How can I protect and expand my financial nest egg? This one question has spawned the largest and most lucrative businesses in the U.S. is telling people how to spend their money. Financial advisers, money gurus, self-help experts and an entire financial services industry have made a ton of money — oftentimes your money — selling tips and tricks to help you build your nest. Some of them are right….and some of them are very wrong. We are NOT financial advisers, but we do try to encourage commonsense in consumer retail markets. Here are some links to financial advice bloggers who we think have some common-sense and thoughtful ideas about how to preserve and build your savings, along with some of their best tips:
1. Go with the tried and true. There are some very compelling and long-tested ways of building and protecting your nest egg. They are listed at numerous non-profit and government sites — for free — including the U.S. Department of Labor. They may not be sexy or the “new big thing” but they’ve worked for decades if not hundreds of years. They include creating goals and sticking with them, knowing your needs, use employer pension plans, invest in IRAs and understand your Social Security options. They are all sound advice, as are many of the other tips at these government-sponsored sites.
2. Be sensible with your spending. If you’re saving 10% or more of your pretax income toward retirement, you are doing pretty well. Even if you’re retired, you should be limiting your annual portfolio withdrawals to 5% of your nest egg’s beginning-of-year value. Another decent rules is the 50/30/20 rule. The 50-30-20 rule puts 50 percent of your income toward necessities, like housing and bills. Twenty percent should then go toward financial goals, like paying off debt or saving for retirement. Finally, thirty percent of your income can be allocated to wants, like dining or entertainment. These percentages help create a balance between obligations, goals and splurges. Sites like The Simple Dollar are good sources for these basic but still useful rules of thumb.
3. Don’t carry life insurance unless you’ve got children or dependents. Term-life insurance may be acceptable if you have young children and do not have sufficient savings to care for them in the event that something goes wrong. But once they’ve left the nest….or your savings have been built up sufficiently, it is time to kick insurance to the curb. There are numerous reasons that insurers push you to buy life insurance, but their argument always boils down to “peace of mind”. Making “investments” so that you can sleep soundly is generally a questionable investment strategy. G.E. Miller’s 20-something finance presents some useful financial information in easy-to-understand fashion.
4. Use a Fee-Only Financial planner. Rather than one who gets a commission every time you invest in something, go with someone who will charge you a fee-per-service. Although you’ll need to closely monitor their fees, as you would do with your monthly credit card statements. A decent source of financial planners is National Association of Personal Financial Advisors. However, often times, word of mouth is the best way to find a planner.
5. Don’t buy individual stocks. There’s a very fine line between investing and gambling and it is easily crossed when purchasing individual stocks. If you decide to “bet” on individual stocks, you’ve got to do a lot of research and really know the rules of that industry’s particular game, according to Harry Campbell who publishes a Millennial-oriented financial blog called Your Personal Finance Pro. It risky to bet heavily on any one stock, and I don’t fool myself into thinking that I can create a collection of stocks that will outperform the overall market or the best mutual fund managers. Similarly, be careful about buying stocks based upon suggestions by friends and family. As tempting as that can be, the enthusiasm of others often is a sign that the investments are overvalued.
6. Don’t invest in actively managed mutual funds. Writer Jonathan Clements claims that there’s a mountain of evidence that most professional money managers fail to beat the market, once you factor in their investment costs. For instance, in 2014, just 13% of large-company stock funds outpaced the Standard & Poor’s 500 stock index, according to the investment research firm Morningstar, Inc. That won’t be true every year, but it’s true often enough that I stick with passively managed index funds, which allow me to capture the market’s performance while incurring low annual expenses. Also, index funds generate modest annual tax bills because they don’t have a big turnover in their holdings each year, as many actively managed funds do, so they’re slow to realize taxable capital gains. And when they do, the gains will be taxed mostly at the lower rate that applies to long-term capital gains. Unless you’re in the top federal income tax bracket, your long-term capital gains and qualified dividends are likely be taxed at 0% for the lowest bracket or 15% for other bracket.
7. Minimize debt. Where you can, avoid borrowing money—even mortgage debt. While that the mortgage-interest tax deduction is a great tax break, you can still do better. Home loans with 15 year terms are a decent forced-savings plan, but longer terms make it hard to ever really own your primary real estate asset. If you have a 30-year loan, think about making extra principal payments on your mortgage in order to escape the mortgage and its interest costs more quickly. Get Rich Slowly offers some timely and wise advice about financial matters, including why you definitely don’t want to keep up with the Joneses.
8. Avoid timeshares and vacation homes. Buying a second home for your own use may be a good way to spend your money if you like to vacation in the same place year after year. But don’t expect that vacation home to make you wealthier……usually better deals can be found on travel websites or cool tips at our blog.
9. Never retire. Work part time, volunteer and continue friendships that may have been nurtured during prime working years. Retirement shouldn’t mean that you are retiring from the life you have created during your working years. The most successful retirees continue to make goals for themselves; perhaps it means spending travel time volunteering all over the world teaching English to other cultures or volunteering at non-profits throughout the world for “service trips”. If you must retire due to health, family or uncontrollable job circumstances, stay active and be engaged in the world. Keep learning…..never stop learning.