Sorry, there's no magic `formula' for investing

Your Money


I catch your column in the paper every now and then, but not always. So I don't miss it, please e-mail me the formula for figuring out how much to save and how to invest.

I am sorry I can't e-mail you any formula because I address reader questions only through this column - and, more important, because no simplistic formula can provide a satisfactory answer.

But I am glad you asked, because your question is representative of literally thousands I've received in 10 years of writing this column. Largely, I have found that most readers long for formulas and sound-bite type answers to financial questions. They want a quick thumbs-up or thumbs-down to a financial strategy or product rather than the almost always more appropriate answer, "It depends."

And I am afraid I agree with Jonathan Clements, personal finance columnist of The Wall Street Journal, who wrote a couple of months ago that most people aren't really interested in educating themselves about financial matters but want to be told precisely what to do.

That's too bad, because the business of financial writers is to explain and educate as well as we can, to present facts and lay out the pros and cons so readers can make better-informed decisions.

Only you can decide what's best for you, either on your own or with the guidance of a competent financial adviser who spends the time needed to get to know you and help you establish your investment priorities.

Many people who ask questions or seek financial advice do so without a clear understanding of what they want to accomplish or what their most important goals are.

If you don't know what you are saving or investing for, how much it is going to cost you, and when you will need the money, how can any formula be of any help?

"My experience shows that the vast majority of people do not know where they are trying to go or what to focus on," said Larry Frank Sr., a certified financial planner in Roseville, Calif., and author of the book Wealth Odyssey: The Essential Road Map For Your Financial Journey.

One of his main points: Financial planning is a process rather than a collection of separate products or issues.

"People are conditioned to think about the products that solve their concerns, yet they have not adequately determined what their concerns are, or what their priorities are among those concerns," Frank said.

In practical terms, that means most financial products - different types of investments or retirement accounts or insurance policies or annuities, for example - are not "good" or "bad" in themselves but rather appropriate or inappropriate in the context of your goals.

Another problem is that even when people say they have clear goals, their actions belie their words.

"People make decisions that undermine their goals every day," said Mari Adam, a certified financial planner in Boca Raton, Fla.

For example, they may say their goal is to retire at age 55, and then they stretch their budgets and spend $50,000 on home improvements they are unlikely to recoup if and when they sell.

That doesn't mean the expenditure was necessarily "bad." Perhaps the home improvements will bring more satisfaction than retiring at 55 would. But you have to know that.

"If your mind is clear as to what you are trying to do, if you can say what you want out of life and make your money move in that direction, you will be happy," said Adam, a self-described saver whose own priorities include protecting her children financially, providing for their college education, and having a reasonably comfortable (but not extravagant) lifestyle, now and in retirement.

Know your goals and priorities. And spend, save and invest accordingly.

If saving for retirement is indeed your most important financial goal, for example, contribute to a retirement account first, then budget for current expenditures with the money that is left.

Humberto Cruz writes for Tribune Media Services.

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