Thursday, January 10, 2013

Spending, Saving and Investing: Staying Focused in the New Year

We’ve managed to avoid the latest scary financial threat – the fiscal cliff. Largely out of our control, the outcome could have pushed the economy back into recession. Uncertainty over such events can keep us from making important decisions about our own long-term financial goals, such as preparing for retirement.

Planning for our future can seem abstract at best. Yet at some point, we will all stop working. We need to set aside the distractions and rely instead upon some solid ideas to keep us pointed in a positive direction. Three key areas to focus on are how we spend, save and invest.

Since this is a new year, we all get to start fresh. I will review each of these factors and encourage you to choose something you would like to work on in the year ahead. Taking small steps today will make a big difference in our future financial wellbeing.

Spending
This is a complicated subject worthy of an entire article. Much of our spending seems to happen automatically. The task here is to keep track of our spending while taking a close look at our priorities and values. Are we spending on what we think matters most? The only way to know is to track our spending. I might say that I value saving for retirement but when I look at my actual spending, I see that I spend far more on my car, my wardrobe or dining out than I put towards retirement each month. By tracking spending we can make better decisions because we’ve identified what really matters.

Saving
It remains an absolute truth in the world of personal finance that we should save. No, rather we must save if we hope not to rely solely on Social Security as our ‘retirement plan.’ Performing the first step, tracking spending, and then spending in line with our priorities, enables us to find ways to save. Identifying what matters makes it easier for us to find trade-offs. If you could save $50 for retirement by dining out one less time each month, you might make that choice.

Investing
Investing makes me think back to my first savings account at a bank. I was about seven or eight years old and was earning 7% on my money. I remember thinking for every $100 I saved I could get $7…without working for it (mowing lawns and pulling weeds were my primary sources of income.) Then the next year I’d earn interest on $107. As a youngster, I intuitively understood the power of compound interest.

Today savers would kill for a safe 7% return. Investing demands extra effort. Nowadays we are forced to assume much greater risk to achieve modest returns. We must carefully consider diversification, while taking only the risks we need and can afford to take.
Taking small steps in the three key areas of financial planning - spending, saving and investing - can make a difference in your future. Some of you might still be working on the first two. We don’t have to let headlines and other fears and uncertainties keep us from our tasks. Working on those things we can control will keep us focused on our goals: conscious spending in line with our values, making savings a priority, then investing, educating ourselves on wise options to earn returns on our precious savings. Let these be the beacons that guide you. When it gets too complicated, seek the help of a professional.

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