THE LIST OF MAJOR financial goals is short, but daunting: Prepare for financial emergencies, save for retirement and buy a home. To this list, many of us need to add one more: Pay for our children’s college education.
Roughly speaking, it costs $20,000 a year to attend a state university, $50,000 for the typical private college and $65,000 for an elite private college. Make your choice, multiply by four and you’ll have the cost—in today’s dollars—to send each of your children to college for four years.
WHEN WE FIRST enter the workforce, we shouldn’t worry about precisely how much we need for retirement—and instead focus simply on socking away as much money as we can. Those initial dollars we save may seem like a drop in the bucket, but they should make a major contribution to our eventual retirement, because they’ll enjoy decades of investment compounding.
But around age 40, it’s probably worth sitting down and calculating how much we might have at retirement—and whether it’ll be enough.
ESTATE PLANNING can involve all kinds of legal documents and complicated strategies. But three simple steps are essential: We should make sure we have a will, the right beneficiaries named on our life insurance and the right beneficiaries listed on our retirement accounts. Naming the right folks on our retirement accounts is especially important, because there’s a good chance these accounts hold the bulk of our wealth.
These aren’t one-and-done decisions. For instance, we’ll want to revise our will if we move to another state,
PURCHASING A HOME is a huge mistake if we’ll move within the next few years. But it can be a great idea if we envisage staying put for at least five years and preferably far longer. And, no, this isn’t because houses are a great source of price appreciation—which they usually aren’t. Instead, there are two solid reasons to buy a house.
First, we lock in our housing costs. While renters face never-ending increases in their monthly payments,
HEALTH INSURANCE can help us to stay productive and earn an income in the short-term. But we also need to consider our long-term earnings, and what would happen if we suffered a disability or—perish the thought—we died prematurely.
We should start by pondering who depends on us financially. If nobody does, we probably don’t need life insurance. But if we have a spouse and children, we might need heaps of coverage. We should think about how much we’ve saved already—and how much additional money our family might need in the years after our death to,
IF FUNDING a 401(k) with an employer match is the best deal in savings, the second-best deal is paying down high-interest debt, notably credit card debt. Got a card balance costing 20% a year? Paying off that debt is like earning a guaranteed 20%—a rate of return far higher than we’re likely to earn in the financial markets.
What if we have lower-cost debt, such as student loans, car loans and mortgage debt? Much depends on what the interest rate is,
YES, WE’RE ONLY on step 4—and we’re already talking about retirement. There’s a host of reasons saving for retirement should be a top priority. But two reasons stand out.
First, retirement is easily our most expensive goal, and it takes decades of saving diligently and earning investment returns to amass enough. By starting to save for retirement as soon as we enter the workforce, the sum we need to sock away each month will be far more manageable.
FORGET THE DEBATE over how best to ensure access to health insurance, whether it’s Obamacare, Medicare for All or some other system. One way or another, we should each make sure we have health coverage—because our financial life could quickly unravel without it.
It isn’t simply that those without coverage might be reluctant to see a doctor, imperiling their long-term health and their ability to work. On top of that, if we don’t have health insurance,
THERE’S NOTHING like a pile of cash to ease our financial worries. Indeed, while today’s spending often brings only fleeting pleasure, not spending that money—and instead building up a cash cushion—will likely deliver ample long-term happiness.
Consider stashing that cash in a low-cost money-market mutual fund or a high-yield online savings account. These accounts should pay more than a savings account at a brick-and-mortar bank, plus separating our cash cushion from our everyday bank account will likely make us think twice before dipping in.
ALL TOO MANY Americans lead shaky financial lives. They often overdraw their checking account. They carry credit card balances. They pay bills late. Even an unexpected $400 or $500 expense can leave them scrambling.
We should strive mightily to avoid this sort of financial life—because it’s a life overflowing with stress. How do we escape its clutches? We should cultivate three qualities.
First, we need to build some financial breathing room into our lives,
ONCE YOU’VE BUILT your portfolio of low-cost index funds, benign neglect is the best strategy. But you shouldn’t neglect your portfolio entirely.
Every year or so—or after big market moves—look to rebalance your portfolio. This isn’t something you need worry about if you opt for a one-stop shopping fund, described in step 4. But everybody else should have target percentages for their various fund holdings. For instance, you might have earmarked 40% of your portfolio for a total U.S.
INVESTMENT EXPERTS often talk about four asset classes: stocks, bonds, cash investments and alternative investments. This last category includes a hodgepodge of investments, including real estate investment trusts (REITs), commodities funds, gold funds, hedge funds and mutual funds that pursue hedge-fund-like strategies. In each case, the hope is the same—that these investments will not only generate decent long-run gains, but also they’ll perform unlike the broad stock market and, indeed, they may post gains when stocks next nosedive.
IN RECENT YEARS, there’s been much buzz about so-called factor investing—favoring groups of stocks that academic research suggests will generate superior returns over the long haul. But those superior returns are by no means guaranteed and, indeed, the various factors have occasionally suffered long periods of underperformance.
Among the most popular factor tilts: overweighting small-company stocks, bargain-priced value shares, stocks displaying upward price momentum and companies with high gross profitability. There are now mutual funds and exchange-traded funds available that seek to exploit all these factors.
MOST BONDS PAY a fixed rate of interest—which means inflation is their mortal enemy. Every tick higher in consumer prices means the interest you earn has less purchasing power.
What to do? You might split your bond portfolio between a total bond market index fund—which will hold mostly traditional fixed-rate bonds—and a fund that focuses on inflation-indexed Treasury bonds. The latter have their principal value stepped up along with the inflation rate, plus you earn a little additional interest on top of that.
WANT TO BUY the right investments? First, you need to decide why you’re investing. Are you looking to make a house down payment next year, put your toddler through college or fund a retirement that won’t start for 30 years?
That brings into focus the crucial issue of time horizon and hence the maximum amount of risk it’s prudent to take. While those who will spend their savings soon probably shouldn’t own anything riskier than a short-term bond fund,