5 Good Financial Lifetime Decisions
I help a lot of clients with their financial decision making. In some cases, clients need to save money on taxes and in other cases they want to know how to pay for college educations or how to have more money to spend in retirement. However old you are, the financial decisions you make affect your future. A lifetime of good financial decisions will improve your chances of fulfilling your goals and meeting your family obligations. Here are 5 decisions that will put you on the road to financial success!
1. Start Saving when you start earning.
As soon as you start earning money you need to start saving it. If you start early, I recommend saving 10% of your salary. If you have access to a 401(k) or it’s equivalent at work, then put enough in it to get the company match. Save the rest in a ROTH IRA until you hit the limit and then save the rest in a savings account until you have enough to invest. Save your 10% for your entire life, increasing the rate if you can. This savings will compound and by the time you get to middle age you should start having real wealth. This greatly increases your financial flexibility. If you save your 10% with a combination of salary reduction (401(k) contributions) and automatic savings deposits whenever your paycheck hits your account, you won’t even notice the money missing. Pay yourself first!
2. Have an emergency fund
An emergency fund pays for emergencies such as job loss or your car or a major appliance breaking down. Something that might really hurt you if you don’t have the emergency fund. A credit line or credit card debt is not an emergency fund. In fact, when people come to me who have trouble with credit card debt, it was not usually an issue of profligate spending. It usually started with a leaking roof or broken car and no emergency fund to pay for it. How much should your emergency fund be? Most financial publications recommend 3-6 months of expenses. I tend to recommend 6 months for most people. How should your emergency fund be invested? I always recommend a high-yield money market or savings account. Something that’s FDIC insured and readily available if needed. If you don’t have an emergency fund, then use your 10% savings to fund one.
3. Don’t go into debt for depreciating assets
I’ve talked about good and bad debt in previous blog posts. Debt is only good if you use it to invest in an asset that might appreciate. A home mortgage is a good example, since the property that your home is on will appreciate in value. Education is another good example, since a good education or a higher degree can raise your (or your children’s) lifetime earnings. Credit card debt to buy a refrigerator is bad debt, even though you might really need that refrigerator. But the refrigerator is not worth what you paid for it as soon as you bring it home and it will depreciate in value from there. What if you really need that refrigerator today? First see number 1 and 2 above, but if you really don’t have the money, buy used. Check Craig’s list and I bet you will find a refrigerator for sale. Then start saving and buy a new one when you can afford it. Sure, you deserve a new refrigerator, but if you can’t afford one then you can’t afford one. Try to pretend that credit is not an option for you. Substitute car, furniture, or any other appliance for refrigerator above. Don’t spend money you don’t have.
4. Do a yearly budget, not a monthly budget
Just because your monthly budget balances doesn’t mean that you aren’t going negative for the year. The problem is that not all expenses are monthly. I’m not telling you to make your bills monthly, in fact I hate monthly payments because they hide what you really spend. So let’s say you pay $20/month on Netflix and Hulu. It’s only $20/month, so its not a big deal, right? Well, if you were doing a yearly budget, you would realize that you’re spending $240/year on streaming movies. Add in charges for Pandora, Amazon Prime, HBO Go, and other services and you are starting to talk about real money. Always budget on a yearly basis and include your 10% savings in your budget along with taxes, insurance payments, car repairs, home repairs, etc.
5. Buy a house and pay it off before retirement
OK, this one is not a sure thing, but it’s pretty good. You need to live somewhere and at some point you will probably settle down somewhere for a while. With it’s mortgage deduction, the US Federal government gives you a discount on your mortgage rate. And because a mortgage is secured by your home, a mortgage has one of the lowest rates available for consumer debt. As you pay this mortgage back, you are creating home equity which is a form of savings. Once you retire and your mortgage is paid off, that home equity can be a useful tool. Some or all of it can be used to ensure a comfortable retirement even if you continue to live in your house. Uncle Sam gives you another deal by not taxing you on up to $500,000 of gain on your primary residence. For most Americans, their home is a major part of their wealth. Even if you have to move around for your job, as long as you stay put about 5 years, it is a good deal to buy a home for each move. Over a typical 30 to 35 year span of working life, your home will likely increase in value at least by the rate of inflation and often by much more. I do recommend at least a 15-20% down payment and make sure you are not overextended on the mortgage. As long as you don’t buy too much house and don’t take equity out of it to spend, owning a home is a really good financial decision.
Improving YOUR Financial Decision Making
It’s simple! A CFP® Financial Advisor such as myself can help you with all your financial decisions. You need to be very careful who you take your financial advice from. Friends and relatives might mean well, but do they really have the expertise you need? You need a Financial Advisor who knows what they’re doing to be with you every step of the way. Please contact me for any questions or to find out more about Comprehensive Financial Planning.