The end of the year is near! Most of us have spent the past two months engaging in the usual holiday rituals of turkey and eggnog. During this time of year, it’s hard to resist the dual temptations of over-eating and over-spending. Fortunately for all of us who found it hard to resist these bad behaviors, a new year is right around the corner! With it comes the opportunity to start fresh and replace bad habits with good ones.
Save Money in the Right Places
The first step towards achieving financial independence is saving money in the right places. For most people, employer-sponsored retirement plans are a great place to start, especially if your employer provides a matching contribution. Tax-deferred accounts like IRAs, can help you save on your taxes while also saving money for retirement. Roth IRA contributions are not tax deductible, but growth in the account is tax-free, withdrawals after age 59 ½ are not taxed, and you can withdraw what you’ve contributed at any time with no taxes or penalties. This makes Roth IRAs a great place to save money if you are just getting started and don’t have an emergency fund. Once you’ve maximized these tax-advantaged places to save, it’s time to open a brokerage account with a low-cost provider, and also to meet with a financial planner to discuss other types of accounts.
Avoid Commissions, Expenses, and Speculative Bubbles
Products that promise “market upside” with “no market risk” often prove to be “too good to be true”, and come with hidden expenses and fees. Financial products that are actively promoted – (annuities, life insurance, loaded mutual funds, and non-traded real estate investment trusts, among others) are often popular with salespeople because of the commissions they pay, not because of the benefits they deliver to investors. Good investments shouldn’t be complicated and don’t need to be expensive. A good rule of thumb is to understand what you own, and why you own it. History is full of speculative bubbles. Human nature makes us afraid of “missing out”, especially when it seems like everybody is making easy money by investing in the latest greatest thing. Stories from the 1920’s tell of shoeshine boys and taxi drivers giving stock tips before the 1929 crash. In more recent times, we’ve had the “dot com” bubble, an oil bubble, a housing bubble, and a gold bubble. These bubbles were characterized by the same thing – people paid far too much for assets worth much less (and in many cases, worth nothing). Investing in a bubble and taking large losses can be very damaging to your long-term financial security. More importantly, if you have a sound financial plan, you don’t need the kinds of massive returns people imagine they’ll get when they invest in a bubble asset. The second key to building long-term wealth is investing for the long run in the right places.
Invest in the Great Companies in America
Fortunately for long-term investors, over 90 years of stock market history is available to study. Studying this history proves that buying and holding stocks in the great companies in America and the world can produce all the long-term returns you need to have a successful financial plan, build wealth, retire comfortably, and ultimately leave money to your beneficiaries. If you do your part – save money in the right places, avoid expensive insurance products, annuities, and loaded mutual funds, and stay away from dangerous bubbles – the great dividend-paying stocks of American companies will do their part to help you achieve and maintain financial independence.