LOOKING TO IMPROVE your money management? Here are 31 rules for the financial road ahead:
1. Check your retirement progress by taking your nest egg and applying a 4% annual portfolio withdrawal rate, equal to $4,000 a year for every $100,000 saved. Will you have enough retirement income—or should you be saving more?
2. Don’t automatically claim Social Security at age 62. It often makes sense to delay benefits so you get a larger monthly check, especially if you’re married and have been the main breadwinner.
3. Never buy a home unless you expect to stay put for at least five years and preferably seven years or longer. Between mid-2006 and early 2012, the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index plunged 27.4%. Enough said.
4. Planning to remodel your home? If you’ll get a lot of pleasure from the improvements and you can afford the cost, go ahead. But don’t kid yourself that you’re making an investment.
5. Never use a custodial account to save for college costs. Instead, open a 529 college savings plan or a Coverdell education savings account. Both will give you tax-free growth and shouldn’t badly hurt financial aid eligibility.
6. Don’t let your children take on more student loans than they can reasonably handle, given their expected career and likely earnings.
7. Insure against the big financial risks in your life, while skipping the small stuff. Extended warranties and low auto-insurance deductibles? Just say no.
8. If you aren’t rich, buy term life insurance to protect your family. If you’re super-rich, consider cash-value life insurance to save on estate taxes. Either way, never buy life insurance purely as an investment.
9. Worried about layoffs? Limit your fixed living costs to 50% or less of your pretax income. Fixed costs include expenses such as mortgage or rent, property taxes, debt payments, groceries, utilities and insurance premiums. At the 50% level, you know you could get by on half your old income if you lose your job.
10. Think about which expenditures gave you a lot of pleasure over the past 12 months and which were quickly forgotten. Use that to guide your spending in the year ahead.
11. Always contribute at least enough to your employer’s 401(k) plan to get the full matching contribution. Even if you leave your employer, immediately cash out your 401(k), and pay taxes and penalties, you’ll likely still come out ahead after figuring in the employer match. Better still, roll over the money to an IRA and keep the tax deferral going.
12. Expect modest returns from stocks and bonds. The worst that will happen is you’ll save too much for retirement and other goals.
13. Think about your paycheck—and how secure it is—as you decide how much to invest in stocks, how big an emergency fund to hold and how much debt to take on.
14. Avoid investments you don’t completely understand. Among other financial products, that likely means skipping equity-indexed annuities, leveraged exchange-traded index funds, hedge funds and the mutual funds that mimic them, and variable annuities with living benefits.
15. Shun investments with high expenses or whose costs you don’t fully grasp. Examples? See previous point.
16. Never keep 100% in stocks—or 100% in bonds. A well-designed portfolio will always include both investments.
17. Don’t buy individual company stocks, and think hard before purchasing actively managed mutual funds. After investment costs, you’re highly unlikely to beat the market, which is why market-tracking index funds make so much sense.
18. Check that you have tax-efficient investments in your taxable account, while using your retirement accounts to hold investments that generate big annual tax bills.
19. When did you last rebalance your portfolio back to your target weights for stocks, bonds and other investments? Look to get your investment mix back on track—preferably sooner rather than later.
20. If the stock and bond markets make you nervous, you can always pay down debt instead.
21. Never have a year when you pay nothing in income taxes. If you expect to have little or no taxable income in any given year, take advantage of your low tax bracket by converting part of your traditional IRA to a Roth.
22. Check your credit reports for inaccuracies. You can get free copies through AnnualCreditReport.com.
23. Always pay your bills on time. This is likely the biggest factor affecting your credit score. In particular, late payments on credit card bills and loan payments are quickly reported to the credit bureaus.
24. Are you on track to pay off your mortgage by retirement? If not, consider making extra principal payments.
25. Never carry a credit card balance, which might cost you 20% or more in annual interest. You won’t earn that sort of return in the financial markets over the long haul.
26. If you have more than enough saved for your own retirement, consider taking advantage of the gift-tax exclusion, which is $17,000 in 2023 and $18,000 in 2024, to make gifts to your children and other family members. It’s a great way to brighten their lives—and the cheapest and easiest way to reduce the potential hit from state and federal estate taxes.
27. Get a will. You’ve been promising to do so for years. Make it happen in the month ahead.
28. Check you have the right beneficiaries listed on retirement accounts, life insurance and any trust documents. Let’s face it: You probably don’t want your ex-husband inheriting your IRA.
29. Try not to spend money in Roth IRAs. Instead, leave these accounts untouched for your beneficiaries, who could enjoy a decade of tax-free withdrawals and possibly more. They’ll remember you fondly.
30. When giving to charity, consider gifting appreciated investments. You’ll potentially enjoy three tax benefits: an immediate tax deduction, avoiding capital gains taxes on the investments donated, and a smaller taxable estate.
31. Keep an eye on the big picture: You want to design a financial life for yourself where money worries are minimized, you have special times with friends and family, and you devote your days to activities that you think are important and that you’re passionate about.