When it comes to investing, retirement planning, or tracking our markets, we rely on the media to get our information. It may be from the newspaper, television, magazines, the Internet, or our cell phones. Either way, we learn a lot about what to do and what not to do about investing from the media. We must remember that the information can work for us or against us depending on how we apply it. Now, how does this relate to reaching our financial goals? Knowing some of the key elements that help reach financial goals is critical. The value of time, the commitment to save, and understanding what you invest in are a few of these critical elements.
Understanding these elements will help the everyday person read through some of the information from the media and apply it to their situation. For example, many investors may spend countless hours researching a product or investment but not consider the value of time in an investment. The future value of an investment, compounding at a given return, is powerful, but factoring in the concept of time can make a huge difference in one’s nest egg. In other words, if one were to start investing the same dollar amount every year at the age of 21 rather than 35, the value of that investment may differ by the hundreds. Most of the media information we see does not account for the value of time for investing — only the investment and what trend is in place NOW!
Saving for the future is dependent on so many factors. Many of us forget that understanding our behaviors is important as it applies to our finances. The commitment of saving is the first step and is usually the hardest. For some of us, taking the actions to execute a commitment is challenging and requires others to help. A great example of this is when employers automatically sign up their employees to participate in their retirement plan. Studies have shown that when the employers take this approach they had much higher participation even when employees were given the options to opt-out. (Source: “Behavioral Economics” by Sendhil Mullainathan, MIT & NBER and Richard Thaler, University of Chicago and NBER). Planning and committing to saving can be a complex decision, many of us avoid making this decision and committing to it.
Once we have committed to saving, we must consider our investment strategies. It varies among several factors. These factors are risk tolerance, time horizon, and financial needs for retirement. For this reason, I highly suggest using a financial professional to provide recommendations for investments that are appropriate. In addition, it is imperative to consistently review your accounts and objectives. Although we may have a plan in place, our world, economy and financial situations change, so we must be educated and prepared to make adjustments when needed.