One of the most important things you can do for your financial future (outside of paying off your debt), is to invest for your future. Right now, my wife and I are in a comfortable financial situation. Our only debt is our mortgage, and we have been saving as much money as we can over the last year or so. However, we know this is subject to change. We plan on having children in a year or two, at which point, we will likely go down to one income.
Invest as much as we can, while we can. The way we see it, investing as much as possible now is paramount to our future. When we have children, our income will decrease and our expense will increase. This is a recipe for disaster if you aren’t prepared. Which is why we are starting now.
March Financial Goal. My goal for March is to determine the best investment for our situation, and fully fund our Roth IRAs. There are several questions we will face before we do this. I have the answers in mind, but I haven’t shared them yet on this site. Over the next month I hope to answer these questions and share them with everyone.
Invest all at once, or use Dollar Cost Averaging?
I have read several studies that show lump sum investing is better than Dollar Cost Averaging (DCA). The premise behind this is that the market tends to go up over the long run, so the longer you have your money in the market, the longer it has to appreciate. Of course, even with lump sum investing I could invest at the wrong time. But I am not trying to time the market. I am trying to get my investment in as soon as possible and let the markets do the work for me. I can’t control the markets, so why stress over when to invest?
Maxing two IRAs is a lot of money! Are you sure you should do it all at once?
We started saving for this last year and we already have the money set aside. The maximum you can invest in a Roth IRA is $5,000 for 2008, and we are maxing out two of them at once, for a total of $10,000. It took a lot of saving over the course of last year to reach that level, but we have a good emergency fund built and we are confident we can do this without stressing our budget. Remember, we planned for this well over a year ago. We need to take advantage of this opportunity while we can because we don’t know if we will be able to do this after we have children.
Why Invest in a Roth IRA?
In my opinion, a Roth IRA is one of the best retirement options available right now. You invest with post tax money, and your withdrawals in retirement age are tax free. I recently compared Roth and Traditional IRA plans. For our situation, a Roth IRA is definitely the best option.
What about your 401(k) plan?
I am also investing in my 401(k) plan as well. My company offers a small match, of which I take full advantage. For most people, it is best to contribute up to the company match, then invest in a Roth IRA. If there are funds left over, then you should add more to your 401(k) to take advantage of the tax benefits. Again, the plan my wife and I have to to be aggressive with our retirement savings now because our financial priorities will change when we have children.
Mutual Funds, Index Funds, or Exchange Traded Funds (ETFs)?
In most cases, I’m not a fan of mutual funds. Most of them simply cannot consistently beat the market over the long term. On top of that, they generally have higher management fees and those costs are another hurdle to beating the market.
For investing, I prefer efficiency, and that means minimizing fees and other costs. The best way I know how to do that is to match the market by investing with index funds. Index funds are dirt cheap to run and generally have the lowest fees possible.
Exchange Traded Funds are similar to index funds, but they are traded on the open market like a stock. They sometimes have lower fees overall, but usually come attached with brokerage or transaction fees. The benefit for investing with ETF’s is usually a cheaper set of ongoing costs. ETF’s are also usually better for large lump sum investing vs. dollar cost averaging because of the brokerage fees.
For my wife and I, we will be looking into various index funds and their associated ETF’s.
What type of fund will you buy?
I don’t know. I need to rebalance our portfolio, and will buy into funds or sectors to even everything out. I don’t generally sell my funds, I usually just allocate new funds toward the areas that need propping up. Over the course of the next few weeks my wife and I will discuss our current portfolio and our long term goals. Our investment decisions will be based on those discussions.
Will you share the outcome?
I’ll try to share my thought process and the fundamentals behind my decisions, but I may not tell you the exact fund because I don’t want influence anyone regarding a specific fund. However, fundamentals are fundamentals and people can use that information to make their investment decisions based on their situation.
Tips, ideas, suggestions? If any of you have tips and/or ideas, I am open to suggestions. Just leave a comment; I always keep an open mind regarding investments.