Coffee with mentor

How Should I Invest My Savings?

by Pramod Udiaver Last updated on October 12, 2016 Tags: Save Well, How-Tos
I recently met with a friend who told me she got a performance bonus at work, and was wondering how she should invest it. I got the feeling she was expecting me to tell her which stocks to buy, and I think she was initially disappointed that I didn’t suggest a red hot IPO of a Silicon Valley tech company.
 
My friend isn’t the only one who has asked us this question. In fact, it’s quite common. So here's what I told her. It may have been a longer answer than what she expected, but she bought me a coffee and we had some time to chat. By the end of our conversation, she had a better understanding of how to invest smart, instead of how to simply pick popular stocks.

What are you saving for?

Your starting point to investing should always be your goal. Once you know what you’re saving for, it's easier to map out your next steps, similar to planning a trip by figuring out where you want to go first. Once you know your destination, making a plan to get there and figuring out your cost should be next up on your to-do list. How much will you need to save to reach your financial goal? Answering these questions will ensure you take the right steps in getting started. The more you put it off, the greater the chance you end up spending the money.

What’s your risk appetite?

Once you know your goal, know how much you’re willing to lose during your investing journey. Like with anything else in life, you win some and you lose some. With smart investing you’ll win in the long term, but have to endure some losses in the short term. Your investment portfolio should reflect your risk appetite (how much short-term fluctuation you’re willing to handle) and the length of time you have to get to your financial goal. 

How diverse is your portfolio?

Don't put all your eggs in one basket. Diversify. These days, it’s easy to keep a diverse portfolio with low cost ETFs. Often when you think of investing, the urge is to buy a stock. But getting exposure to a broad market through an ETF is a great option for most investors.    

How much are you paying?

Always make sure you’re aware of your fees. If they’re going to be more than 1% per year, that may not be the ideal solution for you. If you’re working with an advisor, ask him or her what your total cost of investing is or will be. Also ask if he or she is a fiduciary. Keep in mind that walking into a bank and buying stocks and expensive mutual funds is not the only option you have to invest your money. You could have your portfolio professionally managed by an online advisor at a much lower cost and at your convenience.

What’s your plan?

Lastly, put a plan together to get to your goal. Know how much you need to save regularly once you've set your goal. Remember to pay yourself first before paying your bills. Maximize any employee savings programs available to you – it’s free money. Most importantly, revisit your plan often to make sure you’re on track and keeping up with your commitment.

The last thing I told my friend is this: while these ideas may sound overwhelming, the hardest part is always the beginning. But once you get started you’ll see how quickly you’ll get into the habit of saving towards your goals, and how much quicker you can get there with a timeless investing strategy. So the next time you get a performance bonus, you won’t have to think about what to do with it; your money can start working for you right away.

For the price of a coffee and a chat with a friend, these investing tips are ones that will see my friend (and you!) through any financial goal. 

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