3 Things You Need to Do (but Won't)
I had a very interesting conversation this week with a writer/editor from a Men's fashion magazine.
Not, as you may have first surmised, due to my snazzy sartorial choices -- especially, the many and varied Ted Baker ties I wear when called upon to don a suit for the tube.
No, his question was more financial in nature. This gentleman asked a rather intriguing question, which, this being a quiet Sunday morning, I will share with you.
He said to me:
"I'm not very good with finances -- I'm not a numbers guy. Many of my readers are the same way. We all know we should be doing something with investing for retirement, but we don't know what to do. Everytime I ask someone, I get a long winded, jargon filled answer. Can you give me three simple suggestions -- in plain English -- that my readers should do to get started?"
No problem, I said. I have three simple things for your readers to do. These will save them and make a ton of money: Pay off your credit cards, Max out your tax deferred accounts, and start Dollar Cost Averaging into a few ETFs.
I enjoyed the back and forth enough, I decided to make this an Apprenticed Investor column (forthcoming in a few weeks). Meanwhile, here's a quick preview:
1. Pay off your credit cards: Most people pay have much higher credit card rates than they realize -- they creep up over time, especially if you have any sort of a balance. Even a late payments to someone else will also send your rate higher.
Paying these balances off are the equivalent of a guaranteed return of 18% (or whatever your rate has become). RISK FREE, GUARANTEED. You wont get that deal anywhere else.
2. Max out your tax deferred accounts -- 401k/IRA: Putting money into these accounts gives you the equivalent of an extra 40% or so investment capital (depending upon your present tax rate), which then compounds over the decades until you take it. When you retire and withdraw these monies (which should have appreciated nicely) you will be in a much lower tax bracket.
3. Dollar Cost Averaging ETFs: The simplest investment thesis: Set your account up for dollar cost averaging for a few different ETFs. Each pay period (or monthly), but the same dollar amount of your choices. example: $100 of DIA, $100 of SPY, $100 of Qs, etc.
When prices are high, you buy less shares; When prices are low, you buy more. Its pretty foolproof.
I warned the editor that most people won't do these things. They are like diet and exercise -- we know we should, but most of us just don't.
Such is the fate of us slightly cleverer, pants wearing monkeys . . .
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one thought--when you get to 59 and a half, put money into regular accounts and go for long term cap gains and dividends where your tax rate is under 20%.
In retirement many of our tax rates will be the 39% so we will have converted dividend and cap gains tax rates to ordinary income tax rates.
Each person will be different so an analysys is appropriate.
Posted by: Hal | Nov 18, 2007 9:43:45 AM
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