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Saving is Hard, Investing is Easy

Spoiler Alert: Save money, invest in 2-3 index funds and leave them alone. That's it, you're an investor. For the how and why, read on.

First Get Control of Your Money: Before you can invest a dime, you have to save some money. After you've paid off any credit card debt, limited or eliminated any school or car loans, limited monthly payments to a manageable mortgage or reasonable rent, have your essential expenses under control, maxed out any available tax-advantaged retirement plans and have an emergency fund of 3-6 months of living expenses, then you can save and invest.

Save, Save, Save: If you’re able to save any money for investing, congratulations, that’s the hard part. The easiest way to save is to figure out a way for your savings to bypass you completely so you never miss the money and make savings automatic, a healthy habit. If your employer has the option for you to direct part of your paycheck to a savings account, do it or decide on a certain amount from each paycheck to go to a savings account and stick to it. Another tried but true way to up savings is to put any bonus or raise towards savings; it’s extra anyway, you were living without it before so keep living on the old amount and save any bonus or raise you receive. The bottom line is the only way to save is to live below your means, and the more you do that, the more you save.

Grow Your Savings, Not Your Spending: Saving is hard, investing is easy. It’s hard to resist the constant call for spending, especially those items that seem small, the latte, the lunch out, the drink at a bar, but they add up and you know there are more affordable alternatives; make your own coffee, bring your own lunch, have friends over for a drink, you get the idea. And pricier things can be easily rationalized, it’s just one outfit, one pair of shoes, only so much extra for the newer car payment, fancier apartment, latest phone, the I-deserve-it-I-worked-so-hard-treat, which of course, can be instantly satisfying and seemingly more interesting than a savings or investment account.

Savings=Freedom: But what’s exciting is when that savings or investment account grows, and doesn’t get old, doesn’t get broken and need repair or replacement, doesn’t go out of style, and doesn’t result in a surprising, depressing or scary bill weeks later from spending money on something that you may or may not have enjoyed or liked, something you forgot or regret, or something you couldn't afford. And when those savings and investments grow over time is when it gets really interesting because of the freedom it gives you to do something different: maybe move to a dream location, take a big trip to an exotic place, start a new career, take a break between jobs or stop paid work altogether. Then you're not rationalizing, then is when you really can afford more, when it's not a trade-off between the car repair and the vacation because at that point, your money is making money and you have that rare commodity, enough. Then you really can live a life of luxury, the luxury to do what you want, whatever that is - travel, visit family and friends more, volunteer, donate to causes you care about, take a course, join a group, play anything or do nothing at all for awhile.

Regardless of what you decide to do with your savings, before you invest, it helps to know generally your goals, not set in stone, obviously they can change, but just generally. You may have short-term goals, anything less than 5 years away like saving for a house, a car, a vacation, or longer-term goals like savings for a kid's education or that elusive, but not impossible goal of financial independence.

Short-Term Savings Should be Safe: For short-term savings, preservation of principal - never losing money - is the main goal since there’s not a lot of time to ride out the lows and highs of the stock market, which is by its very nature volatile. Either a low cost money market fund, tax-exempt or taxable depending on your tax bracket, with an investment company like Vanguard, or a high-yield online savings account with a bank where the money is insured by the government under the FDIC program, is the safest bet for parking short-term savings.

Long-Term Savings; Invest in the Market and Ignore It: For long-term savings and investments, you can only control two things: the cost or expense ratio of the investment and your allocation of assets, that is, the percentage you put in each type of investment asset. You cannot control the return or performance of a stock or bond, what was a winner last year could be a dud this year and vice versa. Timing the market, buy low, sell high, sounds good, but is impossible. Whatever facts, circumstances or events you think may affect the market one way or the other has also been anticipated by the market and is already reflected in prices, either higher or lower. You can never know for sure if the market will go up or down, only that it will change, it will go one way or the other. The only sure thing about time and the market is the more time you have to invest, the more money you may be able to make, if you follow some simple investing rules.

Most days the market doesn’t move drastically but a few days, it can move significantly, either up or down. Since you don’t know when those days will be, you don’t want to miss the large gains, which is why once you decide to invest, you want to get your money in and leave it there. Don’t worry about days the market drops, it will recover but it’s hard to make up for missing a day or two of large gains.

