- I need a new dress for the party!
- I want a new phone for Christmas.
- Need to stop at the grocery store?
- Do you want to build a snowman?
Heard any of those? Of course you have! When you hear “need.…” or “want….,” do they feel different? If you heard your friend say, “I need a new dress for the party!” do you believe she is expressing a true need, or is it really a want?
According to Webster’s dictionary, a need is a necessity or requirement. Want, on the other hand, is a desire to possess or to wish for. The difference seems clear, but it becomes muddy in life. We often use the two words interchangeably, but actually they do not mean the same thing.
Have you ever gone shopping for something you truly need, let’s say a new winter coat, and come home with not only the coat, but also new pants or a sweater? If you are like me, it is hard to resist temptation when there are so many enticing things on display. If you are more comfortable shopping online, it can be worse. If you order one item from a store, ads for other items from the same store or similar items from other stores appear like magic. No matter what media source you use, you are inundated with ads and commercials every single day. They all want to convert a want to a need. Spend, spend, spend!
How successful are you at resisting? Do your shopping trips ever end up with regret that you spent too much money? Are you shocked when you get your credit card bill or swear that someone took money from your wallet? It is not easy to stick to a budget or a shopping list—fulfill the need, but not the want. You can count on a temptation of some sort no matter how or where you shop.
I bet you make a list when you shop for groceries. If not, do you find that you have plenty of chips and other snacks (and buy more!) but nothing to make a salad. Hmmmmm. Been there, done that. There are so many yummy looking things! If a grocery list helps control impulses and assures that you eat a balanced diet, why not make a list when shopping for clothes or holiday gifts or even investments?
Where do you start? A good place to start is with what you already have on hand. If you want your grocery shopping dollars to stretch farther, knowing what you already have is essential so that you only buy to fill in the gaps. A quick look in the refrigerator and cupboard helps. It is the same with investing.
What Do I Already Have?
Why is it important to know what you already have when you are investing? Think of it in terms of financial GPS. How do you know you will reach your financial goals if you have no idea the starting point? Both the starting and ending points are necessary for a successful journey. (Financial goals are discussed in my blog: Set Your Investment GPS). What you already have is perhaps the easiest investing question to answer.
If you are just beginning to think about investing, then the answer may be, “I have nothing”. If your parents or grandparents or other relative purchased some stock or a mutual fund for you, you have a start. If you have a company retirement plan and have been stashing some of your pay in an account with your plan, you have a start. Maybe you inherited a portfolio—your grandparents created a trust, and you are the beneficiary—or know you will at some point in time. No matter your situation, it is imperative that you know what you already have before you do anything else.
Why? Maybe what you already have makes sense for you, and maybe not. Gather the most recent account statements from each of the places you currently save or invest—credit unions and banks, brokerage firms, mutual fund companies, etc. If you know, or have been told, that your relatives are investing for you, but they are resistant to sharing information (not unusual), assume those investments are not part of your picture. You can add them later.
If you are married or have a partner, the two of you must decide if you are going to keep your financial lives separate or combine everything in one big pie. If you choose to combine, then gather the statements for your joint accounts, as well as your partner’s individual accounts. When you have the statements gathered, list everything you already own. A sample template follows:
|ABC Bank||Checking Account||$100|
|DEF Credit Union||Certificate of Deposit||$1,000|
|TUV Broker-Dealer||Money Market||$5|
|XYZ Investment Company||Mutual Funds||$5,000|
Your account statements may not use the same descriptions as the chart. If the type of account or investment is not clear, use either the name or its trading symbol and do an online search. For example, the names do not always tell what is in a mutual fund or exchange traded fund (ETF). It could be stock, it could be bonds, a combination, or neither. Digging deeper will clear it up. If possible, separate what is currently in stock, what is in bonds (sometimes called fixed income), and what is in savings or money market accounts. Set aside for now those things that you can’t identify. When you have a chance, do further research.
A Starting Point
Now you have a starting point! What do you do with that information? From it, you will be able to determine the gaps for your investment shopping list. Please remember that stores that sell saving and/or investment products are just as determined to turn a want into a need as any other store. Having a clear idea of what you need before you go shopping for stocks or bonds is just as important as when you go grocery shopping.
If you have not already read it, please refer to my blog, The Key to Investing – Know Yourself. Take time to complete a risk assessment or even two. Depending on the source of the assessment, a mix of stocks and bonds may be suggested, such as 60% stock and 40% bonds. If you have a suggested mix, compare it to your current inventory. In the above example, let’s assume that both mutual funds listed contain only stock. That means $13,000 of the $18,605 portfolio is invested in stock, which is 70%. If your target for stock is 60%, you do not need to buy any more stock; in fact, you have too much stock.
If your portfolio is similar to the one above, you can concentrate on adding bonds and cash instruments (CDs, money markets, etc.) until the ratio is 60% stock/40% bonds. You could also choose to sell some of the stock to get to the target mix, but there may be tax consequences if you do that so be cautious. Unless your stock is held in an IRA or other retirement type of account which defers taxation until funds are removed from the account, any sale could generate either short or long-term capital gains. Double check before you sell anything.
After this exercise, you have a starting point for investment shopping. You either start with nothing or you fill in the gaps until you reach your target. Even when investing, the difference between wants and needs can be confusing and lead to overspending and buyer’s remorse. Especially at this time of year, a disciplined approach is essential to any type of shopping.
Read more of my blogs and review the description of my book, How to Dress a Naked Portfolio: A Tailored Introduction to Investing for Women. Men can learn from it, too!
Beverly J Bowers, CFP®