money trap

From Charles Schwab

For many of us, managing our personal finances can be about as fun as doing our taxes. But just like software can make the tax process easier, there are specific things you can do to make money management as painless as possible. Below are five common money missteps and what you can do to get on track.

Money trap #1: Delaying saving for retirement

It’s easy to put off saving for retirement when you’re in your 20s — it seems far-off and making a day-to-day budget work may be challenging when you’re starting a career. Soon enough you reach your 30s, and your priorities may shift to saving for a house or paying for childcare — still not an easy time to save for retirement.

The fact is, it may never be easy. But it will always be necessary. And yet, nearly half of American families don’t have any retirement accounts at all.

The fix: As soon as you start a new job, sign up for your employer’s 401(k) plan. If your employer doesn’t offer a 401(k), set up an individual retirement account (IRA) and automate your monthly deposits.

If you don’t get used to having extra money in your paycheck, you won’t miss it when it automatically goes into your retirement savings. Plus, if you start early, your earnings will have a chance to generate more earnings, growing your savings at an accelerated rate over time — that’s the power of compounding.

Money trap #2: Skimping on an emergency fund

Twenty-four percent of all Americans have no emergency savings set aside to cover home repairs, medical bills, temporary unemployment, or any number of unforeseen (and pricey) expenses. Close to 70%don’t have the recommended six months’ worth of expenses saved, according to a June 2017 Bankrate.com survey.

The fix: Stash away six months’ worth of cash in a separate account to cover essential living expenses. The number may be daunting, but you don’t have to get there overnight.

Funnel part of your paycheck automatically to a separate account and you’ll make steady progress over time. And remember to increase your savings rate as your earnings — and cost of living — go up.

Money trap #3: Taking the short view on investing

Given the bear market of 2007 to 2009, it’s easy to understand why so many investors react rashly when the market takes a dive. The Dow Jones Industrial Average lost more than 50% of its value from its peak in October 2007 to its lowest point in March 2009.

But it’s the investors that have the fortitude to buy and hold who prevail: From that rock-bottom point in 2009, the Dow Jones Industrial Average has more than doubled, soaring some 10,000 points to new record levels. Investors who cashed out in 2009 may have locked in losses and consequently missed some or all the upswing.

The fix: Stay invested. If you have a history of making investment transactions right after a major event, consider reducing the number of times you log in to view your account — say monthly or quarterly.

Remember: Day-to-day market fluctuations have little impact on your long-term goals. Bear markets come to an end and research shows that staying invested over the long haul — and not trying to time swings — is the best way to participate in the market.

Money trap #4: Avoiding the market

Market volatility may be scary, but there has never been a 15-year period when stock returns were negative. Keep your time horizon in mind when you’re investing in stocks. 

Having most of your money in the stock market can be quite reasonable for a young person when investing for retirement. You should consider some exposure to stocks, even during retirement.

The fix: You don’t have to jump in cold. Get in the habit of investing by moving a portion of your cash savings into a diversified portfolio each month. This approach, known as “dollar cost averaging,” ensures you buy more shares of an investment when the price is low and fewer shares when the price is high. If you have a significant amount of money to invest, dollar cost averaging will reduce the impact of market volatility on large purchases.

Money trap #5: Concentrating your investments

Some of us might have too much of one type of investment in our portfolio. Maybe it’s stock in the company we work at, or municipal bonds inherited from a relative. But there’s a huge benefit to owning many different types of investments.

Having that variety in your portfolio — called diversification — tends to reduce its volatility and risk. Each investment responds differently to changes in the market or economy. If geopolitical events shake up your international stocks, for example, U.S. bonds might rise and help smooth out your portfolio’s return overall.

The fix: Make sure that you have investments across numerous sectors, industries, and geographical areas. Once you have a diversified portfolio in place, revisit your portfolio’s allocation mix on a yearly basis to make sure it still aligns with your investment goals.

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About LRPC’s Monday Morning Minute

Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges, and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.