By Laurie Itkin
I’m sure you’ve heard you should save and invest your money for the future. But what exactly is “investing” and why should you care?
There are two primary reasons for investing money:
You want to generate current or future income; or
You want to grow a pot of money into an even bigger pot of money over time.
The second reason was my goal when I started investing at age 24. As I explain in this blog post, by living below my means and investing what I saved in the stock market, I was able to grow my wealth from $1,600 to $1 million over 15 years.
How to Invest When You Are Living Paycheck to Paycheck
But how are you supposed to invest money if you are living paycheck to paycheck or have no money left over each month after paying your bills? The answer is that you either have to decrease your expenses or increase your income so you can put money in an investment or retirement account each year. If you never invest the money you earn or are given, you will almost certainly run out of money when you are older.
Think of it this way: it costs you money to live each month. You may pay rent or have a mortgage payment. You may have phone, gas, electric, cable, and Internet bills. You have to fill up your car at the gas station or pay for public transportation. You have to eat, right?
You have to earn or receive enough income in order to pay for your living expenses. You may work at a full- or part-time job. You may receive child support or alimony.
While you will always need money to pay your monthly living expenses, you might not always earn or receive enough money to pay them. How often do you encounter an 80-year-old woman who still goes to work every day? Have you ever wondered how a woman who is too old to work pays her bills? Does money just mysteriously appear in her bank account each month?
Invest Your Money So You Don’t Outlive Your Money
A few years ago a woman in her late 40’s approached me after a talk I gave on investing. She informed me she was recently divorced and had received a settlement of $600,000. (Her husband didn’t want to pay her monthly spousal support so he made an upfront lump-sum payout to her instead.) She didn’t want to work and didn’t think she needed to ever work again because $600,000 was a lot of money and would last her for the rest of her life, especially if she lived very frugally. In this three-minute video I explain how I concluded that if she didn’t invest her money, her $600,000 would be depleted by the time she turned 65. Had she worked with me or another financial advisor to invest that $600,000, not only would she have been able to generate monthly income from interest, dividends and option premium to pay her bills, but the remaining funds could also be invested to last longer.
It is imperative to save and invest your money. If you put a modest amount of money in a retirement account each year for 20, 30 or 40 years — while making wise investment decisions — you can build a pot of money that is large enough so you can withdraw funds every month to pay your living expenses once you reach retirement age. Social security (if you qualify to receive it) will not come close to covering your living expenses when you are in your 60’s and beyond. The average social security recipient receives roughly $16,000 a year. Could you live on that? No, I didn’t think so. However, if you were to receive thousands of dollars from your retirement account each year, that could make the difference between living in poverty and living comfortably.
Improve Your Investing Knowledge
simple and compound interest;
stocks, bonds, mutual funds, and exchange-traded funds;
investing for income vs. investing for growth; and
types of retirement and investment accounts including 401(k), IRA, and brokerage.
If you wish to learn more about investing and steps you can take to ensure you don’t run out of money, I invite you to take my online course. Make sure to enter WORTHY as the coupon code to get $50 off.
Laurie Itkin is a financial advisor, certified divorce financial analyst (CDFA), and the author of the Amazon bestseller, Every Woman Should Know Her Options. For less than the cost of a one-hour meeting with an attorney, her online course, The Recently-Divorced Woman’s Guide to Financial Independence, teaches separated and divorced women essential financial concepts. You can request a free consultation or subscribe to Laurie’s newsletter by visiting TheOptionsLady.com.