I had the pleasure of speaking to Tess Downing CFP, founder of Complete View Financial. Tess has been a financial planner for 13 years. Tess and I spoke about how to get started investing as a new employee.

There are several recommendations that Tess Made to get started with investing. The first thing that you have to look at is where are you financially. Take a look at the sample budget below to determine how you much money that you have to save.

Monthly :

Paycheck Deposits

Less Debt Payments (Credit Card, Student Loan,  Mortgage, Auto Loan, etc.)

Less Rent

Less Groceries                                

Money Left over to Invest

That is a very simplified budget and I recommend using something like that to determine how much you can save. The next step is to look at the different types of financial goals that you can have based on the timing of those goals. Typically most goals are broken down into three categories: short term, midterm and long term. Examples of a short term goal are building up a savings account buffer. A medium goal example is to save up for a down payment on a house. A long term goal is to save for retirement. The general rule of thumb is to save 10% of your net income and 15% of your gross income for retirement. Remember those numbers are the minimum that you have to save!

Some general advice to simplify your finances and automate the savings process. This is very easy with todays computer world. All you have to do is to tell your human resources department and then you will be able to start having your funds automatically deducted from your wages. By doing this you should be able to get your employer’s retirement plan match. The impact of obtaining this match can be huge. At workplaces that I have worked at in the past they have matched 50% on the first 10% that you contribute. This means that if you contribute 10% then receive the 50% match they will give you 5% as your employer match. That can be hugely impactful because it will allow you the ability to meet your 15% savings rate goal by just contributing 10%. If you cannot contribute the full 10-15% now don’t worry you should be able to get annual raises that will allow you to be able to increase your savings rate. If you get a cost of living adjustment or raise of 2% a year that can be funneled into your retirement plan contribution to be able to meet your investing goal.

Over the years the investments that have been placed inside of a retirement plan have changed. Over time the options have moved towards simplification restricting the number of investments that are in a plan. Typically there will be several target date funds some bond, stock and REIT funds. This simplification is because most employees ended up investing in Target Date Funds instead. The reason for this is because of the simplicity of the investment. By investing in a target date fund the fund will pick risky investments at first to  be able to get higher returns. As you get closer to retirement the investments get less risky and the returns will be lower. Typically this means a move from stocks/reits to more bonds as you get closer to retiring.

The one thing that most people don’t really look at is the fees on their plan. The effect of a high fee on your investment can be hugely impactful. I am going to do a simple calculation to show the effect of fees on investment return. For this example I am going to assume a 25 year old invests 15% of their gross pay earning $40,000 per year till they are 65 at an 8% rate of return. If they 25 year old does all of that then they will have $1.75 million in retirement savings. If there is a 1% fee on that rate of return then will end up with $1.31 million. That means a 1% fee would cost you $400,000 in retirement savings. To make up for that difference in fees the 25 year old would have to be saving at least 20% of their pay. That is an additional 5% of gross pay just to get the same result because of the higher fee.

Another recommendation that Tess mentioned is to not to wait to start saving, do soon as soon as possible. If you don’t your future could be quite bleak, when everyone else is off to the golf course or moving to Florida to enjoy the sun you’ll still be working. Work will be mandatory for you at this point and instead of being able to help your loved ones you’ll be a burden to them. As you age your health will continue to decline and you will be unable to work as well as you could have when you were younger. Even if you just wait ten years you the impact could be huge. If you wait to start saving until you’re 35 versus 25 you’ll have to save an additional 10% of gross pay or income to be able to have the same type of retirement versus when you started. That means you will have to save 25% of your gross income to be able to achieve financial independence at 65!

If you want to learn more about starting to invest you can reach out to Tess Downing go to Complete View Financial

Please note the disclaimer below:

THIS IS GENERAL FINANCIAL ADVICE THAT MAY NOT APPLY TO YOU. PLEASE CONSULT WITH YOUR TAX, LEGAL, INSURANCE OR FINANCIAL PLANNING REPRESENTATIVE BEFORE MAKING ANY CHANGES.

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