Nest Egg 101: Invest Now, Benefit Later Learn the three basic steps to creating a nest egg. BY TIM KIRCHNER
Creating the future your want tomorrow requires some thought and simple planning today.
Although it may seem like it for many couples, managing money isn’t a mystery it just takes a little time and effort. When all is said and done there are basically three components: budgeting, saving, and investing. If you master these you should be well on the way to achieving your goals and financial dreams as a married couple.
In many ways, budgeting and saving may seem to be the most difficult areas to master since they require focus and discipline, which isn’t easy in a short-attention-span world. However, the ability to invest wisely can be just as much of a challenge, as the past few years have demonstrated. In today’s world, it’s much more than simply a matter of figuring out where you want to invest your money and watching it grow. Investing, like saving, requires discipline, a plan of action, and a willingness to adjust your plans based on the current economic environment.
There are many types of investments beyond the simple savings account that can help you achieve your financial goals. As a general rule, however, the higher the interest rate or return on an investment, the greater the risk. How much of a risk taker are both of you? These days, people are more inclined to want to play things safe, and with good reason, since even the best laid plans can end up not-so-good for people who thought they were investing wisely.
Decide Your Risk Tolerance
That’s why it’s important to sit down as a couple and answer how much "risk tolerance" you have before making any decisions about investing. Take time to really get a feel for how much of a financial risk the two of you as a couple are prepared to make. The answer may surprise you because your partner may have different ideas. Some people never want their savings to decrease under any circumstances. Others are perfectly willing to risk aggressively growing their savings. Most of us fall somewhere in between.
During that discussion keep in mind that it’s not a matter of right or wrong, but of finding out how much risk you want to take with your future. Ask yourself the following: How much savings do you want to have on hand at all times, in case of the unexpected (such as job loss or illness)? What big ticket items are you looking to buy and when? Also, how would you react if the stock market were to drop significantly?
Once you know your "risk tolerance" as a couple, you’ll want to think about what investments make sense for your situation. I’d strongly suggest the services of a trusted, qualified financial advisor to help you make that decision. He or she will be able to look at your specific situation and offer advice based on actual experience. Don’t be surprised if your financial advisor asks some tough questions—although this is where all those conversations about finances will pay off because you won’t be blindsided.
Understanding the Investments
Before meeting with an advisor, give some thought to the types of investment opportunities you’ll want to explore. There are quite a few out there, each with varying degrees of risk. Stocks are, of course, a common source of investment, but as recent stock fluctuations have shown there can be a high degree of risk associated with investing in the market. Another opportunity involves the purchase of bonds, which are a debt or loan made to a corporation, the federal government and its agencies, or a local government. Overall, bonds are considered a safer investment than stocks because bondholders are paid before stockholders, should a company become insolvent. Yet another option is to invest in mutual funds, which is a pool of money invested in various securities such as stocks, bonds, money market instruments, or a combination. By investing in mutual funds, you often can diversify your investments and balance risk.
One final investment to consider is the purchase of a home. Although you may not typically think of your home as an investment, it’s probably the largest single one you'll ever make. As such, it's important to choose a home with an eye toward long-term value. Keep your residence in good repair to maintain or even improve its market value. Consider as many factors as you can when purchasing and pay off that mortgage consistently and in a timely fashion so that you can build up equity in the house over the long-term.
By mastering the basics of budgeting, saving, and investing, you should be able to dramatically improve your chances of building a solid nest egg to fund your dreams as a couple, right up until retirement. As with anything in a marriage, however, it does require a bit of work and an open line of communication. Of the three components, I personally cannot stress enough the importance of saving. Saving is simply a good thing, period, and can help you weather many an economic storm. When it comes to investing, my biggest advice to newly-married couples is: Invest in a commitment to saving. In any market, that’s one strategy that will never let you down.
Tim Kirchner is vice president of MetLife Home Loans. Kirchner has more than 25 years experience in the home mortgage industry. For additional strategies on saving, visit www.metlifebank.com, and select the tab on "Life Advice." Please note that this article is for informational purposes only and should not be construed as investment advice.