Simple But Solid Investing Strategy For Beginners
An Atlas to Start You Your Wealth Building Journey
This Investing Atlas is for anyone who has an interest in investing, but has little or no knowledge in the process or how to get started. It is specifically designed so that anyone can use it, regardless of how much money they make or how much they have invested to date.
You do not need to be an accountant or good at math to use this strategy. This strategy is designed for people who have put off investing because they find it confusing, overwhelming or think they don’t make enough money. Today they are either putting off investing, or paying an advisor hefty fees to do it for them, costing them hundred of thousands of dollars in lost gains.
This strategy highlights the important basic fact that you need to start growing your money as soon as possible, while paying as little as possible to do it.
Because money wasted on fees, and time wasted on delaying investing equates to huge losses in potential compounding interest.
Start now, by following these simple steps and reaching each mile marker along the way on the journey to building long term wealth. Because long-term financial stability means LESS stress and MORE happiness.
Before you start investing, you need to make sure you have first completed the basics of personal finance and built good financial habits. Then, you’re ready to invest, and on your way!
Starting your investing journey involves first ensuring you have a systematic approach to managing your money, setting financial goals, and making informed decisions. It’s simple, but not always easy, as it requires discipline and consistency. Building good financial habits and making informed choices will lead to long-term financial stability, less stress and more happiness. I will recap the basic steps but you can check out the details of the financial basics to ensure you’re in a great starting position.
The Basics of Money Management
- Assess Your Finances & Net Worth
- Create a Budget
- Dig Out of Debt
- Build an Emergency (“Freedom”) Fund
- Invest for the Future, Automatically
- Build your Freedom Fund
- Monitor and Adjust Regularly
Get Ready to Invest!
Once you have a handle on your monthly expenses, have created a budget, stashed away some money for emergencies, and have paid down your debt, you’re ready to invest!
Investing is not a get-rich-quick exercise. Instead, its a longer term journey.
This is why you need an Atlas that outlines the overall approach to systematically grow your money over time. The investments discussed here are designed for US investors. However, the Atlas and the steps are the same, regardless of your location. You just need to tailor it for the specific account types in your home country.
6 Simple Steps to Start You on Your Investing Path:
- Set Your Short Term Goals
- Figure Out Your Long Term Financial Freedom Number
- Determine How Much You Can Invest
- Invest in Low Cost Index Funds
- Select the Ideal Investments
- Automate Your Investing Strategy
MILESTONE 1 -Set Your Short Term Goals
- SHORT TERM: If you’re just starting out, set your goals for the shorter term only. Short term goals can include things like buying a used car, planning a wedding, putting a down payment on a house, savings for college education or an annual vacation. With the exception of college education for your kids, which could be a ways away, most of these goals should be things you’re looking to achieve in the next 5 years.
- LONG TERM: Once your short term plans are covered, you can work to determine you long term “freedom number” as well. This is the amount of money you will need to have saved to no longer be dependent on a job to finance your future. At this point, you can be living off your investments. We’ll cover long term investing shortly.
An ideal place for your short term savings is a high interest online savings account. A number of institutions offer them. Because online banks don’t have the expense of maintaining a branch network, they can offer high-interest savings well above what the brick and mortar banks offer (which, at the time of this writing, is less than half a percent).
Presently, online banks are offering above 4%, which allows your money to grow, outpacing inflation, which typically can be between 2.5-3%.
If your money is saved in a branch bank, you’re losing money as inflation eats away at your savings.
I have my savings in Barclays, but find one that’s right for you as features and rates will vary. Sources such as Nerd Wallet will help you review current options.
If you’re saving for something a few years out, and don’t need to access the funds in the near term, you can consider a CD (Certificate of Deposit) which offers a guaranteed return in a designated time period (usually 1-5 years). Some of the online banks mentioned above will also offer these, and the rates offered are typically higher than the savings account. My Barclays CD is over 1% higher than my savings account. But, in return, my CD term is one year, so I can’t access the money immediately like I can with my savings account. I have money invested in both my online savings, as well as 1 year CDs.
