The true secret of investment success is so prosaic it almost never gets mentioned.
But, we aren’t afraid to be dull. So let it be said: The key to investment success is developing a modicum of financial self-discipline, particularly when it comes to saving and spending.
To help you develop that discipline, here are 10 steps that will make you a better saver and a smarter investor:
Sign up for your employer’s retirement plan.
The amount you contribute each month isn’t important. Getting started is. If you are going to be a good saver, you have to make it a habit.
And there is no better habit than putting money in your employers 401 (k) or 403 (b) plan. With these plans, you can get the triple benefit of an initial tax deduction, a matching contribution from your employer and continuing tax deferral.
Pay off your credit cards.
At 18% or so a year, the interest on your credit-card debt is more than you are likely to make on any investment. Until the debit is paid off, make a point of leaving your cards at home and instead sticking to a cash-only budget. That will do wonders for your propensity to spend.
Set up an automatic investment plan.
Buy a well-run, well-diversified stock mutual fund with low annual expenses. Thereafter, regularly invest $50 or $100 using an automatic-investment plan, where money is plucked from your bank account every month and invested directly in the fund.
Because these investments occur automatically, you are likely to keep at it, even when the markets turn rough and even when you are tempted to spend. Moreover, many fund companies will waive their investment minimum if you sign up for one of these plans, thus making it easy for cash-strapped investors to get started.
Make a ritual sacrifice.
Settle on one or two items that cost you $50 or $100 a month. Maybe it is booze, or cigarettes, or eating out, or taking the family to the movies.
Don’t be needlessly masochistic. Pick expenditures that you can curtail without feeling too deprived. Then, once a month, write a check for the savings and mail it off to your favorite mutual fund.
Putting your financial affairs in order – and keeping them that way – is one of the smartest money moves you will ever make.
If you are well organized, you will have a better handle on your finances, you will take all the tax deductions you deserve and your heirs are more likely to remember you fondly. Best of all, organizing your finances doesn’t have to cost anything.
Invest all financial windfalls.
Find it difficult to save money from your weekly paycheck? Instead, try investing any windfalls you receive.
Write a check to your mutual fund every time you receive a year-end bonus, an insurance payment from a medical bill, a tax refund, income from a second job or reimbursements from your employer-sponsored dependent-care or medical spending account. Also consider saving any extra money from a pay increase.
Round up your mortgage check.
If your monthly mortgage check is regularly $1,243.16, round it up to $1,300.00. Not only is it an easy way to boost your savings rate, but also you will pay off your mortgage more quickly and thus save thousands of dollars in interest.
Indeed, making extra mortgage payments can be a smart move right now. With bond yields so low, the effective return from paying down your mortgage is far greater than the interest you will earn by buying most bond investments.
Manage your cash for maximum return.
Too many people leave too much money languishing in the bank.
What to do? Close down your savings account and keep just enough in your checking account to avoid checking charges.
With the cash you free up, open a money-market fund, where you will earn a much higher yield.
Act your tax bracket.
Don’t buy municipals, just to get the tax break, and don’t buy the highest-yielding bonds available, just because of the fat payout.
Instead, first figure out what your tax bracket is. If you are taxed at 28% or up, consider munis. If not, go for the higher yield offered by taxable bonds.
Invest for the long haul.
If you purchase a stock or stock fund, buy it with the intention of staying put for at least five years. Thereafter, you should sell only if you need the cash or if there is a sound reason for dumping the investment and moving the money elsewhere.
By taking the long view, you will avoid tax hassles and trading costs and you are less likely to damage your investment returns with lots of impulsive buying and selling.