Save and invest 20% of your income
Many advisors advise that clients save at least 10% of their income. I suggest that my clients strive to save 20% of their income. This increased savings goal provides for some wiggle room in months that have additional and unexpected expenses. The other reason I recommend 20% is that the additional savings made today enables you to harness the power of compounding (i.e. this money is invested and its’ earnings are further reinvested year-over-year). It's far better to save and invest more now then try to catch-up later.
Keep at least 3 months living expenses in safekeeping for emergencies
This money should be kept in reach and accessible, but ideally far enough away that you do not feel compelled to spend it. By emergencies, I am referring to out of the ordinary events that would put a significant strain on your monthly cash flow (for example, your car breaks down, you endure a flood in your home not covered by insurance, etc.). I recommend that this money be put in a high-interest bearing account that has debit-card access. That way, in the case of an emergency, you don't have to rely on a credit card to cover an unexpected expense. Please refer “6 saving strategies you can start using today” for specific bank recommendations.
If you have kids: Draft a will and buy term-life insurance worth 10-20 times your household income
Protecting your family should be priority #1, and both a Will and term insurance policy provides for the direction and protection to accomplish this goal. If you don't have adequate funds to hire an attorney (wills can cost anywhere from $1,000 and up), you can use sites such as Legal Zoom to draft your own will using a standard template.
Term insurance is inexpensive and will provide the security your dependents need. A healthy individual in their 30’s can secure a $500,000 term policy for less than $350/year. You should plan on shopping for policies that cover anywhere from 10-20 times your household income (so a family with combined income of $100,000 should look for between $1-2MM). I tend to recommend higher amounts of term-insurance coverage as there seems to be a natural break point in how these policies are priced. Each incremental dollar of coverage over $500,000 costs less. For example, say a $500,000 policy costs $325/year, a $1MM policy may only cost $475. Stay away from whole life, universal life, or other forms of permanent insurance. These kinds of policies are more appropriate for estate planning once you have already exploited and maxed out your tax advantaged accounts.
Put at least 20% down and always choose a conforming loan
Avoid paying Private Mortgage Insurance (PMI), a fee you will incur if you put less than 20% down on a property. Also avoid non-conforming loans, which generally carry higher interest rates, additional upfront fees, and insurance requirements. You will accomplish both of these by purchasing a home you can afford.
Pay off high-interest debt first and pay your credit card off each month
Revolving high-interest debt is a sure fire way to cramp your cash flow, preclude the ability to save, and ensure that you will be making interests payments for a very long time. The best way to avoid high interest debit is to not spend money that you don't have in the bank. This "golden" rule has proven itself over and over again. Those who master it find themselves on far better financial ground. Pay off that high-interest debit first, avoid using credit for “float”, and pay that credit card balance off in full each month.
Max the match on your 401(k) and maximize tax-advantaged saving vehicles like Roth IRAs, SEPs, and 529 accounts
As I pointed out in an earlier blog post, a match on your company-sponsored 401(k) is essentially free money and it would be silly to pass it down. You should also take advantage of other saving vehicles provided you are eligible to do so. You should discuss these saving vehicles with your advisor or CPA to determine which (if any) is most appropriate for you.
Invest invest invest! But pay attention to fees, avoid actively managed funds, and hire a financial advisor who is committed to the fiduciary standard
The key to wealth accumulation is to make constructive use of the money you save regardless of your income. Be smart about how you invest and be keenly aware of fees, which are sure to erode your performance. Vanguard target funds are a good DIY approach if you are just getting started out. If you are at the point where professional insight would be of value, be sure to hire a financial advisor who is committed to the fiduciary standard (please read more about this standard on my earlier blog post: "How to choose the right financial advisor for you").
This list is not meant to be all-inclusive, and your individual circumstance may require some more tactical guidance. Be sure to confer with your financial advisor about your specific needs. If I can be of any assistance, please feel free to contact me.
Jason M. Gilbert, CPA/PFS, CFF