Finding an investment professional you can trust can be a daunting task. Whether you’re talking about too good to be true cryptocurrency ponzi schemes or executives making bets against the same securities they were selling their clients, the level of deception in the financial industry is simply staggering.
The current compensation structure of mutual fund advisors has created further distrust in this industry. Consider you invest $3000 in a mutual fund and continue to do so every year for the next 20 years, earning an average of 6% annual rate of return. Let’s also assume the MER (the management fee and operating expenses of the fund) is a typical 2.5%. The impact of the MER fee on your investment could result in lost potential earnings of over $40,000 over the 20 years. It’s no wonder that ETF-based portfolio investing such as Wealthsimple is quickly gaining popularity at an impressive rate.
You could be tempted to react to this deception by abandoning the financial services industry altogether, and many young (and senior) investors have done just that. But there is another way. You can simply turn to the financial advisor you trust the most – yourself. Becoming your own personal financial planner is not as difficult as you might think, but it is important to get off to the right start.
Pay Yourself First
One of the most common refrains heard by those in the financial industry is that individual investors simply do not have any money left to save after all the bills have been paid. While it’s true that many people are living on tighter budgets and even paycheck to paycheck, there are strategies would-be investors can use to make the most of what they do have – and the results can be astounding.
Looking for money to invest with at the end of the month misses the point. The time to look for those investment funds is the beginning of the month, before any of the monthly bills are paid and while that paycheck is safely in the bank. For the each month, start by completing STEP 3: Cash Flow of the solowealth financial plan using the solowealth Cash Flow calculator. Upon completing this task, you should have a ballpark idea of how much money to save aside before you start paying bills for the current or next month.
If you treat your savings as just another bill – one that must be paid no matter what – you can force yourself to save. In fact, you might be pleasantly surprised at just how easy it is to live on what’s left over.
The key to making this pay-yourself-first strategy work is to start small and set achievable goals. If you try to do too much too soon, you could end up short of cash at the end of the month. This could leave you scrambling for money and even leave your credit at risk. Instead, set a goal of 5-10% of your net paycheck. Eventually, try to work your way up to an aggressive goal of 15-20% of your net paycheck and begin the road to financial freedom. Before you take care of your monthly bills, deposit this pay-yourself-first amount into your investment account. Better yet, select the direct deposit option [pre-authorized contributions] for your paycheck to rake off that amount and send it to your investment account before you get a chance to spend it.
Once those funds are safely invested, you can pay your monthly bills as you normally would. This strategy forces you to invest and forces you to live within your means. Since that 5-10% is off the table, you are forced to live on 90-95% of what you take home. In the beginning that might seem like an insurmountable obstacle, but as time goes on you can adapt and find ways to save even more money by evaluating your Cash Flow [STEP 3] results statement every month.
The pay-yourself-first strategy works must much like a tax, but a welcome tax that actually puts money in your pocket. When the government raises tax rates, you have no choice but to cut back and deal with a smaller paycheck. The pay-yourself-first strategy works much the same way, except that the money is not lost forever. Rather, it’s put aside, where it’s allowed to grow for years or even decades. Putting aside even a small amount of money consistently month after month can result in a substantial nest egg over time.
Better yet, only a small amount of that nest egg will have come from your actual contributions. The rest will have come from compounding and interest, giving you a far better return on your funds than you would’ve received had you spent the money.
The pay-yourself-first strategy is one of the most powerful in the investment world and you can use this strategy to get started with your investments. Once this strategy is in place, your investment portfolio becomes just another bill that must be paid, much like the utilities bill, the phone bill and the mortgage or lease. The beauty of the pay-yourself-first strategy is that you can get started with any amount you like. If the Cash Flow calculator [STEP 3] determines all you can spare is $50 a month, so be it! Once you start working with this strategy, however, you might find that you’re able to boost your savings and get started with a sound investment strategy.
Lump in a Slump
Yes, you heard it here first… the “Lump in a Slump” strategy. Combined together, the pay-yourself-first and lump in a slump strategies are extremely powerful concepts, and these combined strategies can help you build real wealth over time, no matter how small your starting portfolio.
With the lump in a slump strategy, you simply save a portion of the amount of money determined in STEP 3: Cash Flow of the solowealth financial plan month after month in a savings account. In the meantime, keep up with financial news publications and pay attention to slumps in the market. For instance, certain sectors such as Gold, Oil, Financials, Real Estate and so on may be flirting with their lowest levels in a decade or better yet, there’s a recession [I apologize for my contrarian optimism]. Such slumps in the market are like ‘Black Friday’ for purchasing stocks. This is the time to pull the trigger by taking your cash deposited in the savings account and contribute it as a lump sum into your investment account, for example an IRA. Hence the term, “lump in a slump” and this strategy could be implemented annually, semi-annually, quarterly – essentially whenever there’s a ‘slump’ in the market.
This strategy automatically means you accumulate more shares when the stock market is down. Imagine the number of shares you could have purchased if you had a lump sum available to purchase equities during the 2008/2009 Financial Crisis and the potential growth value of those equities today. This strategy is different from the “Dollar Cost Averaging” strategy which suggests that investing consistently month after month, whether markets are tumbling low or soaring high, averages out in favor of investors in the long-term. The idea being that investing consistently is more important than not investing often enough, if at all.
Once you’ve mastered the twin concepts of pay-yourself-first and lump in a slump, you’ll be well on your way to becoming your own financial advisor. Financial planning is a skill that can be learned by anyone. You don’t have to have a degree in high finance or an MBA to understand the world of financial planning. All you need is to learn ‘tried & tested financial principles’ and the dedication to put what you’ve learned into practice.