MILESTONE 2: Figure Out your Long Term Financial Freedom Number
The number one reason people keep working is a fear of running out of money once they retire.
Yes, there are certainly some work alcoholics that will joyfully work until they’re dead. But for most of us, we’re petrified of not having enough money to last us over lifetime. But truth is, millions of people die with thousands in excess, only to will it to others when they pass. They spend a number of “extra’ years working for money they never get to enjoy!
What Age to Retire?
So the key question is, “how do you figure out how much money to save so that you don’t run out after you stop working, but you don’t work any longer than you need to?”
For me, it was not long after I put in a lot of research to figure out my number, that I realized I was already financially free and no longer had to work. Had I not done that exercise, I could have easily lost another 5 years working, simply because historically, people have retired between 60 and 70 years old.
Prior to the Social Security Act in the US in 1935, there was no typical retirement age. But one needed to be determined in order to establish Social Security. “There was no scientific, social or gerontological basis for the selection . . . it was the general consensus that 65 was the most acceptable age. Members of the Committee on Economic Security thought that 60 was too low and 70 too high for a retirement age.”
Over time, 65 became the culturally accepted retirement age. However, a Financial Independence movement, started in 1992 with the publication of Your Money or Your Life, The momentum behind this movement has grown to millions of people worldwide who are bucking the old cultural norms. They now realize you can stop working at any age once you determine you can safely live off your investments (and potentially any part time work you want to do, just for the fun of it!).
Once you stop working for money, there is an abundance of time and space for you to learn and grow and truly enjoy leisure time and learn what it means to Live Richly. But that’s another article for another time, I’ve had the space to embark on a number of adventures and projects, including launching Live Richly, because I have time and space now that I have become financially independent.
Ok, so if Age doesn’t determine when we retire, what does?
How Much Money Do I need to retire?
If you’ve been wanting to know how much you need to be financially independent, it comes down to the “4% rule”. The key to note is it’s not a rule as much as it is a guideline.
The 4% rule
Like many financial rules, the success of the 4% rule depends on the broader economic environment. According to this rule, you should spend no more than 4% of your investment portfolio in your first year of retirement, ad then adjust the total in the following years to account for inflation. If you do this, your savings should last for 30 years.
Here’s an example.
You have $1,000,000 in an investment account. You can withdraw $40,000 the first year ($1,000,000 x 4%). Then you increase your withdrawal each year by the prior year’s inflation rate.
If inflation is 3%, in the second year you withdraw based on ‘New Portfolio Balance x 4.12%’ (which is 3% higher than last year’s 4%).
There was a lot of research to support this rule when it was developed in 1994. It was backed by 50 years of historical data. However, even Bill Bengen, who came up with the rule, has changed his views through the years. In 2006, he started recommending spending no more than 4.7% of your investments during your first year of retirement. In 2022, he scaled that back to around 4.4% due to that year’s soaring inflation rate.
This year, some financial planners are re-evaluating the 4% rule again, citing concerns over stock market volatility, rising inflation and potential for a recession or Social Security being depleted.
Many financial planners are now recommending changing the 4% rule to 3.3%.
Whether the number should be higher or lower for you depends on your specific needs in retirement, the future stock market and the future economy and of course, how many years you plan to be retired. It typically won’t remain constant either as people’s spending habits can change in retirement.
Many people have found once they no longer have work expenses, they can easily spend much less than they were prior to retirement.
To play it safe, plan ahead and withdraw less each year if you retire early and hopefully, live longer than people have historically. .
How To Find your Financial Freedom Number
Ok, so now we understand the 4% rule, we simply reverse the math to determine your multiplier for how much you need to save.
100 / 4 = 25
So 25 is your multiplier when using the 4% rule.
So multiply you Annual Spending by 25 to find your Financial Freedom number.
