by Karin Mizgala, CEO and Co-founder, Money Coaches Canada
Life is busy, but most of us make time for tasks, big and small, that we consider essential: an annual medical check-up, one or two dental cleanings, oil changes for the car, fresh batteries in our smoke detectors, furnace maintenance, and getting our taxes done by April 30 are just a few examples.
But surprisingly, an annual investment check-in isn’t always on that priority list.
Why? There are many reasons, but simplistically, people are either nervous that they aren’t doing enough and they don’t want to think about it, or they believe that the investments they setup years ago are just quietly doing what they need to do. But denial or complacency is not going to build a strong financial future for you or your family.
Our lives change, so our investment needs change too. An annual financial check-in ensures that you stay aligned with your goals.
Why an Annual Check-In is Important
The pace of modern life makes it feel like the years pass very quickly, but they are still 12 months long, and a lot can change. For example, one or several of these things, could happen to you over the course of a year, and each one could have a significant impact on your finances;
- Birth of a child
- New Job
- Job promotion
- Loss of job
- Health issues (for yourself or a loved one)
- New Home
- Child goes to university
- The unexpected (major home repairs, an extended family member that needs assistance, or any other out-of-the-blue circumstance that affect your finances)
Has any one of those events happened to you? Each one is significant in its own right, taking up all our energy and focus for a period of time. But when the dust settles, it’s important to consider the impact of the change or event on our finances. An annual check-in provides the opportunity to make adjustments.
When reviewing your investment strategy, there are some concerns that are always relevant and others that are more germane at different stages of your life. I’ve divided the financial life stages into three sections (20s, 30s/40s and 50+), but only in a general way, your personal situation may not fit this pattern. It’s important to speak to a financial professional to have a strategy that works for you.
Investment Considerations for Investors of All Ages
Investing is never a one-size-fits-all formula, but, there are some principles that apply to most investors.
- Starting sooner is better than later—Compound interest (earning interest on your interest), is the “magic formula” of investing, so the sooner you invest, the more time you have to benefit from this multiplying effect.
- Keep some funds easily accessible. Having an emergency fund in a savings account, guaranteed investment certificate (GIC) or money market fund, can give you peace of mind at all stages of your life.
- Strike a balance between the best return on investment and your comfort level. Having some of your savings in stocks can help offset the diminishing effect of inflation on more traditional savings. But it’s important that you can afford that risk financially and emotionally. Investments that affect your sleep are not ideal.
- Schedule an annual review with a professional. I know I keep saying it, but this one habit can have a huge impact on your financial future. Keeping your investment strategy at pace with your life is essential to long term success.
- Understand how your investments impact your taxes. Some investments are taxable, while others are tax deferred or tax free. It’s important that you consider the tax implications at the time of investment, and when it’s time to make a withdrawal.
In this post, I’m going to address some of the financial and investment considerations of those in their 20s, but before you stop reading because that’s not your demographic, consider that no one’s life trajectory fits neatly into decade boxes, so something may resonate for you no matter what your age. Also, those of you furthest from your 20s may have children reaching this stage, so you may want to share this advice with them.
Part two of this blog post will provide some guidance on how those in their 30s/40s and 50+ should adjust their approach to investing as they age.
Financial and Investment Considerations for Those in Their 20s
When you are in your twenties, retirement seems impossibly distant; it can be challenging to convince young people to start thinking about it, let alone planning for it. If you are in this age group, you are probably in your first “real” job, and your focus is possibly on paying-off student debt (a good idea), or maybe you are considering marriage and a future home. All worthwhile considerations.
But there is something you have in abundance right now—that you won’t always have—time.
Time is an investor’s gift in two ways:
- The longer you have your money invested, the more time it has to grow, and compound interest (earning interest on your interest) can increase your return significantly over 30 to 40 years. For example, an initial amount of $1000, plus weekly investments of just $50 will grow to $140,000 after 30 years (assuming an interest rate of 3.5%).
- Investing comes with risk, which is why many people prefer less volatile products. But often the best returns come when you can afford to be a little more speculative. With time on your side, you can wait out dips in the market and possibly achieve bigger gains. You also have more time to rebound from a loss.
Another gift that comes with youth is the lack of deeply ingrained financial habits.
That’s a gift because you can take the time to reflect on the financial messages you received from your parents, whether they were taught by word or example.
We all have baggage around money, some good, some bad, but most of it is unconscious. Investigating your feelings about money and wealth can help you challenge limiting beliefs, and break negative family cycles if they exist.
The habits you create in your 20s can serve, or hinder, you for years to come. If you overspend, create debt and fail to put some money in savings, it will be hard to change those habits later, (not to mention the work you’ll need to do to pay back those debts). Likewise, if you create a habit of saving, investing and living within your means in your 20s, that will become second nature to you as the years pass.
I will look at strategies for people in their 30s/40s and 50s+ in an upcoming post, but no matter your age, what matters is being engaged with your money. Don’t just hope everything will work itself out.
Your financial decisions need to keep pace with your life changes. Have a plan, make the best choices for your goals, and if you can’t do that on your own, reach out to a money coach or investment specialist.