A Solid Foundation Makes Growth Possible

Last week, The Johnston Group hosted an evening presentation on saving and investing for Young Professionals of Minneapolis, a personal and professional development organization connecting Minneapolis, Saint Paul, and its surrounding communities.


While none of the content we presented was proprietary by any means, there were in fact several principles and concepts that even the most grizzled market veterans would do well to revisit or share with younger family members who are just getting their figurative “financial feet” under them.

Save Often, Save Early.

Thanks to the power of compounding, someone who starts saving in their 20s and continues through retirement will probably have twice the ending wealth of a peer who procrastinates for ten years.  While not ideal, in theory those “early birds” could turn off the savings spigot in their 30s just as their peers are getting started and match them dollar for dollar in terms of ending wealth, despite having saved for a much shorter period of time.  Moral of the story…save often, save early if you want great financial outcomes or flexibility and financial freedom down the road.  

For instance, assuming a 7% rate of return, a 25-year old would need to save $381 per month (about $13 per day) in order to amass $1M in wealth by age 65.  If they wait until age 35 to begin saving, they’ll need to sock away a little more than twice that figure each month ($820).  Wait until 45 and it’s 5X as much ($1,920).  Don’t even ask about starting at age 55 (it is 15X as much)!  

Prioritize Accounts.  

Most of us have plenty of investment vehicles we could use to save, including IRAs, 401(k)s, regular taxable accounts, and HSAs.  For most younger folks starting out, it makes sense to allocate enough to your 401k to get any employer matchthat exists, then direct any additional savings to paying off high credit card debt.  After that, it be sure to fill up your IRA bucket before topping off the 401(k), since both traditional and Roth IRAs offer more flexible rules around one-time withdrawals.  Meanwhile, HSAs are an underutilized investingtool which is even more attractive than a taxable account due to its triple tax-advantaged status, for those willing to use it as more than a pass-through account.

Don’t lose sight of the forest.  

Many investors often ignore how their total portfolio is performing and focus too much on smaller positions that have not performed as well.  However, it is important to realize that a diversified portfolio NEARLY ALWAYS results in better risk-adjusted outcomes over time (but not every period over which you measure it, especially short intervals).  

It is critical to remember that both our behaviors, and the automated systems we set up for saving and investing, often take a backseat to the more enjoyable and exciting parts of investing, such as picking individual stocks.  Getting a solid system in place for allocating spare savings and making your money productive are the key to success however, assuming you understand why you’re doing it and stick to it through thick and thin.  Success is almost a foregone conclusion.  Just like diet and exercise, easier said than done, but only for those who are intentional about how to make sure it happens.