When you look at the number this way, you realize that they key to financial independence is how much you spend, not how much you have. This is when it usually ‘clicks’ for people. They realize they can shave years off their working life, and bring forward retirement simply by focusing on reducing what they spend. Don’t get me wrong, saving is critical, but you need to ensure you’re laser focused on managing your spending as you can only save what you don’t spend in the first place.
How much you spend determines how much you need.
So if you spend less, you need less and can retire earlier.
So when you hear other people say that “$1 million isn’t enough to retire”, what they’re really saying is they have an expensive lifestyle. The less you spend, the earlier you’ll reach your number
- Spend $40,000 a year you need $1 million
- Spend $80,000 a year you need $2 million
- Spend $120,000 a year you need $3 million
- Spend $160,000 a year you need $4 million
You can absolutely retire on $1 million dollars…
especially if you plan to have multiple sources of income during retirement — such as Social Security benefits, pension payments, or part time work — as then you’re less dependent on withdrawals from your retirement accounts.
The key is to be flexible with your finances and keep a long-term financial view. Remember, 4%, or 3.3%, is just a starting point— a guideline to give you a goal to work toward. You should review and update your savings plan over time based on your situation, risk tolerance, and the market.
How long will it take me to save for retirement?
So now you know your number, but how do you know if you’re on track to achieve it? There are a number of factors that go into figuring out how long it will take you to save for retirement and live richly and comfortably. Starting with your lifestyle (how much you plan to spend), your longevity, and your investment portfolio returns. And given we can’t control how long we live or the volatility in the market, we could use another simple guideline to give us a starting point. Just like we did with the 4% rule.
Fidelity has completed analysis to help determine if you’re on track for reaching your savings goals.
Fidelity’s savings factors are based on the assumption that a person saves 15% of their income annually beginning at age 25 (which includes any employer match), invests more than 50% on average of their savings in stocks over their lifetime, retires at age 67, and plans to maintain their preretirement lifestyle in retirement (see Fidelity for more details).
A word of caution – Fidelity mentions these milestones are aspirational and not likely to be attained but should serve as goalposts to help save enough to maintain your lifestyle in retirement. Personally, I find these numbers to be far in excess of what my family will need in retirement. First, The key word here is maintain. We don’t plan to maintain the same lifestyle we have now, over the next 30 years. We will be empty nesters in 10 years and our expenses will go down. We won’t have work expenses to cover such as commuting, clothes and lunches out. Plus, we’ll travel less in our 70s than we do now.
We will spend less once we stop working such as cars, gas, and clothes, We will likely have less sporting and entertainment expenses in my 70s and 80s than we do now.
Second, these calculations focus on how much you’re earning instead of how much you’re spending. As noted above in the 4% rule, hitting your financial freedom number is more about how much you spend than it is about how much you earn. In using Fidelity’s calculation, I estimate that I would need $1.5 million dollars more by the time I am 67 than I would when I apply the 4% rule.
Third, your savings rate could be different that what Fidelity has assumed, if you started earlier or later, or if you saved more or less than 15%. So there are a lot of variables that can make these numbers hard to relate to your circumstances.
Instead of using these numbers as a number to hit at each age, I suggest using them as directional, and showing the rate at which your savings should grow over time.
The key thing to take away from these exercises is to set a goal that works for you. If my 4% rule goal says I should save $3 million and the Fidelity calculation says $4.3 million, then I can set a range for now and monitor and adjust as needed. The point is its important to set some type of goal, whether more realistic, or aspirational. Some people are motivated by BHAGs (big, hairy, audacious goals as an old manager of mine used to call them) others not so much..
Research conducted by Dr. Gail Matthews, a psychology professor at Dominican University in California, concluded that you are 42% more likely to achieve your goals just by writing them down. Set your Financial Independence number, make plans for how to save for it and check in yearly to see if you’re on track. Determine if you’ll need extra savings and if so, how much per month.
Don’t spend a minute more working than you have to simply because you’re not willing or able to calculate your number.
