I was busy baking cookies and washing up dishes when the phone rang. As I juggled dish towels, phone cord and running children the voice on the other end told me that she was a client from over a year ago and promptly started updating me on the financial status of their family. It was lots of great news on how they were out of debt, they had only their house to pay off and they were steadily working on increasing their savings.
I was congratulating her and her husband for their diligence and hard work when we got to the reason for her call. They had just found out about a “Wonderful” investment opportunity and they wanted my opinion of the company and the situation. Normally, I totally revolt at telling people what to do with THEIR money. First off, I’m not a trained financial professional and always defer to such people in these sorts of situations. Secondly, I don’t know all the hopes, dreams and goals you have as a person for your money, so why should I give you direction on what to do with YOUR money?
However, since I had coached this family before I listened politely as she breathlessly told me of this incredible financial opportunity and how they were seriously considering taking the $5,000 they had worked to save for over a year and invest it with this one company. I then calmly asked, “Okay, but have you and your husband maxed out your IRA contributions for this year?” There was a pregnant pause on the other end before she meekly said, “Um. No.” “Well, before I would spend dime one on any investment, I would make sure that I had made use of the maximum allowable contributions to all the tax advantaged accounts the federal government gives us.” I then asked her to call her accountant about what sorts of retirement accounts were available to them and verify what the allowable amounts were and to contribute to those first before launching all their savings into this other organization.
This is the point, my frugal friend. I know it isn’t sexy and bold and exciting, but the accounts that are IRAs, 401k’s and 403b’s are a wonderful and steady way to invest in your future. Before you go for riskier investments, go with what works first! Go with the OBVIOUS! Are you doing the obvious? Are you investing with accounts that are tax advantaged for you? If you don’t even have a retirement account open, then make your first investment goal that you open one this year. If you’re married make sure you have one open in both spouses names. Don’t jump at the quick buck with all your hard earned money. Go with the safer and less-sexy investments first. Once those have been maxed out, then look around with the extra money you have to invest in other things. But, of course, you’ll chat with your accountant or financial planner about this before leaping into anything, right?
As further evidence for the less-than-sexy investment strategies, I was reading an article in “Money” magazine (January 2007). In it there was an interview with multi-millionaire and financial planner Charles Schwab. He was asked this rather simple question: “If you could give one bit of financial advice to someone who’s just starting out, what would you say?”
Mr. Schwab answered, “Buy index funds and ETFs. That might not seem like enough action for a 25-year old, but it’s the smartest thing to do. Put most of your energy into your work and learn to communicate. I think the people who become really successful are those who sense what others are feeling and how to make them comfortable.”