How Listening To So-Called Finance Gurus Could Wreck Your Finances & What To Do Next
While investing is a key part of retirement savings, we understand it can come with a degree of risk. Whether you're investing via dollar-cost averaging over a long period, or have chucked a bunch of money into the stock market from a severance pay, inheritance, or divorce settlement, don't get caught up in the "financial gurus" who preach buying single stocks. Here's what to do if you've overinvested and lost it all.
The Scenario: Taking A Huge Risk
You're flipping through the channels and suddenly, you come across this finance guru who tells you to buy a certain stock or two, with projections of their percentage of returns on your investment over a five, ten, or twenty-year period. He's confident that your returns will be much greater than the 10% annual average of the S&P 500. He's engaging, charismatic, and has a bunch of letters next to his name. Sounds good! You buy $5,000 worth of these stocks. Your whole emergency fund.
Six Months Later... Crash
You don't pay too much attention to your investments, after all, you've been told they were as safe as houses in these stocks. Then, six months later, the economy changes. Tariffs wreak havoc, and suddenly, the in are worth nothing. What do you do now?
Sell Off Anything You Have Left In The Investment
If you have any money left in the investment, it's time to sell that investment ASAP. You're not going to hold out for a miracle any longer and waste any more money or time. It's time to totally rethink your investment strategy and rebuild your finances.
Take Any Remaining Money & Put It In A Savings Account
But, before you do that, you're going to move slowly and intentionally. Take all of your remaining from selling your stock investments and put into a savings account. This can be used as the springboard to start your emergency fund from scratch.
What Type Of Savings Account Should The Money Be In?
When building an emergency fund, the key thing to remember is that it has to be liquid. It's for an emergency, when you need money right now, so should you be in an easily accessible bank account. Ideally, you'd want to keep in a high-yield savings account, or HYSA, to earn you a few percentage points of interest every month.
Interest-Rate Chasing With Your Emergency Fund
Some people choose to chase the best interest rate they can get by opening and closing accounts with banks every few months. These high interest rates are mostly offered by smaller, online banks that don't have the overheads of the big banks. While it's fine to interest-rate chase with your emergency fund, particularly as it's only there in case of an emergency, it can sometimes be a hassle to open and close every so often.
Once It's Secure, Build It Up With 3 To 6 Months' Expenses
Once you have a secure spot for your savings account, it's time to start building it back up again. Let go of the fact that you lost it all and become laser-focused on getting it back. Start by forgiving yourself and learn from the mistake. Start re-building your emergency fund. Here's how.
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Check Your Budget
Your first step to rebuilding your emergency fund is to check your budget. What can you afford to put towards it's rebuild every month? Consult with your family and your financial advisor. Take a macro shot of your finances to work out where that rebuild cash is going to come from.
Are You Saving As Much As You Could Be?
When it comes to saving your first/second/third emergency fund, you have to go "scorched earth" on your lifestyle. Cut out eating out, stop unnecessary subscriptions, eat good quality, but inexpensive food. Save as much as you can.
Conduct A Bill Audit
Outside of your mortgage or rent, what's your largest bill? Conduct a bill audit and find out what you're paying the most for. Is there a way to either cut out that expense completely, or negotiate down the bill? Explore your options to reduce that expense.
Shop Around For Cheaper Insurances
Have you noticed that your insurance premiums keep climbing, year-on-year? If these are a high expense in your bill audit, consider shopping around for the best rate you can find for your home, auto or tenant's insurance. Many insurance companies will work with you and offer you a lower rate, because they want your business.
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Reducing Your Cell Phone Bill
Unfortunately, Americans pay out of their ears for their cell phones. The average phone bill in the United States is $144/month. That's crazy high and if that sounds like what your phone bill is, then chances are you're being highway-robbed and you don't even realize it. See if you can reduce your phone bill in any way.
Switch (Or Threaten To Switch) Phone Providers
If you're not locked into a contract, then it may be possible to switch your phone provider for a lower rate. Many providers offer promotional rates for new customers. Leverage this to switch your phone provider for a new, cheaper plan if you can get away with it. Or, see if your work will cover your phone bill, if it's something you use for work a lot.
Unplug The Cable TV
The average American household pays about $90/month for their 200+ channel cable subscription. How much TV do you really watch, anyway? Are you paying too much, when you could be getting the same stuff from streaming services and paying less? If you don't use your cable TV enough to justify the cost, then can it while you're rebuilding your emergency fund.