MILESTONE 3 – Determine how much you Can Invest
If you’re not quite on track and want to accelerate your savings, then this is the perfect time to make a plan to increase your savings goal this year. You now have a savings number to work toward.
First, check your eligibility and this year’s limits based on your age for workplace retirement plans such as 401(k)s and tax advantaged accounts like IRAs and Roth IRAs. If you can max out the saving limits on these accounts – great, if not, set your goal to simply save more than last year.
I suggest setting your savings goals on frequent intervals such as daily or weekly as they become more tangible than if you say you’ll save a certain amount monthly and then get to the 29th to realize you haven’t started saving.
+ Enjoy FREE Money – Ensure you’re Taking Full advantage of employer match programs
If offered by your employer, you MUST sign up for the employer match program of your retirement plan like a 401(k), 403(b), or Simple IRA. If the company will match a portion of the money you put away into savings each month — often as much as 50%. That’s free money just waiting for you, so don’t leave it on the table! Ensure you’re putting the maximum amount in that they match, e.g. if they match up to 5%, then be sure to put 5% in. I promise you, you won’t miss it. I also promise you, if you don’t put it in you’ll spend it and likely have no idea where it went.
I can’t stress the importance of this enough. If you stop reading right now, and at least walk away with this one lesson you’ve won and I’m thrilled – Get your FULL company match.
Let’s use an example – if you earn $50,000 per year. Your employer offers you a dollar-for-dollar company match, up to a 5% maximum, on 401k contributions. If you contribute $2,500 (5%) into a company 401k, your employer will ALSO contribute another $2,500.
You’ll then have $5,000 in your 401(k)
and only $2,500 came from you!
Some employers may only match 50 cents for every dollar you contribute – or $1,250 for your $2,500, but hey, it’s still FREE money, guaranteed. Not a word you hear much in investing.
MILESTONE 4 – Invest in Low Cost Index Funds
In the past 20 years, investing in low-cost index funds like the S&P 500 has been the approach favored by billionaire investors like Warren Buffett. And for good reason.
It’s cheaper than investing in most mutual funds, there’s far less trading (which incurs costs), and it’s fairly simple and straightforward, making it relatively easy for anyone to invest.
in 2007, Warren Buffett declared index fund investing to be superior to actively managed investments. Buffett had entered into a bet with a New York City money management firm, that an index fund could beat an active manager.
Why Warren Buffett bet on index funds
Buffett bet that over a 10-year period from 2008 through to the end of 2017, the S&P 500 would outperform a portfolio of five hedge funds, when performance was measured on a basis, net of all fees and expenses.
Buffett, who chose the Vanguard Index Fund as a proxy for the S&P 500, won by a landslide. The five hedge funds had an average return of just over 36% net of fees over that ten-year period, while the S&P index fund had a return of over 125%. Buffett’s advice to investors:
When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”
Warren buffett
The good new is, you don’t need to be a billionaire investor like Warren Buffett to invest in index funds. It’ easy and anyone can do it. How you invest for long-term wealth building will depend on your financial goals and risk tolerance. Consider this simplified approach.
Investing is NOT about picking individual stocks. That’s for day traders, looking for short term gain.
Index funds track the overall broad market, which means they’re designed to create results that are as good as the overall market — they don’t try to beat it, which is why they out perform.
Advisors will claim to beat the market, but research shows fewer than 10% of active fund managers consistently beat the market!
Advisors actively managing portfolios usually underperform the market, and still charge 1-2% in fees!
In a basic assumption of a one time lump sum investment made that you don’t touch for 40 years, a 1% advisor fee would eat up a full 1/3 of your investment!
Or, if you invest $10,000 initially and then also invest an additional $10,000 every subsequent year for 40 years, at 6% annual….
