Written by Trent Hamm, The Simple Dollar is a popular personal finance blog that chronicle's one man's road back from overwhelming debt to financial security. Hamm declared the contents of the blog to be in the Public Domain in 2008 and available for sharing when attributed properly. We will share a couple of posts a week.
One of the biggest fears that people have when they begin investing is that they’re going to make a “dumb” choice and not get the best investment returns that they could get. They fret and worry about this fund or that fund or buying real estate or buying bonds and that fret and worry and indecision keeps them from investing at all.
That’s a giant mistake, and here’s why: it will take a very long time for a poor investment choice to have a significant negative impact on you, but it doesn’t take much time at all for the choice to not invest to have a negative impact on you.
Let’s say, for example, that you’re able to put aside $100 a month for retirement. You can either start putting money aside right now in a investment chosen at random that earns 6% per year (on average), or you can give it six months of study and choose a much better one that returns 7% per year.
How long before the 7% investment catches up with the 6% investment?
A little over 11 years.
A similar example: let’s say you can spend an hour a week fretting over your investments to bump them up another 1% – from, say, 7% per year to 8% per year. Alternately, you can spend that hour finding ways to cut spending and you manage to cut out $25 per month, which you can then invest.
How long before the investment studying catches up with the frugality?
A little over 23 years.
The point is this: when you are first beginning to invest, it is far more important to start now and to put away as much as you can than it is to find the perfect investment.
Let’s say, though, that you’d like to invest but you also have some debts stacked up in front of you. What then?
You should always make the choice that will give you the best long-term return on your dollar. For that, you should assume that stock investments will give you about 7% per year.
So, your first step is to stop accumulating new debt. You should not incur any more personal debt if you want to get ahead.
The next step is to put money into retirement up to the employer’s match – assuming your employer offers a match. Why? That’s an immediate 50% or 100% return on your money. If your employer matches your savings dollar for dollar, then that’s an immediate doubling of your money. Grab that first.
After that, pay down high interest debt. I view anything above about 7% right now as high interest debt. Usually, that means you pay off things like credit cards, but you wait on things like car loans and house loans.
After that, invest in retirement up to at least 10% of your income – and at least 15% if you feel you’re behind. As I said above, do it now. Choose the best investment you can find quickly and start there – if you want to change it later, you can do so quite easily, but you can never make up for lost time.
The key thing is to start now and to contribute as much as you can, using frugality to your advantage. Without those two tactics, you’ll quickly find yourself years behind where you would have been.