I've been a writer for the Illinois CPA Society's INSIGHT Magazine for several years now, and in that time I've written about a broad variety of topics relating to personal finance, investing, the economy, professional development and more. It seems this experience has led many of my family, friends, neighbors and others to ask for some insight into how to handle their own financial futures. I wrote an article geared towards young professionals for INSIGHT called "Five Ways to Save", but really, the same tips can be expanded to apply to individuals of all ages looking to establish a financial plan.
Whether the economy actually is or isn't improving, bulletproofing your budget and solidifying your savings is going to be increasingly important for a successful future. Here's how to get started.
Maximize Your Earnings
If you're lucky enough to be employed by an organization that offers employee benefits, making the most of them is a must. Perks like insurance, employer-sponsored retirement plans and pre-tax payroll deductions can seriously trim out-of-pocket expenses and free up more cash to save and invest.
In most cases, a 401(k) is your best benefit when it comes to your financial future. Aside from the up-front tax savings, it's also one of the easiest ways to save for retirement. The key to 401(k)s is to take note of your employer's match. I strongly encourage you to contribute at least the minimum amount to receive the maximum match -- and more if you're able. Otherwise, you're leaving free money on the table.
If you feel savvy enough, take your 401(k) planning a step further by looking closely at the investment offerings. Many employer-sponsored retirement plans have a limited pool of mutual funds for you to invest in. Since this pool typically contains similarly performing funds, my suggestion is to invest in part based on the lowest expenses (always keep your goals and risk tolerance in mind, too). In my case, this is a Dryden S&P index fund with a net expense ratio of 0.62% -- about 0.5% less than the next similar fund available and more than 1% below the most expensive fund. You'll be surprised, but oftentimes low-cost index funds outperform more expensive managed funds.
Of course, it may be many years -- even decades -- before you can use your 401(k) funds without penalty, but other pre-tax payroll deductions can put more money in your pocket now. For example, having a portion of your salary deducted before payroll taxes for the purchase of transit fares, health club memberships, or a health savings account immediately reduces your taxable income, cuts down out-of-pocket expenses and simplifies your budget by eliminating the need to allocate the funds yourself.
And, when it comes to payroll taxes, if you're receiving a sizable tax return from Uncle Sam, try adjusting your withholdings. A big tax return may seem like a nice bonus, but realistically you just lent the government all of that money for free!
Look at the Long-Term
Even after maxing out your 401(k), you will likely need to build a bigger retirement nest egg. This is where a Roth IRA comes in handy. While a 401(k) offers a nice up-front tax deduction, the contributions and any earnings are taxed at redemption. Since your paycheck (i.e., take home pay) is already taxed, you need to be tax-conscious when saving and investing what's left. By utilizing a Roth IRA, your contributions and any earnings grow tax-free. A Roth IRA also grants you much greater flexibility in investment choices: stocks, ETFs, mutual funds, bonds, bullion, etc.
Personally, I like to invest my Roth IRA funds in dividend-paying stocks (I reinvest the dividends) and others that I think offer very high growth potential so I won't have to deal with the tax consequences later on. I also try to invest in diversified areas that I see as offering long-term value and growth based on global trends, my risk tolerance and investing timeline. Just to illustrate, my Roth IRA portfolio contains some of the following stocks as core positions: Altria (NYSE:MO), McEwen Mining (NYSE:MUX), Phillips 66 (NYSE:PSX), Raytheon (NYSE:RTN), Seadrill Limited (NYSE:SDRL), Seaspan (NYSE:SSW), and Verizon (NYSE:VZ).
Stay Safe in the Short-Term
While planning for retirement is crucial, addressing near-term needs is just as important. Funds for the likes of buying a house or paying for an education within the next few years should never be in risky savings or investment vehicles.
With interest rates so low it's hard to recommend doing this, but building a ladder of FDIC-insured Certificates of Deposit (CD) with this money is one option. With a CD you can secure funds over variable timeframes to guarantee income for your future needs. CD interest rates are commonly higher than standard savings accounts because you are securing it for an extended period and Bankrate is a nice resource for locating competitive interest rates on a variety of CDs and other savings accounts.
Another option that I personally favor over CDs are government-issued I Savings Bonds. I like I Bonds because their interest rate is based on inflation, you can buy them at face value and the minimum term of ownership is only one year. Yes, if you redeem them before five years is up you must forfeit the three most recent months of interest, but that is a small penalty to pay for a secure investment that will out earn (at least currently) any CD or standard savings account. What's more, if you like their performance, you can hold them for 30 years and there are some additional tax-saving benefits.
Save for Rainy Days
Another way to ensure your financial future is to avoid substantial setbacks. I've learned the hard way that setting aside a portion of your paycheck for emergency reserves is tough, but trying to cover unexpected expenses without is a lot worse. Typically, six months worth of expenses is the recommended amount to set aside, but I'd try to build up one year's worth of expenses if you can.
I think it's best to stash your emergency reserves somewhere accessible in case you need it quickly, but keep it out of sight so you're less tempted to dip into it. I personally keep my emergency funds in an online savings account through my credit union. The account is linked to a debit card and my checking account in case it's needed immediately, but it earns a higher rate of interest being online and at a credit union-historically credit unions pay higher interest rates than local brick-and-mortar banks. You can also check out other online banks like Ally and ING Direct (my parents use and like Ally).
Put a Dent in Debt
No matter how much you earn or save, ignoring your debts will lead to a financial nightmare. Carrying a balance on high-interest credit cards or failing to pay down high-interest loans will quickly erase your savings and devour your paycheck. As a matter of practice, always pay the minimum amount to avoid incurring fees, added finance charges or other penalties. If you can pay more than the balance due, or the entire balance, do it! If you have long-term loans like a mortgage, auto or student loan, focus your efforts on paying down the highest interest rate debts first. You should also look into refinancing options considering interest rates are so low right now.
Being debt-free or at least minimizing it to a manageable amount will work wonders for you. It's very easy to overextend yourself which is why another important point is to establish an honest budget. Living within your means will help you avoid financial strains and help you stay on track with your financial goals. Simply put, buy what you need but spend less than you earn. And, if you happen to get a raise, save it; bump up your 401(k) contribution or boost up that rainy day fund.
This is by no means a complete guide to all of the investment and personal financial planning options or out there, but I hope it helps you get started or at least think about doing so.
Interested in adding precious metals to your investment list? Check out my other Seeking Alpha articles, including,"Beginners' Guide To Buying Metals."