You would have paid your advisor nearly $372,000 at a 1% fee, and lost nearly 30% of your returns
| Before fees | With .05% fees | With 1% fees | |
| Balance after 40 years | $1,649,857 | $1,628,629 | $1,277,914 |
| Fee expense | $21,228 | $371,943 | |
| % Portfolio lost in fees | 1.3% | 29.1% |
If setting up your investments is overwhelming, consider a one time, flat fee for an advisor to help get you started. With this type of advisor, you will only pay once, and it won’t increase as your assets increas. You also won’t risk a conflict of interest where advisors are earning commissions on products they recommend.
And it’s not just advisors who charge these fees. Not long ago I took a deep dive into my investment options in my overseas Retirement fund (in Australia) to discover my selected fund was charging .98 (nearly 1%!), which was equating to over $4,200 a year. It was not obvious because my returns were always listed as ‘net returns’. Which means they had already taken out their fees. I researched other fund options and found a similar fund with same historical returns only charging .04. Moving my investments to the lower-cost index fund saved me thousands. Be sure to check the expense ratios and fees for each of your selected investments to select to most cost effective option.
How to Diversify your Investments
Diversification is fancy way of saying “don’t put all your eggs in one basket” and it’s a fundamental principle of long-term investing. Spreading investments across various asset classes (also called “asset allocation”) is a type of diversification and helps mitigate the risk of big losses. When one investment drops in value, your others can offset the loss You need to select a specific asset allocation strategy in line with your risk level. Risk level is primarily determined by your age and how long you have until retirement.
The more years you have until you plan to retire, the more risk you can afford to take and the higher your stock allocation should be. Conversely, the closer you are to retirement and greater need to live off your portfolio, the less risk you should take, and the larger your bond allocation should be.
Here’s a general rule of thumb for how to allocate between stocks and bonds, which are less volatile. This will vary if you are younger and plan to retire earlier than the traditional 60-70 year old range.
| AGE | % STOCKS | % BONDS |
|---|---|---|
| 20 | 80% | 20% |
| 30 | 70% | 30% |
| 40 | 60% | 40% |
| 50 | 50% | 50% |
| 60 | 40% | 60% |
Stocks
Stocks are key to a well-diversified portfolio. When you own stock, you own a part of the company. Stocks are considered riskier than other types of investments because the market is volatile and values can drop quickly based on a number of external factors out of your control. However, stocks also offer the opportunity for higher growth over the long term.
An index fund is a portfolio of stocks or bonds designed to mimic the make up and performance of a financial market, such as the S&P500. It is the optimal way to invest in the stock market for the following reasons:
- Index funds have lower expenses and fees than actively managed funds.
- Index funds follow a passive investment strategy.
- Index funds seek to match the risk and return of the market based on the theory that in the long term, the market will outperform any single investment.
Bonds
Bonds are also used to create a well-diversified portfolio. When you buy a bond, you’re lending money in exchange for interest over a fixed amount of time. Bonds are typically considered safer and less volatile because they offer a fixed rate of return. And, they can act as a cushion against the ups and downs of the stock market. The downside is that the returns are generally lower.
A Simpler Way to Diversify with Target Date Funds
Index funds offer a wide range of choices and lower costs, but require investors to allocate/diversify their assets. Meanwhile a target-date fund is an easy way to invest for retirement without worrying about asset allocations. As the target date approaches, the allocation to risky assets, such as international stocks is reduced, and the portion of funds dedicated to less volatile assets like bonds is increased. All the investor has to do is select their retirement year, and asset allocation is taken care of for them.
Target-date index funds provide easy-to-understand options that work reasonably well for most investors. With target-date index funds, all investors need to know is when they want to retire!
MILESTONE 5 – Select and Fund the Ideal Investments
Once you open the accounts at the brokerage you MUST then fund the account by picking the actual fund to invest your money in. (Yes, I made this mistake with my first account, forgetting to fund it, so it was basically acting like a low interest savings account!).
You’ll want to select between mutual funds and Exchange Traded Funds (EFTs) which allow you to invest in multiple stocks or bonds at once. The latter is recommended due to their simplicity and lower fees an no investment minimums.
