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OSU Extension Educator
It is hard to invest for the long term if you are having trouble getting by in the short term. However, with a little patience and a lot of planning, it is possible to clear stumbling blocks and move on to a brighter financial future.
Whether you’re trying to recover from the recent economic downturn or a new graduate just getting started, the process begins with a tight focus on your immediate challenges and builds toward you being able to reach your financial goals.
Concentrate on paying off your credit cards first, starting with the ones with the highest interest rate, as well as getting a handle on other outstanding or pending bills. The other short-term goal is to create or pad your emergency savings fund so you can deal with unexpected or unplanned situations.
Financial experts recommend having at least three to six months worth of living expenses in an account that allows you to withdraw what you need quickly and without penalty. A simple savings or money market account works well for holding your emergency funds.
After your immediate financial picture improves, the next step is to write down your long-term financial goals. This will allow you to identify any expertise you might need such as an estate lawyer, financial adviser or accountant.
If you have a specific financial goal, like next summer’s family vacation, it is usually best to set up an account dedicated to that purpose. In most cases, the only cost to setting up the account is the opening balance, which is generally pretty low.
If the money is kept separately, you are less likely to spend it. It’s also important to separate monies set aside for goals with tax implications such as retirement or college savings.
Once you finalize your long-term financial goals and are ready to move forward, build an investment portfolio that has a variety of assets with risk levels that are appropriate for your planning horizon. In other words, mix it up. Be sure you understand all the risks associated with any investment you are considering, because the choices you make will dictate the kinds of risk you may have to absorb. For example, if you are investing for income, your interest payments may not rise with inflation. Over time, you will lose purchasing power. You may need to add some growth investments like stocks to offset this particular risk.
If you are investing for safety, you will have to live with a lower expected return. In some instances you may also be exposed to liquidity risk. Say you put your money in a five-year, FDIC-insured bank certificate of deposit. If you need those funds before the full term expires, you will pay a penalty to access the funds. That is what liquidity risk means.
Finally, consider using mutual funds, which allow you to buy portfolios of assets such as stocks, bonds and/or a combination of both. They are a cheaper option compared to purchasing similar assets individually.
Achieving your financial goals will not happen overnight. Strategic planning can really pay off in the long run.