You've got your goals set, you know the rule of 72, your budget is on a spreadsheet at home and now all that's left is socking away that dough. But where do you start?
The answer will be different for every person. Depending on age, income, openness to risk the choices are infinite. However, here are some do's and don'ts for the long term that are a safe bet:
The Basics - 3 Do's and 3 Don'ts- DO - Have 3-6 months of your expenses in cash
If the average person lost his/her job today and continued to spend at their normal rate, he/she would be out of cash in 15 to 30 days. How long would you last?
Most financial advisors recommend taking your monthly expenses and having 3 to 6 months of cash as a reserve in case of emergency or job loss. This is not a "wish list" savings or a "vacation fund."
This money is there so when the unimaginable happens, your mind will be free to fix the problem.
- DON'T - Put that cash into a savings or checking account
Depending on where you bank and how much money you have, this may be the only option when you first start, but getting 0.4% interest in a savings account is almost as bad as keeping it under your bed.
If possible, put the money into a money market savings account offered by most banks and credit unions. These usually pay a higher interest rate (up to 3%). However, they usually require a minimum balance ($1,500 - $2,500) and only allow three to six withdrawals per month.
Money market accounts are insured by the FDIC like other bank accounts. Just make sure you don't go below your balance and incur fees.
Once you've saved the entire 3-6 months worth of interest you may want to consider moving that money into a CD (Certificate of Deposit) which will pay even a higher interest rate. However, you will not be allowed to touch this money until the CD matures (from 1-month to 5-years depending on your selection) without a penalty.
- DO - Open a ROTH IRA (if your company does not have a matching 401K plan)
A young person can do a lot of good by investing in a ROTH IRA as early as possible. This is a retirement/savings account provided by almost any financial broker that can be invested into stocks, bonds, mutual funds, CDs, or even real estate! The money put into this account grows tax-free and all gains can be withdrawn tax-free after the age of 59-1/2.
You are allowed to contribute $4,000 a year to the ROTH if your income is under $100K per year (if it's over $100K per year YAY! You must have written goals and have great focus. Find a good financial advisor). A 25-year-old contributing $4,000/yr. for 40 years will have $1.1 million at the age of 65 (considering an average of 8% interest) that can be withdrawn TAX FREE! Not too shabby.
"What if I don't live 'til I'm 65?"
"I want to enjoy my life NOW!"
Two quotes I hear quite often when this subject comes up.
True, some of us will not make it to 65, but according to the U.S. Social Security Administration currently 72.3% of males and 83.6% of females do. So the odds are in your favor.
If you're in a pinch, the money contributed can be withdrawn tax free, but the earnings cannot. If you choose to withdraw the earnings before age 591/2 there is a 10% penalty plus a tax bill.
You can read more about the ROTH IRA at www.rothira.com
DON'T - Stick your money into risky investments, looking for a "quick buck."From the 1600's Tulip Bubble, to the 1857 Wall Street Crisis, to 1929's Wall Street Crash, to the Japanese Real Estate Bubble, to the Dot Com Bubble of the 1990's investors will always be bit by the "quick buck."
I believe in "get rich slow" and having a balance between wealth, happiness and responsibility. Your actions today will have an effect on your personal life, the life of your children, and your children's children.
Most people reading this column do not have the time, interest or know how to play the stock market (myself included). The company Qualcomm's stock went from $13 in 1991 to $200 in 1999 back to $35 in 2003. Although an exciting ride, this is no territory for a novice and probably not a place to bet your family's future.
- DO - Pay off and limit your credit card accounts
Putting away $200 a month into a money market account that is giving you a 3% interest return on your money will mean nothing if you have outstanding credit card debt that is accumulating interest at 16%.
Here's where the basic principle of financial well-being comes into play:
- IF YOU'RE UNABLE TO PAY CASH, DON'T BUY IT! (I guess that makes 4 don'ts)
Credit card debt is almost ALWAYS the biggest obstacle to finding the funds to start saving. Tackling this monster and continuing to stay out of debt will almost guarantee your financial freedom.
- DON'T - Close your credit card accounts
If you have multiple accounts and choose to close them you will be shutting down your credit history which can affect your credit score. The better solution is to pay off the balance and forget about them. Keeping the account active will preserve your credit history.
Again, I invite you, the reader to leave any suggestions or comments about strategies you've used in the past that may or may not have been helpful. I appreciate everyone's honest feedback and continued support thus far.
