It has been a crazy couple of years for the economy. The DOW was at 14,000 (in 2007). Then it was a little over 6,000 (in 2009). Now it's hovering around 12,000. Amid the oil scares, gold price spikes, unemployment fluctuations, and general global upheaval there is a lot of confusion about whether or not to invest... and of course (if you choose to), where to put your money.
Let me disclaimer here that I am not a Certified Financial Planner. In other words, I'm spouting off some thoughts as a CPA whose parents started me on a Roth IRA in middle school, but don't follow my advice, lose millions, and then come sue me. I don't have much money to be sued for anyway :o).
That said, I think there is a lot of confusion out there regarding financial planning, especially for my peer age group, which is out of college, and often debating grad schools/new families/buying homes. So what to do first? Pay off student loans? Pre-pay a mortgage? Save for retirement? And how do we create a budget? Below are some thoughts on what to tackle... in order of importance!...
1. Create a budget (easy to do... hard to stick to)
There's a CNBC TV show that I find interesting (although I think I'm one of approximately four total viewers), where a financial adviser named Gail Vaz-Oxlade visits couples in debt and gives them a budget and challenges to complete over the course of one month... if they do, she gives them $5,000 to help pay down their debt. Her whole shtick is that people who struggle to stick to a budget need to learn to live on cash, write everything down and keep budgeted cash in jars (a food jar, a transportation jar, etc) so you can visually see where you stand weekly. My parents actually did something similar with my brother and I when we were younger - we had savings/spending/church jars, each of which received 1/3 of our weekly allowance. The linked site to Gail's blog actually includes a very useful interactive budget worksheet, but the basic idea is that you save a minimum of 10%, and spend no more than 35% on housing, 15% on debt repayment, 15% on transportation, and 25% on "life" (the variable stuff like food/clothing/fun).
So that answers question 1, how much should I put toward student loans/other debt (max of 15% of your income, for those who lost interest and started skimming - you know who you are!) But what if you're not in massive debt and have some cash set aside? What to do with it?
2. Establish a liquid emergency fund. Stash enough away to cover 6 months of expenses - and keep it liquid enough that you can easily get to it in an emergency (i.e. not in stocks!). The recent lay-offs and scary unemployment numbers are enough to drive home to importance of this one.
3. Start saving for retirement I know this one sounds like a bummer (what fun is saving if you don't get to do anything with it for 50 years?!) but starting early here is critical... due to our friend, the strange Compounding of Math. Let's say you save $50,000 and it earns 6% a year. Save it when you're 45 and you'll have $160,356 at retirement. Not bad. Save the same amount at 35 and you'll have $287,175 at retirement. Ooo, sounding better! But wait - save the same amount at age 25 and you'd have $514,286 at retirement! Starting just a few years earlier makes a huge difference in what you'll end up with. And PLEASE PLEASE PLEASE put inenough money into your 401(k) so that you maximize any matching from your employer. It's free money. Enough said.
Roth IRAs are nice options because the earnings is tax free when you withdraw it at retirement. So you pay tax on the original $50,000 you invested, but that extra it earns along the way ($464,286, assuming this blog is rapidly frightening you into saving early for retirement and you opted for our 25 investment age above) is TAX FREE! Nice. Roth 401(k)'s are the same deal - you pay tax on the principle now, but anything it earns along the way is tax free. (If you're wondering what difference a Roth makes (and I'm pretty sure you're not), regular 401(k)s are tax free now to contribute, but principle and earnings are both taxed at retirement).
A scary statistic? Many retirement planners recommend saving 1.5x your annual income by age 35 to consider yourself 'on track' for retirement. But anything is better than nothing!
4. Save for yourself (or your kids)
So you're on a budget, paying down debt, saving for retirement, what now? This is the fun section, saving for yourself! You could start 529 plans for your kid's college (kind of like a Roth, investment growth is tax free if you use it for college expenses)... or that bigger house... or investing to build up a nest egg (mutual funds, money markets, CDs, bonds, treasuries, etc).
What are the different investment options, you say? Well, there's about a 2% chance (if I'm generous) that you've endured all the way to the bottom of this post, so I'll defer that excitement until that glazed look in your eyes fades slightly. Stay tuned for part 2 of the post. In the mean time, happy saving! Perhaps we could all plan now to take a cruise to Tahiti together when we're 80 on that well-saved surplus retirement money? :o)
No comments:
Post a Comment