How to invest when you feel like you're behind

There’s a Chinese proverb that says: “The best time to plant a tree is 20 years ago; the next best is today.” The same can be said of saving. The best time to start is 20 years ago —or even before you were born—the second best is today.

The same is true of savings. The best time to have started is 20 years ago; the second best is today.

To help, we came up with a list of tips for how to save and invest when you already feel behind.

The Power of Saving Early

Most people think: “If you want to save $1 million over 20 years, that’s $50,000 per year. I can’t do that.”

What people don’t understand, is that they don’t actually have to save anywhere near $1 million in order to have $1 million at the end of 20 years, thanks to the magic of compound interest.

Instead, all you have to do is be dedicated and persistent—to keep saving week after week, year after year, and invest in assets that will help your money grow at an ever-increasing rate.

How to boost savings & investment

If you’re feeling behind, here are four things that you can do to help give your savings a shot in the arm.

Adopt a high-savings lifestyle

One of the most important things you can do to set yourself up for success in saving and investing is to adopt a low-cost lifestyle. This doesn’t mean that you need to become a minimalist, but it’s pretty hard to maximize your savings rate without minimizing expenses.

Here are some easy things you can do to save money:

• Stop eating out at restaurants
• Quit drinking at bars or restaurants
• Take a 30-day break from drinking
• Have happy hours with friends on Zoom instead of at a bar
• Avoid buying any new clothes or accessories for 8 - 12 weeks—If you need to find a middle ground, let yourself buy items occasionally in second-hand stores or thrift shops
• Make your own lunch instead of ordering in
• Watch content you can access for free through streaming services rather than renting movies
• Stop buying processed food (you’ll be amazed at how much you save)
• Take a 30-day break from eating meat (it’s expensive and you may not even miss it)

The biggest thing about constructing a lifestyle to optimize your savings is to be conscious in everything you do. It’s amazing how many things people do for no reason except they’ve always done them. And yet, once you’ve built a lifestyle and developed habits, it’s incredibly difficult to drop them later on. But, that’s what you have to do.

Establish savings goals, even in a crisis

If your goal is to start saving to build toward financial independence, then all of this information needs to be consolidated around some defined financial goals. And, you need to decide exactly what those goals should be.

For many who are trying to reach true financial independence, the answer is 25 times their annual expenses. Once you have that level of savings, you can theoretically live for 25 years without working—and that’s if you earn NO return on your money. If you can earn just 4% per year, you can live forever without ever having to work again.

Now, your goal may not be to live without working. But, until you decide what your goals are, you can’t know for sure what you’re working towards, which makes it extremely hard to stay motivated.

Pay off one small debt

If you feel like your finances are stuck in a rut, you won’t believe the relief that comes with resolving just a single outstanding debt. It can be a credit card, student loan, medical debt— anything. Just the simple act of paying off one debt will give you the encouragement to keep going.

Once you’re ready to start paying off debt in earnest, give some thought to which method you prefer to use: snowball or avalanche.

Paying off high-interest debt is certainly more impactful in terms of total interest saved each year, but using the snowball method to completely pay off smaller loans first can help you save real money each month by eliminating payments and freeing up cash to pay down higher-interest debts.

Put your savings to work

Once you start to save, you can’t just put your money in a bank and expect it to grow. To help catch up with your savings, you need to invest to earn a decent return. That’s where stocks, bonds, ETFs, and mutual funds come in.

Since the beginning of the year, a lot of stocks and ETFs are way down and can be bought for just a fraction of what they cost in January. Here are just a few names that I’ve invested in at substantial discounts and already started making returns:

• American Express
• Bank of America
• Boeing
• Ford
• GM
• JP Morgan Chase
• VOOV (Vanguard S&P 500 Value ETF)
• VIOO (Vanguard S&P Small-Cap 600 ETF)

If stocks are too risky for you, you might try CDs or high-yield savings, although they won’t build your savings very fast. Right now Nationwide is offering 1.61% on savings accounts through its partner, Axos Bank, and Marcus is paying at least 1.3% for CDs that last a year or longer.

For more on how to get started with index investing, see our ultimate guide here.

Don’t slack off

One of the hardest things about saving and investing—especially when you’re behind—is that you have to stick with it. Keep finding new ways to save; keep exploring new investments. If you already stock investments through a 401(k) (that you’re maxing out), may try finding a rental property. Already have a rental? Maybe try a fix-and-flip.

