5.3 Saving and Investing for Education, Housing, and Retirement Goals

Couples who share money can avoid a lot of conflict by talking about long-term goals together. Automatic transfers and payroll deductions into retirement accounts make saving happen without relying on willpower.

• College or other training: where to go and what to study depend on career goals and money available. It's usually paid for with a mix of savings, student loans, scholarships, grants (which don't have to be repaid) and work-study jobs. Federal student loans often have lower rates and more flexible repayment than private loans, and some are subsidized, meaning the government pays the interest while you're in school.
• Housing: renting or buying depends on preferences and money. Buying usually means a down payment from savings plus a mortgage loan. The monthly payment depends on the loan size, the repayment period and the interest rate, which can be fixed or adjustable.
• Retirement: when and where to retire depends on preferences, health and money. Retirement income usually comes from Social Security, employer retirement plans, personal investments and any continued work.
• Charitable giving: people choose causes whose missions they support and how to give (one-time, recurring or in a will). Donations may bring tax deductions.

Compounding means earning returns on your past returns, not just on the money you put in. At an example 5% a year, $1,000 grows to about $1,629 in 10 years and about $4,322 in 30 years. The longer money has to grow, the more of the final amount comes from growth rather than from your own deposits. That's why people who start investing young and stay invested usually end up with more than people who start later.

People can hold savings accounts and CDs, individual stocks and bonds, or mutual funds, which pool many investors' money to buy many stocks and/or bonds. Insured accounts and guaranteed-income assets are low risk with lower expected returns. Individual stocks are higher risk, because their value depends on one company's success, but are expected to return more over time.

Four things shrink returns. Fees: transaction fees, management fees and advisor fees. Most people buy stocks and bonds through a broker; discount brokers charge less but give less advice than full-service firms. Taxes on interest, dividends and capital gains. Inflation, which lowers the real (inflation-adjusted) return; investors look at both the nominal (unadjusted) return and the real return. And behavioral biases: overconfidence can lead people to take needless risks, and loss aversion can make them sell in a panic at a loss.

A plan weighs how much money the goal needs, how much can be saved each pay period, the time horizon (how long until the money is needed), risk tolerance and expected returns. With a long time horizon, people can hold riskier, higher-return assets because they have time to recover from downturns. With a short one, safer assets make sense, since being forced to sell in a downturn locks in losses. People with low risk tolerance lean toward insured accounts and CDs; those with higher tolerance lean toward stocks and mutual funds.

Many advisors recommend diversification, spreading money across assets with different risks and returns, to seek long-term growth without taking on too much risk. People compare their results with a benchmark such as a stock or bond index. People choosing a financial professional usually compare licenses, certifications, education, experience and cost.