Target date index funds (a type of EFT) help take the guesswork out of saving for retirement because they provide you with a diversified mix of stocks (also called equities) and bonds that changes over time. For many, as they get closer to retirement age, they choose to reduce risk and increase the percentage invested in bonds, and decrease the amount in stocks. This is because the stock market will have more ups and downs, and they’ll have less years to make up for any downturns.
Super simple – just pick your planned retirement date and the target date fund will adjust for risk as time passes. For example, I have invested in a 2030 Vanguard Target Date Fund, that will decrease the allocation in stocks as we get closer to 2030.
You’ll want to check the expense ratios when comparing funds. Aim to keep your expense ratio at .2% or lower. If fees are higher than .2%, then explore other options.
MILESTONE 6 – Automate Your Investing
Keep investing regularly with every paycheck, regardless of whether the market is up or down. The best way to do this is to set up automatic contributions from each paycheck into a 401(k) plan or IRA account so that money is taken out before it has time to get spent elsewhere — this makes it easier to stay disciplined about saving. Automating contributions also ensures you won’t miss any deadlines and if the funds go straight to your account, you won’t be tempted to spend it.
Don’t monitor the market portfolio progress frequently, don’t sell when its high, or worse, when its low. Remember wealth comes from uninterrupted compound interest. Stay the course.
Historically, over the last 100 years, the average yearly return of the S&P 500 is about 10.5% .
Advisors actively managing portfolios usually underperform the market, and still charge 1-2% in fees!
Remind yourself WHY you’re saving. I call my savings fund my “Freedom Fund”. I call it that because in reality your’e not just saving for a home or a holiday, you’re actually saving for the freedom to choose what you want to do. Money buys you time and time buys you freedom.
Here are how some of my readers define freedom:
- Freedom to save for your future dream wedding, even if you’re single
- Freedom to buy a home in our current neighborhood, where we love our kid’s school. We don’t have to rent any longer and worry about when or if our landlord is going to terminate our lease
- Freedom to take time to figure out what my next career move is after being laid off – not having to take a job I don’t want because I have to pay the bills
- Freedom to take an extended family holiday because you’ve realized once they are school age, you only have 2,160 days to spend with them until they’re 18
- Freedom to leave my 9-5 in my early 40s and follow my passions.
Figure out what does freedom looks like to you.
Still Have A Little Extra to Stash Away?
If you’re in the groove now and have ditched debt and built your Freedom Fund, and still have some left over, here are some ideas.
- If you receive unexpected additional income, such as tax refunds or a bonus from work, put it directly into your retirement account rather than spending it
- Put extra income toward retirement savings, increasing your savings rate to 15%
- Make additional payments to your mortgage to save thousands and pay off sooner
What happens if I pay an extra $200 a month on my 30-year mortgage?
If you buy a $300,000 house with a 30-year mortgage and a 5.7% interest rate, you could save $84,223 in interest by paying an extra $200 every month — and pay off your mortgage 6.7 years sooner!
Monitor and Adjust Your Investments Regularly
Once you save your first $10,000, it will get easier to save as you’ll be motivated by watching your money grow through the magic of compounding.
- Regularly review your budget, expenses, and progress toward your financial goals. Make adjustments as needed to stay on track. You spend hours earning it, spend a few minutes managing it.
- Lift your savings rate by just 1% a month or a year, which significantly accelerates your portfolio growth
- Stay informed about changes in your financial situation and adapt your strategies accordingly. Life events, income changes, and shifting priorities may require updates to your financial plan and savings strategies
- Take a Long Term View. It cuts down on costs of constant trading, keeps you from selling and allows you to compound any earnings you receive from dividends. Stay consistent and as Warren Buffett famously says “never interrupt compound growth”.
LIVE RICHLY. FIND HAPPY.
Congrats! You’ve mastered the basics and have a simple but solid investing strategy!
Now, learn more about the major milestones on your journey to living richly!
Milestone 1 – Envision the life you want to live. Define what living richly means to you.
