Let’s face it, while some people love to go spend hours reading about investing and following the nuances of the markets, most people really don’t want to spend any more time worrying about their finances than they have to. They pay their bills and keep their receipts for taxes, but they really don’t want to worry about tracking their money.
Unfortunately, bad things happen to people everyday who don’t do some minimal things to prepare for their future and properly utilize the money they have coming in. They end up losing their home when they get laid off from a job for a few months. They find themselves buried in credit card debt with no way to dig themselves out. Their children end up taking out tens of thousands of dollars in student loans or they end up at retirement age unable physically to work anymore and face living in poverty. Worst of all, they lose a loved one unexpectedly and need to change their lives radically because of the loss of income.
Today I thought I would give five simple things you can do to make your financial life better. None of these take a great deal of time, but even if you do nothing else, just do these five things and you’ll be better off than 90% of the people out there.
1. Get 20-year level term life insurance for you and your spouse. The worst thing that can happen to a family is for the primary breadwinner to die unexpectedly leaving the spouse to find a job after years out of the workforce while also trying to pay for childcare and all of the other expenses on their own. The next worst thing is for the spouse who takes care of the children to die, forcing the working spouse to find a way to pay for childcare and all of the thousands of other things the caretaker spouse would do. For only $200-300 per year a healthy 30-year old can get level term insurance of $500,000 to a million dollars. Should the unthinkable happen, this money can be used to pay off the house and then the rest invested to replace the income of the individual who died, in the case of the working spouse, or hire a nanny, if it is the caregiver who dies. While life won’t be the same, at least things will be the taken care of financially. Get a policy that provides at least 10 times your income today!
2. Sign up for the 401k and contribute at least 15% of your pay. Studies have shown that those who put away 22% of their income (including any company match) for retirement will end up with enough to make it through retirement comfortably almost all of the time. Start from the beginning putting money away and you won’t ever miss it. Wait a few years and you’ll find that all of the money will be spoken for and it will be much more difficult. As far as investing goes, just distribute it among large and small cap funds, with perhaps 10% or so in an income fund like a REIT or a bond fund and you’ll be just fine. Choose the funds with the lowest costs you can find. If you want to goose your return a little, rebalance it once a year so that you are buying more of funds that are down and selling off some of the funds that are up.
3. Save up a 20% down payment and limit your house payment to 25% of your take home pay on a 15 year fixed mortgage. Putting down a 20% down payment will take thousands of dollars in mortgage insurance fees off of your bill. A 15 year fixed loan will get you a better interest rate and mean that you will have paid off your home about the time the kids are starting college. If you don’t have kids, that will give you a lot of extra money to put towards retirement, invest, or just enjoy in your forties and fifties.
4. Buy four-year old used cars for cash. Invest the money you lose in depreciation on new cars, even subtracting out a little extra money for repairs, and you can retire a millionaire just from the investments. Today’s cars will easily run reliably for 12 years or more, and even if you sell the car at eight years you’ll be saving thousands on depreciation. Pay cash instead of taking out a loan and you’ll save another million dollars over a lifetime. If you aren’t a millionaire, you can’t afford a new car even if you can afford the payments.
5. Put away 10% of your income each month. Start out putting money into a cash account until you have at least $10,000 in cash. After that, send the excess into an index fund and spend no more than 5% of the value of the fund each year for anything but emergencies. Do this and you’ll have the cash you need to pay for new used cars, medical emergencies, new air conditioners, and other emergencies. You’ll also have money for vacations. By the time you get into your forties you’ll have several thousand dollars extra each year to enhance your lifestyle. You’ll be able to do everything other people are doing without taking on the debt that they are.
Anyone have other easy tips?
Please contact me via firstname.lastname@example.org or leave a comment.
Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI
Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.