Even with extensive training and a strong financial background, it’s difficult to know just how much you should be investing. Markets fluctuate and strategies change. So, how can you tell if you are investing enough to secure your financial future? Here are 7 under-investing signs that indicate you should ramp up your annual contributions.
7 Signs of Under-Investing
1. You have no dedicated retirement or investment accounts.
Unfortunately, American Social Security benefits are not enough to sustain you through your retirement years. Moreover, many workers receive watered-down pension plans and employee benefits. This means you need to find a way to supplement your retirement income.
If you don’t have a dedicated retirement or investment account, then you are showing one of the first signs of under-investing. Perhaps you haven’t given much thought to retirement planning or future security. The good news is that it is never too late to begin investing. You can start by opening a Roth IRA or participating in an employer-sponsored 401(k). These types of accounts are ideal for beginners since they can deduct contributions from your paycheck automatically. And, many employers offer partial or full contribution matching to help you build your retirement savings even faster.
2. Your emergency fund is way higher than it needs to be.
Maintaining an emergency fund is a critical component of your financial plan. Having money quickly accessible in a savings or checking account makes those unexpected expenses easier to manage. However, your emergency fund only needs to have enough money to cover about 3-6 months’ worth of living expenses. Once your account balance reaches this level, it’s another one of the under-investing signs. And, it means you should do something with it.
It is much better to invest any money you have leftover at the end of the month rather than letting it sit in an account that offers little return on your investment. High-yield savings accounts won’t earn you as much as a brokerage account. While you may feel safer keeping your money close at hand, you are also missing out on a valuable opportunity for portfolio growth.
3. All your assets are in a single account.
Any good financial advisor will tell you not to put all your eggs in one basket. So, if you have all your money tied up in a single account, you should consider diversifying your portfolio. Diversification is crucial to an investment strategy that allows you to get the most out of your money. Not only does it increase your growth potential, but it also insulates you against market fluctuations.
Rather than funneling all your money into a single account, consider supplementing your retirement with multiple investment accounts. You may even try your hand at individual investment accounts as well if you want to take a more hands-on approach with your portfolio.
4. Your portfolio is too conservative.
As you near retirement age, you should become more conservative with your investment strategy. But, if you have many years of investing ahead of you, a low-risk portfolio is not ideal to reach your long-term financial goals.
First, you must determine your risk tolerance. However, if you choose to continue with your low-risk strategy, you can compensate for the low rate of returns with a more aggressive contribution rate. Simply add more to your accounts to help counteract the increasing rate of inflation and lower returns.
5. You can’t remember the last time you evaluated your investment strategy.
Even if you consulted someone to determine your initial investment strategy, it needs to be regularly evaluated and adjusted. Your brokerage account can remain on auto-pilot as long as your financial situation never changes. But, this is not usually the case.
Major life changes will affect how you view and save money. As you grow and change, so should your investment portfolio. After changing jobs, earning a promotion, getting married, buying a house, or starting a family, you should discuss your long-term objectives with your financial advisor and increase your investing rate.
6. You have ambitious financial goals.
Most investment models are built for average goals and modest strategies. They use figures based on your current earnings and lifestyle expenses to determine how much you need to maintain a comfortable lifestyle after retirement. But, maybe you have bigger plans once you retire that require more income.
It’s great to have ambitious goals, but you don’t need to become overly aggressive to achieve them. However, if you have loftier goals that take you into another tax bracket, you need to save more in order to turn your dreams into your reality.
7. The market has shown steady returns.
Yes, I know it seems counterintuitive to invest when the markets are performing well. Investing 101 taught us to buy low and sell high. While it’s good to recognize weak markets as a prime buying opportunity, it isn’t the only one.
When the market is reaching new highs, many expect it to turn south. But, what if it continues going up? If you already have a plan in place and make regular investments, the best advice is to continue doing what you’re doing. However, if you have been avoiding investing altogether because you expect the market to crash, you are missing out on another money-making opportunity. You can still make more conservative investments that allow you to take advantage of strong markets.
What Do You Do If You Are Under-Investing?
If you are asking yourself whether you should be investing more, then you probably already know the answer. Often times we look for a reason to justify our lack of action because it is too much financial strain or we have other things we would prefer to spend the money on. But, investment accounts are important savings vehicles to help you reach your long-term financial goals. For those who don’t know where or how to begin investing, seek expert advice and discuss your current situation and goals with a financial advisor.
- 7 Signs You Are Over-Investing
- How to Tell If You’re Over-Diversifying
- What Type of Investment Has the Lowest Risk?
Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to working with children, she also enjoys good friends, good food, and new adventures.