Building your own personal fortune might be easier than you think. Most people with a million dollars or more in savings didn’t get it from inheritance or by having a million-dollar idea. They got it the old-fashioned way. They worked middle income jobs and spent well below their means. They made regular contributions to a safe retirement fund and retired to a life of leisure. Want to be like them? There are a few easy steps you can take today to build a portfolio you can feel secure about, from almost any salary.
Cut down on your biggest spending
The difference between a 4 percent return and a 4.5 percent return is not the difference between a comfortable retirement and working until you’re 80 years old. More important than what you invest in is the amount you end up investing and the length of time you let it earn. If you want to get rich, spend less. If your aim is to aggressively cut your spending, you need to look at your big ticket items.
According to the Bureau of Labor Statistics, 51 percent of household spending is on just two of those items: housing and transportation. Your house and your car are likely two of your biggest investments. Saving money on a car means making do with less. Get a well-maintained late-model car and drive it until the wheels fall off. Save money on housing by buying or moving into a smaller house or dealing with a less convenient location. Don’t shop for as much house you can afford, shop for as much house as you need. Once you pay off your mortgage, roll the money into a CD or IRA.
Invest in low-risk, gradual return investments
A small percentage of investors succeed by chasing big returns on risky stock ventures. Your odds of beating the market are low, so try safer, low-return investments like broad index funds, bond-based retirement accounts and total stock market mutual funds.
If you’re young you could devote a portion of your savings to slightly riskier investments. Buying index funds that track mineral and energy sectors, for example, can introduce some risk while offering slightly higher returns. You might improve your portfolio growth from 3 percent to 3.5 percent. It’s not enough to make a tremendous difference, but every little bit helps. However, the amount you save is far more important than the rate of return.
Don’t panic – but don’t celebrate too much
If you’re trying to actively manage your portfolio, you might see swings in the value of your portfolio of a half percent over the course of a month. These are normal market fluctuations and are rarely anything to be concerned about. Keep an eye on them, but avoid acting based on small fluctuations. Acting on limited information means the investor loses out on a 5 percent gain. So it’s important not to panic.
At the same time, tremendous upswings in value usually bring paradoxically diminishing returns. As a stock gains in value, the company issuing the stock needs to do less to attract investment. That means reducing dividends and other investor perks. As senior editor for the Wall Street Journal, Jonathan Clements tells us, “As valuations climb, expected returns fall.” It seems counterintuitive, but every financial instrument can only grow so much.
If you want to be rich, you should take an “all of the above” approach to savings. Cut luxuries, lower your fixed costs on necessities and get the best return you can for your money. Don’t let complexity be a barrier to action.
Saving money today at any rate of return is better than saving nothing. If you’re ready to get serious about your financial future, call or stop by an FSU Credit Union branch today. Our partnership with Private Wealth Management and Consulting could be a natural fit for your retirement planning needs.
*The content provided in this article consists of the opinions and ideas of FSU Credit Union, does not constitute legal or financial advice, and should be used for informational purposes only. Any decisions you make based on the information contained in this article is made in your sole discretion and liability. FSU Credit Union disclaims any damages or liability for decisions you make based on the information provided.