Part III: Riding the Train; Implementing your Plan
Mind the gap. Mind the gap. Oswald Laurence’s voice echoes through Embankment station of London’s Underground Northern line. You’ve surveyed the map and made travel plans. Now it’s time to hop on the train and ride. Becoming a passenger is the first step to implementing your plan. Having mastered complex concepts, it is not the time to forget the basics! You’ve so carefully chosen rail line, so you must be sure to “mind the gap” and not fall from the platform when you board. Here are some final points to guide and encourage you with your personal finances!
You need tickets to ride the trains just like you need cash if you are going to save and invest.
In the previous post, you examined your financial position. You considered questions about your expenses and how much money you could save. Are you content with the amount of money you are saving, spending, and giving? Could you a few minor adjustments make a major impact over the long-term? Do you see any ways that you can minimize your expenses and make a plan to save money? Even choosing to brew coffee at home could save you $3.00 per day, which is over $900 annually. Consider how you can refine your cash management and make a plan to save. Here are some practical ways you can save and earn money:
- Eat more meals at home
- Use cash to buy your groceries
- Turn off the lights when you leave the room
- Earn cash back by using your credit card and paying the balance off monthly
- Wait 30 days before you make a major, optional purchase
- Write a list before you go to the store
- Buy quality things that will last
- Clean or replace the air filter in your car to increase your gas mileage rate
- Buy generic brands; they often are identical to name brands
With money for tickets, you are now ready to ride.
Choosing a train is much like selecting investment accounts. Previously, we compared a rail line to an investment strategy. Now it’s time to add a train to the rail line and build on the analogy. A train is like an investment account. Just like a train moves along a rail line, an investment account contains a portfolio that follows an investment strategy. The cash, commodities, stocks, and bonds that make up a portfolio are stored in investment accounts. While there are many available, we’ll define commonly used ones:
- A brokerage account is an account that is held at a licensed brokerage firm (such as Charles Schwab, Fidelity, or Vanguard). An investor can deposit cash into the account and place orders to buy and sell stocks, bonds, and other investments. The investor owns the assets in the account and earns income on the account when the investments yield interest and dividends. This type of account can be opened by anyone and there are no annual contribution limits.
- A traditional IRA is a type of individual retirement account. You can contribute income before it is taxed. As long as money stays in the account, earnings on investments through interest and dividends are not taxed. The money is only taxed when it is withdrawn. There is an annual contribution limit.
- A Roth IRA is a type of individual retirement account. It was established by Senator William Roth by the Taxpayer Relief Act of 1997. The income you can contribute will already be taxed. When the money is withdrawn, it is not taxed. There is an annual contribution limit. This type of account is usually recommended for young people.
- A 401(k) Plan is a type of individual retirement account. It is established by an employer. Employees may contribute some of their salary to the account. Employers can make matching contributions. Details vary. You can contribute your earnings after they have been taxed or before they have been taxed. Earnings on the in the investments in the plan are not taxed until money is withdrawn from the account.
….How can you establish these accounts?
Like station managers, other passengers, and hotel concierges can help you use the metro system, financial advisors and other resources can help you set up these investment accounts and manage your finances. With so much terminology, theory, and technique to grasp, what good news it is that there is help available. You have saved money for your tickets, but operating the ticket machine is another thing to master. Some companies such as Charles Schwab have financial advisors who are willing to meet with clients for an hour to offer advice at no cost. (Higher level professional services due come at a fee). They can help you set up accounts and understand the mechanics of buying and selling commodities, stocks, bonds, and other investments. They are also available by phone. Many websites provide definitions, investment principles, tax advice, and market data.
Here are some resources to explore:
Relax and enjoy the scenery as you ride the train.
Once you have set off on your journey, do not be troubled by the fluctuations of the market. The values of investments are bound to rise and fall, but the market as a whole has an overall upward trajectory. It is much like jostling a yo-yo up and down while climbing an escalator. Be encouraged to make wise decisions, seek advice, and learn, but do not react in fear. In fits of concern, getting on and off the train, or constantly buying and selling stocks and bonds, will hinder your progress and lengthen the time it takes to reach your destination, your financial goals. Staying on the train and waiting patiently to get to your destination will be a great benefit. Recline and enjoy the sights as they go by.
Oh, and yes, my story ended well. I made it to Abbey Road!
Author Bio: Rachel is a Christian and serves her church. She enjoys thinking of puns during long trail runs. If she had to choose between cheese and chocolate, she wonders what she couldn’t live without.