Managing money is not as simple as it sounds. Manage it, or it will manage you! The skills required to successfully manage your own money are not really taught in school, yet they are so important. So many books have been written on this subject yet the information that is shared is tough to follow. Gratuitous advice is provided by so many, like “Spend less than you earn, invest the rest”. How easy is that? Well first you have to earn more than you spend and in these tough economic times that’s not always that easy.
When you’re young and carefree, the farthest thing from your mind is saving for your retirement. There is nothing wrong with that. I sincerely believe one should enjoy their youth as much as feasibly possible. You might have a family to take care of, a mortgage to payback and the typical car loan. These are all important stepping stones in life for so many. However, the day will come when reality sets in and some serious financial retirement planning will be required. Some say, one should start planning and saving, to some degree, for their retirement between the ages of 27-30. The reason is – we are living so much longer than our grandparents or great grandparents. No one wants to outlive their available income stream during their retirement years.
Some of the basic money lessons I learned that helped me meet my retirement plan goals were:
- Lesson 1: Minimize the debt load, pay off those credit card balances monthly, and never ever just pay the minimum balance. I can honestly say that I never once paid interest on an outstanding credit card balance.
- Lesson 2: Live within your means, stick to your budget. A general guideline for determining your monthly budget is to allocate 50% towards your fixed monthly costs (e.g. rent/property taxes, food, utilities, etc.). Then another 20% towards some type of savings be it short term loan repayment or long term (e.g. retirement). Lastly the final 30% could be used for yourself to buy clothes, entertainment etc. Download a free copy of money management software and track your expenses against your budget.
- Lesson 3: When you are ready and saved enough for a down payment, buy that first house/condo. Grow your personal equity value.
- Lesson 4: Ensure you save 10% of your earnings every month for your retirement investment plan. Participate in your company’s matching contribution plans. Many companies will match any contribution their employees will make to a Defined Contribution Plan.
- Lesson 5: Be sure to set up an emergency savings account equal to 6-8 months’ worth of your expenses. Be prepared for that unexpected expense requirement.
- Lesson 6: When you have saved that first $100,000, find a reliable Financial Planner/Advisor who can grow your savings through the stock market with diversified blue chip company shares which pay out healthy dividends with growth opportunities in the stock price and its dividends. Make use of all of the tax avoidance investment opportunities available. In Canada, we have Registered Retirement Saving Plans (RRSPs) and the Tax Free Saving Accounts (TFSAs). Similar offerings exist in the USA and these should be taken full advantage off, again with the guidance of an experienced and trusted Financial Planner/Advisor. Keeping in mind, that any non-registered investments/savings, depending on your marginal tax bracket, for example, interest from Savings Accounts, Guaranteed Investment Certificates and Bonds, are taxed at the highest level when compared to capital gains or corporate dividends. Thus all the more reason to invest in a diversified dividend paying stock portfolio. You not only avoid paying higher income tax on your dividends you can also enjoy a 50% tax break on any capital gains you achieve if and when you decide to sell any of your preferred or common shares.
- Lesson 7: Real estate investment opportunities are out there but there is risk with over inflated market values, troublesome renters and unexpected maintenance expenses. However, there are Real Estate Investment Trust (REIT) stocks that deal with commercial real estate investments which pay out reasonable dividends and can appreciate when real estate markets are up. Best of all, there are no calls in the middle of the night from renters.
- Lesson 8: Life insurance is really required when you get married and then even more when you have children. Term insurance is the right choice. Our mortality is something we all have to deal with.
- Lesson 9: Learn how to prepare your own tax return. Purchase an Income Tax preparation software package and enter your own information and find ways to avoid paying tax through helpful tips and hints provided by the software. Income tax avoidance is totally legal. Income tax evasion is illegal. Everyone who wants to manage their own money needs to understand how much and why they pay income tax.
These are some very basic money management lessons that served me fairly well. Granted there is always room for additional risk/reward options given your age and as opportunities present themselves these can be pursued with an open mind, again with the guidance of a reliable and trustworthy Financial Planner/Advisor.
In an upcoming blog posting, I plan to conduct an interview with my personal Financial/Investment Advisor where I will document her responses to some key questions on what’s involved in financial planning and investment advice for one’s retirement.