Contribute to your company’s 401(k). If your company matches funds, sign up. This will be the best investment you can possibly make. Typically, a company will kick in 50 cents for every dollar you save, up to 6 percent of your salary. That’s the equivalent of earning an immediate 50 percent return—a rate you can’t get anywhere. Yet incredibly, one in three American workers who are eligible isn’t taking full advantage of it. With the matching funds, you can more than double the size of your 401(k) in 20 years, even if the stock market remains flat. For a family making $44,000, your contribution may cost you as little as $30 a week, money you won’t even miss after a while.
Put retirement savings ahead of college savings. This sounds crazy to parents who need to come up with tuition money well before it’s time to retire. But because of the tax breaks and the flexibility of retirement accounts, you’re much better off contributing to a 401(k) or an IRA and taking out loans for college. Many people don’t realize that the contributions you put in Roth IRAs can be withdrawn free of penalties at any time. That’s very different from the college savings plans, called 529s, that smack you with a significant penalty if the money is not used for college. Another plus: Most schools don’t count money in your retirement accounts when assessing how much financial aid they’ll offer you. (For more detailed advice, check out Kalman Chany’s book, Paying for College Without Going Broke.) Once you’ve saved the maximum amount that the government allows in your retirement accounts, then research 529 plans at savingforcollege.com.
Say no to company stock. Think of Lehman Brothers, Bear Stearns, and Enron. All were once on top, but when they went under, many employees were left without jobs and with retirement accounts that were overloaded with worthless company stock. You already have a huge stake in the company because you depend on it for your paycheck. Don’t risk your retirement money as well. If your employer offers company stock as a 401(k) option, don’t take it. If you get company stock as part of your matching-funds plan, sell it as soon as you’re allowed to and switch that money into some other type of investment. Ask your HR representative for details.
Don’t worry about Social Security. You’ve probably heard the dire predictions that anyone younger than 35 can’t expect to collect Social Security. Even in bleak economic scenarios, though, Social Security will probably pay you 65 to 80 percent of your currently promised benefits. And with some fairly modest changes—like raising the retirement age or increasing payroll taxes for anyone earning more than $250,000 annually-the system can be shored up for decades to come. Make sure you’re saving enough so you don’t have to count on the program for your entire retirement income.
Stay away from individual stocks. In spite of what you may hear from your cousin the broker, buying the stock of a single company is generally not wise. It’s essentially putting all your eggs in one basket-and paying broker fees that could eat up your earnings. In fact, you don’t really need a broker. Instead of buying individual stocks, invest directly in mutual funds, which spread your dollars among a group of stocks. It’s usually safer, cheaper, and simpler. But remember, you should do this only with money you can invest long term and can afford to lose in the short term.
Stick with index funds. You’ll want to go with a special type of mutual fund called an index fund, which buys a little piece of each of the companies that make up established market benchmarks like the S&P 500. One of the best-kept secrets of investing is that in the long run, index funds perform at least as well as the funds that charge high fees and have a professional stock picker making the choices. And how are index funds doing these days? As of early December, they had actually lost less than the average stock fund run by the so-called experts. For a list of low-cost index funds, go to vanguard.com or fidelity.com.
Don’t buy investment products from your bank. Banks sell a wide range of mutual funds, annuities, and individual stocks and bonds. These aren’t FDIC-insured, and they tend to be more expensive than what you could get elsewhere because banks usually charge high sales commissions. Buy directly from mutual fund companies instead. Go with companies like Vanguard or Fidelity, which charge low fees and no commissions.
Build a portfolio. The rule of thumb is to put 50 percent of your long-term savings in stocks and 30 percent in bonds and keep 20 percent available in cash (that means in a savings or money market account where you can withdraw it at a moment’s notice). In tough times especially, getting the right mix will depend on the risk you’re willing to take and how soon you’ll need your money. Stocks are generally more risky than bonds, but there are exceptions. For example, bonds issued by companies that are in questionable financial health-called junk bonds or, more euphemistically, high-yield bonds are a lot riskier than, say, stock in utility companies. Financialengines.com, which charges about $40 for a three-month subscription, is a great site for calculating the right mix.
Take care of your health. Eat right, exercise, and get plenty of sleep. Says Rutgers finance professor Barbara O’Neill, “The last thing you want in a financial crisis is huge medical bills.”
Keep Your Money Safe
FDIC-insured bank savings, CD, and money market accounts
FDIC-insured credit unions
Series I bonds
Money market funds that invest in Treasury bills
Somewhat Riskier: Corporate and tax-exempt money market mutual funds
Riskiest: Bank investment products not FDIC-insured Individual stocks
A clip-and-save guide to the sites in this feature.
- irs.gov: Calculate withholding, track refunds.
- turbotax.intuit.com and completetax.com: Tax-prep software.
Checking and Savings
- bankrate.com: Compare accounts.
- cranedata.us: Compare yields on investment accounts.
- fdic.gov: Determine whether your bank is FDIC-insured.
- annualcreditreport.com: For your free annual credit report.
- myfico.com: For your numerical credit score.
- affordableinsuranceprotection.com and unum.com: For rate quotes on disability insurance.
- carinsurance.com: Compare rates.
- nolo.com: For templates and instructions on writing a will.
- statecoverage.net: For the specifics on health coverage in your state.
- term4sale.com: Compare term life insurance policies.