My favorite Rio Olympics-related headline so far:
Now, the story isn’t confirmed, but it illustrates all of the controversy related to Brazil’s preparation for the Olympic Games. This situation is a great analogy for personal finance, because it helps us think about the answer to this question:
Are you being realistic about how much your investing, and the growth rate of your portfolio?
Are you saving an amount that is meaningful?
A country that puts on the Olympic Games is required to spend billions of dollars on facilities, such as stadiums and a Village for the athletes. Businesses plan for large future expenses using a capital expenditure (CAPEX) budget. If, for example, a furniture company needs to spend $100,000 on a new machine in three years, the firm plans for that expense. That means either setting aside dollars each year for the purchase, or creating a plan to borrow money to buy the asset. Companies that host the Games should be doing the same thing.
When it comes to personal finances, you have a big future expense, which may be buying a home or retirement. Once you have a idea of how much money you need, you can create an investing plan to get there. But ask yourself: is your plan realistic? Consider this statistic:
“In 2015, according to the FINRA Investor Education Foundation, only 40% of Americans said they spent less than they earned.”
-The Washington Post, July 13, 2016
Saving to reach that goal requires you to create a personal budget, and to stick with your budget. When you create that budget, you need to crave out some dollars each month for investing. The only way to reach your goal is to spend less than you earn.
Monthly saving allows you to take advantage of compounding interest- the concept of earning interest on both your original investment and interest earned in prior months. Here’s a great calculator you can use to plan your investing.
Holding cash won’t get you to your investing goal
It’s as old as the hills: economic uncertainty causes investors to move away from stocks and bonds and hold more cash. Here are a few recent statistics on that topic:
“Despite the stock market’s post-Brexit rebound, nervous investors are keeping more cash in their portfolios than they have in 15 years. Cash levels are now at 5.8% of portfolios, the highest level since November 2001.”
-The Wall Street Journal, July 19, 2016
According to a recent survey, 25% of people believe real estate is the best way to invest money they wouldn’t need for more than 10 years, followed by 23% who said they would keep their money in cash. Another 16% said they would invest in gold or precious metals, which tied with the percent of respondents who answered “the stock market.”
-MarketWatch, July 22, 2016
Now, every mutual fund portfolio manager holds some amount of money in cash, and the manager is likely to hold more cash during economic uncertainty. But with interest rates at near record lows, you need to be invested in some combination of stocks and bonds. If not, you’ll have to invest far more dollars each month to reach your goal.
Give these ideas some thought as you create a budget and invest. As always, these posts are for informational purposes only. Consult a financial or tax advisor as needed.
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
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