January 14, 2010
We save money for three reasons:
• To meet emergencies. I recommend that people maintain liquid savings, which means that money is readily accessible in bank accounts or money market funds, to cover six months of basic living expenses
• To spend
• To invest
Saving is quite different from investing, although the two are often confused. We can save without investing, but we usually cannot invest without saving. Investing presumes that assets have a reasonable expectation of producing earnings or appreciating in value. I do not believe most passbook savings accounts or even many certificates of deposit that pay fixed interest meet this definition.
Your savings for emergencies and to invest should be, at a minimum, equal to 10 percent of your income — and it should be the first 10 percent of your income. Save first, spend later. Saving for other purposes, such as the new plasma TV or a vacation, should be in addition to the 10 percent for emergencies and investing. All money you take in should be subject to this 10 percent rule. If you get a gift or a windfall, such as an inheritance, at least 10 percent should go into long-term savings. If you get a raise, increase your savings to match.
January 12, 2010
Retirement planning has become more challenging in recent years. Aside from current market uncertainties, there are other more constant issues to consider, such as inflation and taxes. Investors planning for retirement have questions about how these factors will affect their retirement funding issues. Have I saved enough? What is a reasonable and sustainable withdrawal amount? Can I plan for retirement while also meeting other intermediate financial goals, such as educating children and paying off debt?
These and other questions weigh heavily on the minds of most retirement investors. What’s the solution? While it may be necessary to adjust your financial expectations for retirement or even postpone your retirement date, you can still achieve retirement security. But to do so, you’ll want to engage the services of a financial planning expert. Once retained only by the wealthy, financial advisors now assist all types of investors in making decisions about retirement. In fact, in a landmark survey conducted by the Certified Financial Planner Board of Standards, Inc., the most common reason for people to begin financial planning is to build a retirement fund. And among those who use a financial advisor as their primary source of guidance, a landmark 2004 survey found that 81% were extremely or very satisfied with the advisor.*
*Source: Certified Financial Planner Board of Standards, Inc., 2004 Consumer Survey.
January 5, 2010
A lot of people, concerned with racking up too much debt focus on paying off credit card and auto loan debt as well as their mortgage. While decreasing such high-interest, non-efficient credit card debt is a good idea; it may not always be in your best interest to strive for that “13th” mortgage payment.
Mortgage debt is considered “efficient” or “good” debt. This is because this debt has a tax-deduction on interest payments and was taken out on an asset that generally increases in value, especially if you end up staying in the home for a long period of time (these last few years notwithstanding). Having such debt is not a bad thing as long as you can afford the monthly payments.
However, there are several reasons for not putting that extra payment toward your mortgage principal each year. The biggest reason is that you give up access to that money in case you need it down the road. That extra payment could instead be put toward your cash reserves for potential future cash emergencies, thus eliminating a possibly higher-interest rate on monies you are borrowing because you did not have access to your own money. Or it could go toward other savings that have the potential of paying more interest than you would save by paying down the mortgage. The catch is, if you do end up using the money, you need to make a schedule for paying yourself back just as you would a bank – with the same interest – that way you can either continue to build your savings or have access to the money for additional cash needs in the future.