– Pay yourself first –
The purpose of this post is not to go back to the basics of investing terms and making the different between a stock and a mutual fund. As I meet with several young professional and entrepreneur, I noticed that most of them have something in common: they make money, they know they need to put money aside to retire but they don’t really want to take care about it. So if you haven’t find a good financial advisor, this is a good post to get started in the investment world.
Setup a budget and pay yourself first
Start saving young is beautiful as this is the time of your life where you don’t have much debts already in place ( you are actually working pretty hard to get all your payments in place as you are buying your first house, your first new car and maybe having your first kid). So before you get all those payment, you are better off taking a bi-weekly amount (according to your pay check date) and start systematic investment. Your investment amount should be your very first payment once you cash in your pay check.
There are many ways to establish your budget and setup how much you should put towards your investment account. I actually suggest that you use a retirement calculator first and then, try to fit the number in your budget.
Since your retirement should be a priority (do not underestimate the power of compounding interest!), you should try to figure a way to include your bi-weekly savings into your budget instead of doing your budget and then trying to fit a bi-weekly savings investment in it.
The retirement calculator will help you out determine how much you need to put aside each pay in order to retire comfortably. In order to have a realistic results (the goal here is not to make beautiful charts and think that you are good for retirement with a systematic investment of $100 by pay check!), you need to include reasonable assumption.
For example, inflation rate should not be below 2%. Some people will argue that you should consider 2,5% in order to be really safe but I would say that anything between 2% and 2,5% is fine. Then, you need to determine how much you will make as investment returns. For now, I suggest you take something between 5% and 6% (net of fees). You will have a better idea of which number to put in with my second post of this series (how to determine your investor profile) on Monday.
You can also play different scenario with different age at retirement. You will be surprised to see how 3 years at work can make a huge difference on your retirement. By the way, never underestimate your life expectation. You should calculate your retirement as you would die older than 90 years old. My two grand-mothers are 88 and 86 and they are in top shape. I bet it’s going to be your case too!
In order to help you out, I have searched a few retirement calculators that you can use to determine the amount to be included in your systematic investment.
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