Barbara O’Neill, Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
Personal finance does not have to be complicated. Rather, most people can manage their finances quite well by doing just a few key things right. Below are ten suggestions to improve your personal finances:
Spend Less Than You Earn- The only way to save and invest is to have money left over after expenses. Shop around for bargains (e.g., online promo codes, price matching, and thrift shops) and ask yourself whether you really need something before you buy it.
Save at Least 10 Percent of Your Income- Do it automatically via payroll deduction or electronic fund transfers. Most people who have money taken out of their paycheck for retirement or their checking account, to invest in mutual funds, say they never miss the money and are a lot more financially secure.
Invest for the Long Term- Don't trade too much; market timing is very difficult. If you don’t have the time or energy to research individual stocks, just keep it simple and invest through no-load mutual funds. Never invest with cold-callers and be very skeptical of investments that sound like “guaranteed” winners. Stick with reputable companies and experienced and well vetted investment advisors.
Don't Run Up Your Credit Cards- Going deep into debt to buy nice clothes or restaurant meals will not impress your friends. Instead, impress them with your kindness and sense of humor. Monthly payments on all consumer debts (excluding a mortgage) should not exceed 15% to 20% of monthly take-home pay.
Set Goals- What are you saving for? A nice house? Retirement? College education for your children? Keep your eye on your goals and it's easier to make sacrifices (read: spend less) to achieve them. Use this worksheet as a goal-planning tool: http://njaes.rutgers.edu/money/pdfs/goalsettingworksheet.pdf
Purchase Insurance Wisely- Examples of unnecessary insurance include extended warranties on appliances and low deductibles on property insurance. Rather, cover big financial risks including adequate disability insurance and term life insurance to protect your family if you can't bring home a paycheck.
Be Patient- Similar to the progression to large prizes on the TV show Who Wants to Be a Millionaire?, it usually takes people a long time to build wealth. The average age of millionaires is 60, meaning that they’ve been investing for about 35 years. Using the Rule of 72, if an investor earns an 8% average return on a diversified investment portfolio, their money will double in nine years (72 divided by 8).
Dollar-Cost Average Investment Deposits- This means investing a regular sum (e.g., $100) at a regular time interval (e.g., monthly), preferably through automatic deposits such as payroll deductions for a 401(k) plan. Dollar-cost averaging avoids bad market timing and takes the emotion out of investing because regularly scheduled investment deposits take place automatically regardless of market conditions.
Limit “Shocks” to Finances- Financial shocks include frequent job changes, moving, home purchases, health care expenses, and divorce. Conversely, stability aids in wealth accumulation. If you switch employers, be sure to roll over tax-deferred savings into a rollover IRA or other tax-deferred account.
Congratulate Yourself for Making Progress- If you hear that you need, say, $500,000 or $1 million to retire in comfort, you might feel too depressed to try to save anything. Instead, celebrate paying off your credit cards or saving $1,000. You have a lot to be proud of as long as you're headed in the right direction.
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