andy_b
Footballguy
I am trying to compile thoughts into one simple guide that people can use to prioritize their savings and investments.
This guide is not meant to be one stop shopping for everyone, but more of a general feel. Please note that these steps assume you already own a home. If you are currently saving for a home, then many of the steps below would change.
Please comment, specifically pointing out anything that is factually incorrect or that I am missing.
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1) Track all of your expenses over a 6 month period. You don't necessarily have to know exactly where the money is being spent but you need to know how much is being spent. You can use something like Quicken or a simple spread sheet. The key is to track everything.
2) Build up small emergency fund - Put 1-2 months worth of expenses into a safe, liquid vehicle (ie money market).
3) Pay down all high interest debt (ie credit cards.). It is not recommended to do any investing with significant credit card debt. Depending on the interest rate, you could very well pay more in interest than you could make investing.
4) Build up full emergency fund - Put 6-9 months worth of expenses into a safe, liquid vehicle (ie money market). If you are less likely to be out of work for a long time, then you can shoot for the low end (6 months), if you are more likely to be out of work for a long period of time (or are the sole bread winner), shoot for the higher monthly time frame (9 months).
4.5) Make sure your insurance needs are taken care of. This is a complex topic by itself and needs to be considered as part of any personal finance plan.
5) Invest in your companies 401K/403B up to the point where you can get the full company match. If your company does not match, move on to step 6 before you invest in a 401k (assuming your company offers one).
6) If you qualify for a Roth IRA, fund it for the legal limit. If you don't qualify for a Roth, move on to step 7.
7) Max out 401k to the legal limit (assuming your company offers one).
8) If you don't qualify for a Roth, max out a traditional IRA to the legal limit
9) If you have kids and if you are saving roughly 20% of your gross yearly income towards retirement, then you can start to feel ok about investing in a 529 plan or a Coverdell plan (which ever one better suits your situation). Note that if you will be getting a pension, the 20% number can drop lower. This is a very rough rule of thumb.
10) Invest in non tax shelter items (Mutual funds, bonds etc). This is as simple as setting up a brokerage account at Fidelity or Schwab
For more conservative investors, you can also pay down your house mortgage, which you could factor in any time after step 5 above. Simply look at your interest rate on your mortgage and then determine if you feel you can get a better guaranteed return by investing.
Eventually go back to step 1 and figure out not only how much you are spending but where you are spending. This will allow you to make better choices and be more nimble down the years as life changes come into play. It will also allow you to have a better model to track your retirement needs.
This guide is not meant to be one stop shopping for everyone, but more of a general feel. Please note that these steps assume you already own a home. If you are currently saving for a home, then many of the steps below would change.
Please comment, specifically pointing out anything that is factually incorrect or that I am missing.
====================================================================
1) Track all of your expenses over a 6 month period. You don't necessarily have to know exactly where the money is being spent but you need to know how much is being spent. You can use something like Quicken or a simple spread sheet. The key is to track everything.
2) Build up small emergency fund - Put 1-2 months worth of expenses into a safe, liquid vehicle (ie money market).
3) Pay down all high interest debt (ie credit cards.). It is not recommended to do any investing with significant credit card debt. Depending on the interest rate, you could very well pay more in interest than you could make investing.
4) Build up full emergency fund - Put 6-9 months worth of expenses into a safe, liquid vehicle (ie money market). If you are less likely to be out of work for a long time, then you can shoot for the low end (6 months), if you are more likely to be out of work for a long period of time (or are the sole bread winner), shoot for the higher monthly time frame (9 months).
4.5) Make sure your insurance needs are taken care of. This is a complex topic by itself and needs to be considered as part of any personal finance plan.
5) Invest in your companies 401K/403B up to the point where you can get the full company match. If your company does not match, move on to step 6 before you invest in a 401k (assuming your company offers one).
6) If you qualify for a Roth IRA, fund it for the legal limit. If you don't qualify for a Roth, move on to step 7.
7) Max out 401k to the legal limit (assuming your company offers one).
8) If you don't qualify for a Roth, max out a traditional IRA to the legal limit
9) If you have kids and if you are saving roughly 20% of your gross yearly income towards retirement, then you can start to feel ok about investing in a 529 plan or a Coverdell plan (which ever one better suits your situation). Note that if you will be getting a pension, the 20% number can drop lower. This is a very rough rule of thumb.
10) Invest in non tax shelter items (Mutual funds, bonds etc). This is as simple as setting up a brokerage account at Fidelity or Schwab
For more conservative investors, you can also pay down your house mortgage, which you could factor in any time after step 5 above. Simply look at your interest rate on your mortgage and then determine if you feel you can get a better guaranteed return by investing.
Eventually go back to step 1 and figure out not only how much you are spending but where you are spending. This will allow you to make better choices and be more nimble down the years as life changes come into play. It will also allow you to have a better model to track your retirement needs.
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