When it comes to being financially secure, having a decent salary is only one part of the puzzle. There’s also your savings accounts, your emergency fund, and — *gulp* — your retirement plan. For most people, retirement comes in the form of a 401(k) and that tax-break money is invested through the employer to grow slowly over time.
But how much should you be putting toward your 401(k)? What if you want to get more involved in investing to save for other priorities like college for your kids or additional income? We talked to Jenn Imbeault, VP financial consultant at Fidelity Investments, and Rita Silvan, editor-in-chief at Golden Girl Finance, about their best tips for women looking to invest.
Allocate about 50 percent of your income to living expenses, says Imbeault. Fifteen percent of your take-home income — and that can be including employer 401(k) matches — should go toward retirement. Five percent should go toward emergency savings. If you still have enough money to live the lifestyle you enjoy and put money into extra investments, go for it.
You have to know what you’re saving for, says Silvan. “You can have multiple goals — short-term, longer-term — but you need to write them down in a contract with yourself,” she says. It will help you understand where to invest and how much and will also help you stick to your plan.
Paying down high-interest “bad” debt is going to serve you better in the long run, says Imbeault. Your next big focus should be long-term retirement savings and emergency fund savings.
“One of the most common misunderstandings women — and many men — have about investing is that you have to have a large sum of money invested or ready to invest to talk with a financial professional,” Imbeault says. That’s just not true. “There are a wide range of professionals and services available to help you understand your investment options.”
You have to be able to sleep at night. Your friends might be making a ton of money in one sector or another, but if those sectors are higher-risk than you’re comfortable with, they’re not for you. “What would you do if the value of your investments dropped 35 percent, which is the typical average drop in a bear market?” Silvan says. “If the idea of that terrorizes you, then invest accordingly.”
A surprising amount of people do the work of investing in their 401(k) plans, but don’t take the time to roll them over when they join a new company, making it hard to keep track of where large chunks of their money have gone. “Simplify, organize, consolidate,” Imbeault says. “Having everything located in one place provides the opportunity to keep track of your investments to make sure they’re still lining up with your long-term goals.” It also helps should your family ever need to step in to help with your accounts.
We hear a lot about diversifying your investments, which typically refers to spreading your money across different industries so that if one struggles, you haven’t put all your eggs in one basket. But that doesn’t mean you have to become an expert in dozens of sectors. “Diversification can still be accomplished across your investments within one investment firm,” Imbeault says.
Consider geography when you’re looking to diversify your investments. “Home bias is typical of most investors and it’s a costly mistake over the long-term,” Silvan says. “This is very easy to do today with low-cost global ETFs — exchange-traded funds.”
Silvan says that although it can be tempting to trade investments frequently, it actually increases your risk. “You have to be right twice,” she says, “Once when you buy and once when you sell. Plus, there are frictional costs of trading and taxes to consider.
“Buying funds or ETFs that have done very well in the recent past increases the likelihood they will underperform in the future,” Silvan says. It’s called regression to the mean. “Over time, both high and low performers settle somewhere into the middle range.”
The biggest mistake people make is not sticking to their investment plan, Imbeault says. Writing down the goals is important, but “following the plan will help you achieve them.”
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