- Shift the paradigm. Remove the mindset of “I make this amount, I spend this amount, and whatever is leftover I may get around to saving.” Focus on your life goals and make this shift: “I make this amount, I need to save this amount for my life goals, and I will spend what’s leftover (my rent/mortgage, groceries, leisure).” Live within in your means and never spend more than you make!
- Use credit cards (consumer protections and earn points) but be sure to pay off the balance each month. If you have current credit card debt, attack it each month by paying more than the minimum payment and/or the highest interest rate cards first. Try your best never to fall into the credit card trap again!
- Create a “safe and sound” fund. Build a cash reserve of 6 months (or more) of your living expenses. Consider using a separate account as a second-tier cash reserve account that may earn a bit more interest.
- Save, Save, Save. Save at least 10% of your income each paycheck. If you can save more, do it!
- Take advantage of your company’s retirement plan. Make sure that you contribute at least up to the company match, if applicable. Tax deferred growth means that you will not have to pay taxes each year so that money continues to compound without the burden of paying taxes until money is withdrawn in retirement.
- Create additional buckets of money by opening/funding a Roth IRA as well as a non-retirement investment account. Contribute each month. Talk to your employer about if Roth after-tax contributions are allowed in your retirement plan. While some individuals may not be eligible to contribute to a Roth IRA due to income limits, they may be able contribute to the Roth component of the retirement plan, if allowed by their plan. (There may be other potential strategies to fund Roth IRAs for high income earners, but one must be careful and understand the tax rules!).
- What to invest in? Keep costs down by investing in exchange traded funds and/or index funds. Match your goals to your investments. Diversify by having the right mix of cash, bonds, and stocks. Keep in mind that you may need your money to last 30+ years throughout retirement, thus the need to outpace inflation.
- Set up 529 College Savings Plans for each of your children as soon as they obtain a SSN.
- Ensure that you have adequate life insurance. If money is tight, consider term life insurance for low premiums and high death benefits for the years when you require the most coverage and need the biggest bang for the buck, especially while the kids are young.
- Your most valuable asset is your ability to earn a living. Make sure that you have adequate disability coverage and understand the taxability of potential benefits. Ensure that you have proper coverage in other risk areas (homeowners, renters, auto, umbrella, etc.). Have an independent broker review all insurance coverages to determine if your premiums are competitive and if you have the proper insurance for your unique situation.
- Establish (at least) three estate documents (a will, a health care power of attorney, and a durable power of attorney). Be sure that you name beneficiaries on any retirement accounts and life insurance. In addition, confirm that you have named beneficiaries on your employer-sponsored retirement plan.
- Control your emotions! Do not panic during times of market turmoil. There will always be some type of apocalypse du jour or negative news that could get you off course. Stick to the plan. The biggest determinant of long-term, real life investment outcomes is investor behavior.
These tips are meant to be general guidelines for people interested in building a solid foundation of financial success. Certain items may not apply to your specific situation. If your situation is more complex, you should meet with a CERTIFIED FINANCIAL PLANNER™ practitioner.