Being a successful saver means not only adopting the right mindset, but maintaining it for the long term.

To give you an example, five years ago my wife and I were living in a four-bedroom, four-bathroom home in a golf course community in Ohio. We had two club memberships and dined out in restaurants at least four nights per week.

After we sold our house, we rented for a while in a high-rent area of Miami. Even though we had dropped our club memberships and gone down to one car, we found ourselves eating out just as regularly, Ubering everywhere, and drinking more. Then, we moved across the country to a much cheaper area.

It wasn’t until we moved across the country AGAIN that we found a house that was much cheaper to live in and in an area that helped us cut down our dining expenses.

Most recently, we’ve given up eating meat, stopped going to bars due to coronavirus, and regularly buying alcohol to have at home. We’re both considerably healthier, as are our bank accounts.

6 Reasons You Should Start Investing Immediately

If you’re just getting started saving and beginning to feel discouraged, DON’T! When it comes to saving money, it’s important not to feel bad about whatever you have or haven’t done up to this point. What really matters is that you’ve made the decision to start today and put yourself on the right track to increasing your savings and putting your money to work for you.

The power of compound interest demonstrates the importance of getting started saving earlier rather than later. But, if you need more reasons to start saving today, some reasons to start saving now include:

1. Avoid lifestyle creep

Most people tend to build a lifestyle around their income. Whether you’ve been working for 20 years or are just starting out in your career, your household budget will likely be based on how much money you make. If you aren’t conscious of your spending and careful to set money aside, your lifestyle expenses will likely grow until they consume all of your income, if not more (hello, credit card debt!).

2. You can’t control your income

Most people can’t really control how much money they make. Sure, you can try to find a second job or find some part-time work, but it’s usually much easier to control expenses and savings. What this means is that if you decide to hold off on savings until your income hits a certain level, you have no way of knowing whether you may be waiting for 6 months or 6 years.

It's better to structure your household budget, regardless of income, to let you set aside some savings every month — rather than waiting until you think you’ll be rolling in cash.

3. You’ll need the money

You may not think so now, but at some point in the future, you’re going to need access to savings. Even if you aren’t focused on your retirement, yet (which you totally should be, by the way), you could still encounter a medical emergency. Or your car could break down. Or you may have to move. Or all of the above. In the same month.

The important thing is to start saving now so that you’ll have money that you can access later. The way doesn’t really matter.

4. There will always be a reason not to save

Life is what happens when you’re busy making plans. You may have the best of intentions to start saving as soon as you get your car paid off. Or as soon as you get your new house furnished. Or as soon as you get your long-overdue promotion.

As long as you think you have a reason to put off saving, you’ll always come up with another. There is no perfect time to save money, which is why it’s important to do it now.

5. You can’t get your time back

You may be reading all of these and thinking: “Gee, Dock, this is all great, but where were you 15 years ago?”

And yeah, sure, if you’d started saving even $5 per day 15 years ago, you’d already have a nice little $44k nest egg built up (assuming a 6% average annual return).

But we can’t do anything about that. All we can do is make the best choice we can today and move forward. So that’s what’s best for us to focus on — to do everything we can to build savings starting right NOW.

6. No one has ever gone broke betting on U.S. stocks

People make thousands of decisions every year that have the potential to hurt them financially. Whether to change cars. Whether to buy or lease. New or used. What insurance.

Investing shouldn’t be another source of worry. People have enough that they have to overcome mentally or emotionally to really commit to saving; choosing an investment doesn’t need to be another one.

Luckily, things like index funds can take a lot of the guesswork out of investing. These funds are very well-diversified and cost-effective. All that’s left for you to do is pick one or a few funds and invest as much as you can every day, week, or month.

To learn more, be sure to check out our ultimate guide to index investing.

A final word of savings

In my 10+ years in finance (eight as a registered financial advisor) I’ve seen lots of different strategies for saving and investing money. Some work; some don’t. Some work for me but won’t for you; others work for you but not for me.

The key to saving and investing is to consider lots of options, try different things, and figure out what works for you. But, then you have to keep at it.

If you’ve struggled with some of the strategies named above or have other tips or tricks that have worked for you, be sure to share them in the comments below. We’d all love to hear what’s worked on your financial journey and to help each other stay on track.