Follow These Proven Budgeting Tips to Secure Your Retirement
By Paula Pant
Updated March 29, 2017
Getting solid financial footing requires you to focus on the most important elements of your money: saving and investing. But of course, that’s easier said than done.
What are the key tasks you should focus on when improving the state of your finances? Consider these 11 rules of wealth-building:
1. Keep at Least Three Months of Living Expenses in a Savings Account.
That's just a starting point. If you’re self-employed, work on commission, or work in an unstable industry or position, double or even triple that baseline.
Many financial planners believe it's a good idea to have 6 to 9 months of your normal expenses stashed away.
2. Multiply Your Living Costs by 25.
That’s how much you need to retire. To spend $40,000 a year in retirement, you need to have $1 million saved. Better start cracking!
3. Save a Minimum of 10 Percent of Your Salary.
Start as young as possible, when the power of compounding returns is the greatest. An easy way is to opt into automatic withdrawals to your 401(k) if your employer provides one.
Through compounding interest (the money that your money earns), you'll reach the $1 million mark. It might take several decades, but your future self will thank you.
4. Take Advantage of Your 401k Company Match.
Or else you’re not collecting all your hard-earned compensation. The match is essentially free money. If you don't take advantage, you're leaving that money on the table.
5. Open a College Savings Account for Your Children.
It’s never too early, even if your child is still in diapers.
With the cost of college rising rapidly, you'll be thankful you started earlier.
6. Make the Maximum Contribution to Your Roth IRA.
While you shouldn't touch the funds in this account until you're 59 and a half years old, you will avoid future taxes on your contributions, including capital gains tax.
It's a good choice for a retirement investment vehicle.
7. Spend No More Than 28 to 33 Percent of Your Income on Your Home.
That should include all your home-related costs, like insurance, property taxes, replacing the roof, trimming trees, mowing the lawn, and steam-cleaning the carpets.
If you’ve never owned a home before, you’re probably vastly underestimating how much home maintenance will cost. Brush up on what you should expect so you can budget accordingly.
8. Refinance Your Home.
Only do this if you can erase at least 1 percent from your mortgage rate. Otherwise, the closing costs will likely make this option ineffective.
9. The Number 120 Minus Your Age Equals...
The percentage of your portfolio that you should put in stock funds, according to this popular rule of thumb.
Keep the rest of your portfolio in bonds. (If that's too aggressive or risky for your taste, then keep your age in bonds, with the rest in stocks. So if you're 30, keep 30 percent in bonds. This is a more conservative alternative.)
10. Avoid Any Investments You Don’t Understand.
For obvious reasons, you shouldn't invest in anything you're not 100 percent sure on. If someone's using fancy words and making big promises, be cautious.
It's better to stick to tried-and-true, get-rich-slowly methods than to gamble your future on something you're not ultra-familiar with.
11. Avoid High-Fee Funds.
The highest fee you should pay is 1 percent but aim for the lowest-fee quality funds you can find.
Vanguard, Fidelity, and Schwab, among others, are known for their low-fee index funds and commission-free ETFs.
There you have it. Eleven solid rules to build wealth to create a stable financial future for yourself. Follow these, and you'll be on the right path with your money in no time.