Investing For The Long Haul - personal finance

Black Enterprise, Feb, 2000 by Derek T. Dingle

Don't get stuck in financial gridlock. By learning the basics, you can steer your finances onto the road to prosperity.

IT'S TIME FOR YOU TO SHIFT INTO HIGH GEAR. YOU'VE decided that you want to move your financial life forward. Now. all you have to figure out is how to steer yourself in the right direction.

In the last issue of BLACK ENTERPRISE, we shared with you the principles underlying the Black Wealth Initiative. our comprehensive program of financial empowerment. The centerpiece of the initiative is the BE Declaration of Financial Empowerment, or DOFE, a document that lays out your commitment to 10 specific financial objectives. In this article, we will discuss how you can implement two related principles of DOFE: the practice of saving and investing 10% to 15% of your after-tax income and the process of becoming a proactive and informed investor.

Why are these principles so important? For the most part, African Americans continue to play catch-up when it comes to investing. Some do not start investing until they're almost 30, which means that they have lost at least a decade or more in which to accumulate, assets through such investment vehicles as stocks, bonds and mutual funds. According to the blackenterprise.com financial health survey, the average age at which our respondents joined the ranks of investors was 28.4. And others surveyed decided not to get on the investment highway at all, missing out on the most spectacular bull market in history. The reasons: 55% felt they did not have adequate funds: 36.5% said they lacked information; and 22.6% feared losing money. "Those that haven't invested their money have really missed out on an opportunity to achieve the American Dream--to be independently wealthy," says Ira G. Turpin Jr., an investment advisor with Edward Jones Investments in Bowie, Maryland. "And the longer they wait. the more wealth-building opportunities will pass them by."

How do you get started? To design a solid savings and investment program, you should apply the following guidelines:

* Pay yourself first. It's mandatory that you allocate a portion of your income for savings and investment. In fact, get your employer to autoumatically direct 10% to 15% of your paycheck into a savings, money market or mutual fund account. Make sure that these directed dollars are separate from those placed in your employer's 401(k) or tax-deferred company-sponsored retirement plan.

* Calculate the amount that you need to save. The process begins with establishing specific goals. Outline the reasons why you are saving and investing your money. Do you seek early retirement? Are you trying to finance your child's education? Do you want to buy a home? After figuring out each goal, establish a time frame and dollar amount to achieve it. (The guide in the BE Wealth-Building Kit includes a worksheet that will help you organize such objectives.) It will make it easier for you to hit your targets by categorizing your needs into short-, intermediate- and long-term objectives.

Factor into your plans adequate funds for emergencies and unplanned expenses such as unemployment, catastrophic illness or necessary home repairs. How much should you park in your contingency fund? Three to six months' worth of fixed and variable expenses in checking, money market, savings or short-term certificates of deposit.

* Determine where you need to save and invest. Set up a separate account for each goal and prioritize them according to the time frame you establish. By creating different accounts, you can start diversifying your portfolio while developing a manageable way of monitoring your holdings. Know the difference, however, between marketable and liquid assets. Emergency funds should be liquid, giving you the flexibility to convert an asset into cash without suffering a significant loss. Long-term objectives should be tied to marketable accounts such as mutual funds, since they are subject to movements in either the stock or bond markets and their returns will vary.

* Seek professional help. As you map out your financial goals and identify the vehicles to achieve them, consult a top-flight financial planner. Such an advisor will help you assess your financial position and spending patterns as well as provide guidance on how you can make adjustments. (See "The Right Stuff," May 1999.)

The key to growing your money, however, is the development of a solid investment plan. The average yield on a money market account is 3.5%, which can easily be eaten up by inflation and taxes. For instance, if inflation is a modest 1.5%, then the yield on your savings account has been reduced to a mere 2%--and that's before the tax hit.

Make your money work harder by investing in equities, bonds and/or mutual funds. By doing so, you can take full advantage of the power of compounding--taking a small amount of dollars and watching them multiply exponentially. A quick acid test to figure out how quickly an investment will double is through the application of the Rule of 72. How does it work? Simply, divide the number 72 by the compound annual rate (expressed as a whole number) of your investment. For example, a $10,000 investment with a compound annual rate of 8% would be worth $20,000 in nine years.