financial reserve. Being prepared (with 3 to 6 month's living
expenses) can help relieve some of the financial anxiety often felt.
Consider an automatic savings plan with some amount being deposited
into a savings account from each paycheck. The fund will grow and
you may end up not even missing what you save each month.
a Savings Cushion
Get rid of
high interest rate credit card debt. Interest rates on some
credit cards are high. If you are carrying over balances and paying
interest, cut down on your card use, pay more than the required
monthly minimum and eliminate this expense. You may want to consider
a different credit card that offers a lower rate.
Your Debt Burdens
a household budget. This is often one of the most dreaded parts
to being financially responsible. To make the process less dreaded,
call it a "household spending analysis." Determining how
you spend your money will probably lead to identifying how to reduce
some expenses. You may want to use some common financial management
software (Quicken or Microsoft Money) to help. These relatively inexpensive
programs will also help organize your finances and may save you time.
Your Monthly Spending
retirement. Even as you are starting your financial life, it
is important to begin considering retirement. Your financial lifestyle
during retirement is largely dependent on the financial decisions
you make now and financial habits you form before retiring. As Social
Security and the traditional company defined benefit plans have
become less important, the responsibility for preparing for a financially
secure retirement has shifted to the individual.
Start with your
employer's retirement plan. Many plans, especially 401(k) plans
make it easy to save, offer investment flexibility and enable you
to reduce your taxes. Many plans also have provisions for the employer
to make contributions on your behalf. Review your plan details,
contribute as much as you can and at least contribute enough to
get the full employer "match."
If you have
taken full advantage of company sponsored plans, and can still afford
it, consider contributions to an IRA or Roth IRA. The tax deferred
compounding aspects of these plans enable your funds to grow faster.
Components of a Financially Secure Retirement
Full Advantage of Your Employer's 401(k) Plan
sensitive to taxes. No one likes to pay more income taxes than
absolutely necessary. Be aware of the opportunity of deducting certain
items like mortgage interest, state and local taxes, charitable contributions
and certain medical expenses. Also, consider the preferential tax
treatment from capital gains on your investments. However, you should
be careful to put taxes into perspective - do not let tax considerations
prevent you from making sound financial decisions.
an Effective Income Tax Strategy
Have a sensible
investment strategy. Regardless of the size of your investment
portfolio, having a logical strategy is important. Understanding
the risks of investing, having a realistic expectation of potential
returns and practicing diversification should be part of your thinking.
Start with an
asset allocation goal that divides your investments into equity,
fixed income and cash investment categories. Your initial asset
allocation should be based on your time horizon (your age) and how
you feel about taking risks. The younger you are and the more comfortable
you feel with risk, allocating a larger portion of your funds to
equities may help you earn the higher returns stocks have historically
had. However, remember that all investments involve risk and that
past performance is no guarantee of future results.
adequately protected. Insurance provides protection against the
unknown. Make sure your possessions, life and health are adequately
insured. Examine the level of deductibles and the coverage amounts
to get the protection you need at the lowest cost.
an Insurance Strategy
of estate planning. Thinking about estate planning is important
at any age and regardless of your wealth. A will can ensure that
your assets are distributed as you desire on your death and can
help reduce any estate taxes that may be due.
But estate planning
is more than reducing taxes. Your estate plan should designate custodians
for any children and include documents that designate someone to
make financial decisions if you are incapable of making them (durable
power of attorney for finances) and that designate someone to make
medical decisions if you are incapacitated (durable power of attorney
for health care).
Basics of Estate Planning
Planning is More Than Minimizing Taxes
organize your records. Having a system for handling monthly expenses
can reduce the stress and time needed to handle your everyday finances.
Using a system to keep track of investment and tax records will make
every tax season less "taxing." Keep other important information
organized, too. Having to hunt for the name of your insurance agent,
an account number, a frequent flyer number or any other bit of information
can be a waste of time.