All that counts is the value of an investment the day you buy it and the day you sell it, and it doesn’t help to focus on any high values, which can make you cocky, or any low values, which can make you panic. Instead, when you check your investment accounts, not daily, which can make you crazy, but at a regular interval like once or twice a year, focus on the total shares you own, not their cost or current value. Continue to add to your investments with regular savings especially when the market dips because then you could be buying the investment at a discount and effectively on sale. Always opt for dividend reinvestment, another form of automatic savings. Do these things and your number of shares will invariably increase.

Thru the bubble, Y2K, 9/11, the Great Recession of 2008, every time the market came back. Now, during the coronavirus pandemic of 2020 and highly polarized politics, the market is erratic but will be fine. Successful investors know that the market has a remarkable ability to transfer wealth from the impatient to the patient, from the active to the inactive. The ability to do nothing, to sit on your hands, to ignore short-term market news and dire warnings that the sky is falling, when the market crashes, and it will, is the hallmark of excellent investors. As long as you're in it for the long haul, no need to worry because it won't matter when you sell. Stay calm and carry on, don't start selling, don't stop buying or reinvesting, investing works if you stay the course.

Investment Basics; A Crash Course: The two main types of investment assets are stocks and bonds, and within each are US or international. Stocks can be large, mid or small cap, which refers to the size of the company that issued the stock. Bonds can be short, intermediate or long-term, depending on when the bond pays out. Mutual funds are baskets of stocks or bonds, and those funds can be actively managed by a fund manager or passively invested by following an index of stocks or bonds. Fortunately, for investors today, it's not necessary to be a stock or bond expert to invest in either, to buy individual stocks or bonds, to pay brokers to make recommendations, buy, sell or trade stocks or bonds, to pay mutual fund managers to pick possible winners and avoid potential losers, or to have lots of money to invest in a wide variety of stocks and bonds. The reason is that wonderful investment option, boring, not for cocktail talk, but has stood the test of time, the index fund.

Index, Index, Index: The beauty of the index fund is that it fires on all cylinders; low expenses since there’s no fund manager to pay, lowers risk by investing in many companies or many bonds so no need to hope that you picked a winner or avoided a loser, and minimizes taxes because index funds don’t buy and sell often so don’t generate much taxable income. An index fund guarantees that you’ll get the average return. It turns out that average is above-average when it comes to investing since many actively managed mutual funds return less than their comparable index fund, particularly when adjusted for higher fees and more taxes. Stock values always go up and down, but over time, stocks consistently make more than savings or money market accounts, and more than bonds.

Bonds aren't foolproof, Bonds are a Buffer: As for bonds, they can lose money and sometimes at the same time as stocks, but if they do, bonds usually won’t lose as much as stocks. This is why it’s prudent to have some bonds for when the market tanks, and it will occasionally, bonds can soften the blow. Short-term bonds pay very little and long-term bonds are such a guessing game that intermediate term bonds make the most sense.

Asset Allocation Depends on You: There‘s a wide-range of recommended asset allocations that boil down to: the longer until you think you’ll want or need the money and the greater your risk tolerance - that you won’t sell during a downturn - the more you should have in stocks versus bonds. As between US and international, most large US companies are global so some would say international stocks are unnecessary. Still, newer markets abroad may have more room to grow than mature markets in the US and may be worth the higher risk.

If you can trust yourself, not act when others panic, you’re young, 35 or younger, and don’t think you’ll want or need the money for many years, then 85-90% stocks, with 15-25% of that international stocks if you want, and the rest US intermediate-term bonds, skip international bonds, is a good way to go, and titrate between them depending on your age and risk tolerance. That means opening an account, which anyone can do on their own, online or by calling Vanguard, with as few as 2 or 3 index funds, the Vanguard Total Stock Market Index Fund (US stocks), Vanguard Intermediate-Term Bond Index Fund (US bonds), and if you want, the Vanguard Total International Stock Index Fund, all of which have rock bottom expense ratios for their investment type. As soon as you have enough, make sure you're buying the Admiral shares of each fund, which has a lower expense ratio than the Investor shares.

Now you know, saving and investing isn't complicated, it doesn’t take an advanced degree, it’s certainly not calculus. Save money, invest in index funds, do both regularly, buy and hold, it's that simple.

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