Investment Basics

Raising a child is an expensive proposition. Expenses including housing, food, transportation, clothing, health care, education, childcare, and other expenses through age 18 can easily reach $200,000 or more, not counting college costs! And while you know you need to save for your child’s future, the sheer number of investment choices can be quite overwhelming. So here’s some information that will get you started on the path to savings in terms that are easy to understand.

First Things First

To protect your family against a short term financial shock, you should have an emergency fund with 3-6 months of income in a safe place such as a checking account or an interest bearing money market fund. Having the emergency fund in place will let you stay afloat in the event of a job loss or an unexpected expense, such as a medical emergency or large unanticipated auto repair bill. If you are faced with a situation like this, use your emergency fund to pay your rent /mortgage and other financial responsibilities while you get back on your feet. And while you may be tempted to do so, don’t dip into the fund unless you have a real financial emergency. And if you are unlucky enough to have to dip into your emergency fund, quickly replenish it once the financial crisis has passed.

Saving for Your Family’s Future by Investing Early and Often

Investing for the long term can help you secure your family’s financial future. One of the best ways to get ahead is to invest money early and often. This means socking away any spare cash into an investment early and letting the effects of compounding work in your favor. Studies show that investing even modest amounts of money early will let you reach your goals much faster than if you procrastinate, then try to catch up with higher levels of savings later in life. So skip the $5 latte a couple days a week and instead bank the extra money in your checking account. Once you have accumulated about $500 or so, you can start shifting some of the funds to a higher interest rate account such as a money market fund, Certificate of Deposit or bond or stock mutual fund.

Pay Yourself First

One commonly used technique that helps people save money is to “pay yourself first”. This means investing a portion of your paycheck (say 10% or so) into savings through automatic payroll deduction. By putting a predetermined amount of your check directly into savings, you will be less tempted to spend it on incidentals. Once you start on the road to saving, you’ll be continually encouraged as you watch it grow!

Let Uncle Sam Help You Save

Another simple and effective way to start saving money is to start contributing money to a 401K and/or IRA retirement fund. In the case of a 401K (or 403B if you’re a teacher) you can use direct deposit to invest money into the plan. And since it goes directly into savings, you won’t even notice it’s gone. And since these funds allow you to save in a tax deferred mode, your money will grow much faster than if it was in a standard investment vehicle. As an added bonus, oftentimes your company will match part of your 401K savings that you contribute, allowing you to reach your goals even faster! Either way, putting money into a 401K or IRA allows you to start saving in a tax deferred mode, so your money will work harder for you.

Time Horizon and Risk

To maximize your money, remember that you need to choose an investment that meets your risk tolerance and growth goals. If you’re a novice investor with 20 or more years before you retire, a good way to start is to put the money into a stock market index fund such as the Standard and Poor (S+P) 500 or Wilshire 5000. These types of funds offer growth potential without too much volatility. If you’re closer to retirement age, a “balanced fund” (a mix of stocks and bonds) may be a better bet. Various companies such as T Rowe Price, Vanguard, Fidelity and other mutual fund companies offer great mutual funds to help you meet your investment goals. Look for no-load stock market index funds, which provide a good diversity without high costs.

Dollar Cost Averaging

So with all the ups and downs in the market, how do you know when to invest? Experts agree that it is good to use time to your advantage by starting your savings plan as early as possible. That way, you can gain the advantage of compounding to grow your money. One way to make you savings grow is to use the concept of dollar cost averaging. While it sounds complicated, it is actually pretty straightforward and if you are participating in a 401K, you may already be undertaking this strategy. With dollar cost averaging, you put aside the same amount of money into your investment vehicle every month. So when the market is low, you end up buying more shares than normal and when the market is high, you end up buying less shares. This technique lowers your average share price so that over the long haul, you’ll grow your investment more than if you had bought a regular number of shares.

Saving for College

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