Читать книгу Mutual Funds For Dummies - Eric Tyson - Страница 52

Justine and Max, both in their 20s, recently married and excited about planning their life together, heard about a free financial-planning seminar taking place at a local hotel. A financial planner taught the seminar. One of his points was, “If you want to retire by the age of 65, you need to save at least 12 percent of your income every year between now and retirement … the longer you wait to start saving, the more painful it’ll be.”

For the couple, the seminar was a wake-up call. On the drive home, they couldn’t stop thinking and talking about their finances and their future. Justine and Max had big plans: They wanted to buy a home, to send the not-yet-born kids to college, and to retire by age 65. And so it was resolved: A serious investment program must begin right away. Tomorrow, they’d fill out two applications for fund companies that the financial planner had distributed to them.

Within a week, they’d set up accounts in five different funds at two firms. No more paltry-return bank savings accounts — the funds they chose had been returning 10 or more percent per year! Unlike most of their 20-something friends who didn’t own funds or understand what funds were, they believed they were well on their way to realizing their dreams.

Although I have to admire Justine and Max’s initiative (that’s often the biggest hurdle to starting an investment program), unfortunately they made numerous mistakes by investing in this fashion. The funds themselves weren’t poor choices — in fact, the funds they selected were solid: Each had competent managers, good historic performance, and reasonable fees. Here are some of the mistakes they made:

 They completely neglected investing in their employers’ retirement savings plans. They missed out on making tax-deductible contributions. By investing in mutual funds outside of their employers’ plans, they received no tax breaks.

 They were steered into funds that didn’t fit their goals. They ended up with bond funds, which were okay funds as far as bond funds go. But bond funds are designed to produce current income, not growth. Justine and Max, looking to a retirement decades away, were trying to save and grow their money, not produce more current income which they didn’t need because they were working and earning money.

 To add tax insult to injury, the income generated by their bond funds was fully taxable because the funds were held outside of tax-sheltered retirement accounts. The last thing Justine and Max needed was more taxable income, not because they were rolling in money — neither Justine nor Max had a high salary — but because, as a two-income couple, they already paid significant taxes.

 They didn’t adjust their spending habits to allow for their increased savings rate. In their enthusiasm to get serious about their savings, they made this error — probably the biggest one of all. Justine and Max thought they were saving more — 12 percent of their income was going into the funds versus the 5 percent they’d been saving in a bank account. However, as the months rolled by, their outstanding balances on credit cards grew. In fact, when they started to invest in funds, Justine and Max had $1,000 of revolving debt on a credit card at a 14 percent interest rate. Six months later, this debt had grown to $2,000.The extra money for investment had to come from somewhere — and in Justine and Max’s case, some of it was coming from building up their credit card debt. But, because their investments were highly unlikely to return 14 percent per year, Justine and Max were actually losing money in the process.

I tell the story of Justine and Max to caution you against buying funds in haste or out of fear before you have your own financial goals in mind.