A financially secure future means that debt is eliminated and future debt is a financially sound investment. In this world of continuous inflation this task seems more and more like an uphill battle. Here are 10 guiding rules that can help put you back in the control seat.
1. Rent, don’t buy a home – One of the major financial drains to any person is buying a home, which indeed makes great sense when the real estate prices are rising. When they stagnate or are falling this no longer makes financial sense. You should check whether owning or renting would give you greater benefits by comparing how much you would pay per month in a rented home vs mortgage costs in your own home. Get help with a renting calculator at http://partners.leadfusion.com/tools/kiplinger/home10/tool.fcs.
2. Small is safer – When and if you decide to buy a home, go for a smaller home. The general rule should be that the total mortgage should not exceed 3 times your annual gross income. Your monthly payment should ideally not exceed about 1/3rd of your income. This includes payment of principal, interest, taxes and insurance. All of these costs combined can be the difference between having a home for your future or a financial burden on your credit report.
3. Close mortgage concurrent to retirement– Mortgage payments can cripple you financially if they continue into your retirement period. Plan in such a manner that the complete repayment of your mortgage coincides with the time of your retirement. Pay more while you are still working if it enables you to reach this goal; but take the necessary steps to liquidate this loan by retirement time. Thinking that far into the future ensures that you will not be using the money you are meant to live on, on mortgage expenses. Frugal and cautious financial decisions now will enable comfortable worry free living later.
4. Roth is better – Tax bills are always deferred on savings and investments to the latest possible limit. However, with Roth IRAs and Roth 401(k) plans you can forgo the tax break that you would normally get upfront (on traditional IRA's) and instead have your retirement withdrawals become tax free.
5. Dividends stay steady – The stock market today is too volatile to count upon. It is better to focus on dividends because you can count on these to provide you a predictable and steady income even though they will not make you rich in the proverbial sense.
6. Build a large safety nest egg- It is no longer enough to have about a 2-3 month corpus fund to ferry you over a financially trying time. In these times when nothing is really guaranteed, let alone your job or a steady income from your business; you need a larger safety net. Aim at saving funds to carry you for a year to 18 months. People who have retired should aim at investing 2-3 years finances in short term CDs and mutual funds.
7. Maximize your retirement benefits– Do not collect your Social Security benefits until you are 66 years old if you were born between 1943-1954 and older if you are born later. The safest option is to cash in when you are approximately 70 years old. It is at this age that you (and your spouse) can get the maximum benefits on your retirement plans.
8. Credit Cards are good for you– Your first aim is to keep your credit card usage in close check. However, do not close credit cards in order to achieve this goal. Your FICCO score (credit score) uses the information of your maximum credit vs maximum usage as a ratio to determine your credit worthiness. The optimal goal is to use about 20% of the total credit you have available to you. However, use credit cards with extreme caution. Never charge more than you can realistically pay in full at the end of the billing cycle.
9. Pay attention to your stream of retirement income– No matter how financially secure you are in the prime of your life, you will have trouble during retirement if you do not pay close attention to the projected expenses you will incur during retirement. The reason is simple- the income you receive during the time you work is greatly reduced or eliminated all together once you go into retirement. Invest in an annuity that will assure monthly payments for the rest of your life. For the highest returns you will need to lock in the amount– but seek professional advice in this area so you are able to lock it in when the rates are most conducive for you.
10. Take advantage of all the free money available for your retirement – Yes, you have free money when your employer matches your 401(k) plan. The best plan is to put aside about 15% of your gross income for your retirement plan. This amount includes your employer’s matching grant.
There is, of course, much more to financial planning than these 10 tips. This is designed to be a first step to put you on the right track and ensure that you begin healthy financial planning for your future goals.