Sell Unused Items
If you have things laying around the home that are of value that you don't use, it may be worth listing them on Craigslist or Facebook marketplace to make some money. The goal here isn't to make the most money we can from the sale, it's to get money together quickly.
Check Sales Aisles When Buying Groceries
Most grocery stores have some sort of sales or clearance section when buying groceries. Perfectly good product that's just going to go to waste otherwise are often between 30% and 50% off. Use these aisles to find food that's nearing it's best-before date to save money on groceries while you're being frugal.
Once You've Re-Saved Your Emergency Fund, Take Another Financial Snapshot
Having an emergency fund is the core springboard for almost every other financial decision you'll make. It allows you to have a cushion, a safety net to catch you when life happens. When your emergency fund has been fully-funded with between 3 and 6 months' worth of expenses, then (and only then) can you re-examine your financial picture.
Do You Have High-Interest Debt?
If you have high-interest debt, paying that down should be your next priority. Take a total of all of your debts, minus your mortgage and rank-order your debt from highest to lowest interest. Once that's done, start paying off that debt first, then use the savings you'll gain from paying off that debt to pay off the next one—and so on until you have eliminated all of your debts.
Don't Be Afraid To Negotiate Debt Repayments
If you've got a high amount of credit card, you may be able to negotiate the amount down to a more manageable number simply by talking with the credit card companies. They'd rather get some money out of you than none, so consider asking if they'll settle the debt for a lower amount than you currently owe.
Do You Contribute To Your Retirement?
Does your company have a retirement plan that you contribute to? Or are you on your own? Have you even started contributing to your retirement yet? If not, then once you've paid off your high-interest debt, now is the time to start contributing.
Open A Roth IRA
While there are many different kinds of retirement accounts, the Roth IRA is the most powerful—because both contributions and any earnings within it—are tax-free growth and upon withdrawal. You can contribute a lifetime maximum and an annual maximum to a Roth IRA, before you'll face tax penalties.
See If You Can Contribute 15% Of Your Annual Income
If you're on an annual salary, do the math and work out how much 15% of that annual salary would be. Now, see if there's a way that you can put that amount away for retirement each year. Break down your salary into monthly or bi-weekly payments and start putting that amount away.
Automation Will Make Saving For Retirement Easier
Automating this process through automatic transfers will make saving for retirement so easy you won't have to think about it. As long as you don't go over your annual limit for contributions to your Roth IRA, you'll be able to save automatically, which will make you more likely to save for the long-term.
Using Your Roth IRA As An Investment Account
Really, a Roth IRA should be your first priority when it comes to investing for the long-term. Because of the tax benefits it provides, it's the perfect vehicle for long-term investments. Having rebuilt your emergency fund, paid off your high-interest debt, you're back in the best position you could be in to make investments.
Diversification Is Key
Most investment advisors will tell you that diversification is key. But, you already know this, because you put all of your eggs into one or two baskets and the whole thing blew up in your face. So, approach this time around with the mantra that diversification is how you'll stay afloat through hard economic times.
Consider Exchange-Traded Funds Or Index Funds
Index or Exchange-Traded Funds (ETFs) are essentially large baskets of stocks that you own a small piece of each stock in within the fund. These funds often track the performances of different market, for example, the S&P500, or the Toronto Stock Exchange. There are thousands of funds out there, dedicated to stocks from across the financial and industrial spectrum.
ETFs Allow You Flexibility While Tailoring Them To Your Needs
Because you're buying a basket of different stocks, and there are many different fund options, you can choose what you want to invest in. Big tech, industrial companies, or a basket of stocks that tracks the S&P500, you can also choose to invest in bonds or other instruments within an ETF. It's a great option for people who've been burned by stock picks.
What About Investing In Bonds?
Investing in bonds is an option, but they're traditionally a long-term investment. Something that you buy-and-hold for retirement—depending on your age, this may be applicable to you, but if you're nearing that retirement threshold, you'll want to pick a low-risk bond. Or, select a broad bond ETF.
Time In The Market Beats Timing The Market, Always
Nearly always, the time that your money spends in the market will beat out trying to time the market by making a shrewd trade. It's always better to invest your money today and let it grow over time. Start now. The longer your money sits out of the stock market, the longer it's missing on all-important compound interest.
Educate Yourself Better This Time Around
Now, it's your job to educate yourself better this time around, so that you don't make the same mistakes as last time. Ensure you know what you're doing and don't put all your eggs in one basket. Rebuild yourself financially, then diversify your investments once you have a stable footing. Good luck!
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