going to finish off by talking about one of my favorite things you can do with extra money: invest it.
Investing is an absolutely enormous subject. People devote their entire lives to the study of investing. Some people are quite successful with it. Others lose their shirts. I don’t claim to be a very savvy investor and, to be honest, if I did have some way of investing that would ensure profits every time I would not share it here (unless I wanted to wave goodbye to my profits).
I want to talk about one aspect of investing that is not based on theories – but rather on hard facts and real-life experience. One of the most sure-fire ways you can retire sitting on top of a sufficiently-large golden nest egg is to invest regularly. I know – it’s boring isn’t it?
When you regularly invest, you ensure that you are investing without emotion. For instance, let’s say I set up an account with a mutual fund house (such as Vanguard, or T. Rowe Price). The emotionless way to invest is to just decide how much of the excess cash (created from budgeting) that is available should go toward your investments. You can then set up with the brokerage house exactly how you want it handled. They’ll gladly draw on your account each month and throw your money into the fun(d).
I personally prefer the idea of investments that don’t require much maintenance, or thought :). I just don’t want to be a full-time investor. And even if you were a full-time investor, your chances of doing better than the market would be pretty slim.
This ‘walk-away’ approach to investing is why I personally prefer index funds to make up the bulk of my retirement portfolio. There are index funds for just about everything now, so don’t think your options will be limited in any way. Occasionally, I do dabble in single stocks, but only with money I can afford to lose.
A relatively new approach with index funds is to even remove the investor’s need to make annual adjustments to their holdings. (Each year you should look at your portfolio and make sure it syncs up with your risk tolerance and retirement goals). For instance, the Vanguard Target Retirement Fund Family is built on the fact that things change, time passes. For instance, I am 25 and would like to retire when I’m 65 (well, 55 really). I would choose the Vanguard Target Retirement 2045 fund. The fund automatically adjusts its portfolio each year to reflect the fact that I’m am coming closer and closer to retirement. The adjustments are to move to a more conservative approach (less equity, more bonds to state it simply).
I personally love this idea. I can invest with confidence that I’m extremely well diversified, my portfolio is adjusting automatically to reflect the ever-changing environment I live in, and the fund is extremely cheap (meaning more of my money goes toward growth than toward one-time management fees).
In no way am I endorsing this fund in particular. I’m only highlighting the characteristics that appeal to me when it comes to investing:
- Automatic
- Consistent, emotionless
- Cheap
- Diversified
- Low maintenance
What you’ll find is that your excess cash will just grow and grow and grow once you begin a consistent investment plan. I’m reminded of a caller I heard a while back on the Dave Ramsey show. He had a particularly vexing problem. He and his wife had been very good about budgeting and watching their money. As a result, they had a lot of excess cash that had been built up over the years – about $3 million. They were still relatively young (67 and 68). So what was the problem? Their money was growing so fast they didn’t know where to spend it or what to buy.
Gosh. What a problem.
Budget. Give. Have fun. Invest. Rinse and repeat.
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