3 New Year's Investing Resolutions

Dominique Jones |

3 New Year’s investing resolutions, courtesy of U.S. News & World Report:  http://tinyurl.com/m7z8t7b

3 Investing New Year’s Resolutions to Build Wealth
Making sacrifices now will allow you to invest more money and build your future wealth.

Will this year be the year you begin investing?

By Barbara Friedberg

Jan. 13, 2015 

10:12 a.m. EST+ More

Do you set New Years resolutions?

Are you gung ho to get on the right financial track this year?

Follow these three investing New Year’s resolutions for 2015 and you will be on course for a wealthy life.

1. Start investing today. Have you promised yourself over and over again that you’ll begin investing? Time is the most important factor in building wealth. The more time your money has to compound or make money on top of money, the wealthier you’ll become. If you need some convincing, take a look at this example:

Kyle starts contributing $400 per month at age 25 into his Roth individual retirement account and doesn’t stop until he reaches age 68. If $400 seems like a lot of money now, consider that $400 per month is equal to 10 percent of a $48,000 per year salary and only 6 percent of an $80,000 per year salary. Let’s assume Kyle earns a 7 percent average annual return over 43 years. At retirement, his $400 monthly contribution (total amount contributed is $206,400) is worth $1,318,096. His total investment contributions increased over six times.

Now let’s look at Morgan’s investment results. Morgan starts investing into a Roth IRA at age 35, and contributes the same $400 per month as Kyle did. Morgan also earns 7 percent annually, on average. Morgan stops her retirement contributions at age 68 as well. When Morgan retires at age 68, her $400 monthly contribution (total amount contributed is $158,400) is worth $621,228. By waiting 10 years to invest, her retirement contributions increased less than four times.

By starting in his 20s, Kyle earned almost $700,000 more than Morgan, and invested only $48,000 more dollars. Your employer may even match part of your retirement contributions. That "free employer money" grows along with your own investing dollars.

2. Cut your investing costs to the bone. Would you pay an additional 1 percent each year to invest in the same investments as your neighbor? Of course not. If there are two comparable investments, you’d choose the one with the lowest fees. It would be silly not to choose the lowest-fee investments.

All mutual funds charge management fees. You may not have paid attention to the amount, but the annual fee can range from as low as 0.06 percent on a diversified index mutual fund or exchange-traded fund, compared to 1.5 percent or more on an actively managed fund.

In general, index funds are those investments which mirror popular groups of stocks and bonds, such as the Standard & Poor's 500 index or the Barclays Capital U.S. Aggregate Bond Index. The S&P 500 index is the popular stock index most frequently used to represent the overall U.S. stock market. The Barclays Capital U.S. Aggregate Bond Index measures the performance of U.S. investment-grade bonds.

In general, fees on these types of index funds sport low expenses. Take that into account, knowing that, on average, 50 to 80 percent of all mutual funds don't beat the market, according to Investopedia. Knowing that, will an actively managed fund, with all its expenses, really be worth investing in? Whether you invest on your own or with a financial advisor, find out the annual management fee on your mutual funds. If it’s higher than 0.5 percent to 0.75 percent for an index fund, and 1.0 percent for an actively managed fund, look for a lower cost alternative. Paying an additional 1 percent per year can cost you tens of thousands of dollars over an investing lifetime.

3. Thwart all roadblocks to investing. Do you want more than you can afford? Do you borrow so you can buy stuff you can’t afford to pay for now? Very few of us have enough money to buy everything we want. That means you have to make choices about where your dollar goes. Spend $50 at the local casual dining restaurant with the family and that’s $50 not going into your emergency, college, debt payoff or retirement fund.

There’s always something more you could buy. But sometimes you have to step back and make a conscious decision about your most important priorities. If going out to dinner is more important than saving for retirement, then by all means, go out to dinner. But realize that by making that choice on a regular basis, you are choosing to sacrifice thousands of dollars available in retirement.

See what happens if 35-year-old Bridgett bites the bullet and takes the $100 per month she normally spends to take the kids out to eat and invests that money instead. At age 68, Bridgett’s $100 per month investment in her retirement account grows to $155,307 (assuming she invests in a portfolio of stock and bond mutual funds and earns a 7 percent average annual return).

At first, directing that $100 from dining out to investing may sting a bit. Over time, as Bridgett notices that her retirement nest egg is growing, and the pain of making the financial sacrifice now and is replaced with feelings of comfort and security.

Follow these three investing resolutions this year and watch as your financial stresses diminish. Make 2015 the year you get on the proper saving and investing course. Make a few changes this year, and watch how small saving and investing adjustments can yield thousands of dollars for tomorrow.

Barbara Friedberg, MBA, MS, is a former portfolio manager, university investment instructor, website CEO and author of “How to Get Rich; Without Winning the Lottery.”