19 Personal Finance Tips You Were Never Taught—but Need to Know
We asked half a dozen personal finance experts the best tips they could share that most people are never taught. Here are the money-saving and wealth-creating tips they revealed exclusively for Reader's Digest.
Take a day to think about large purchases to avoid impulse buys
"Delaying your purchases for a day gives you time to think about whether or not you really need the items, and it curbs regrettable impulse buys," advises Marc Diana, CEO of MoneyTips. "Sale items may be an exception to this rule, but even then, question how badly you need the item compared to saving or investing the money you would use to purchase it. When times are tough, and you're cutting expenses, would you rather have a rarely worn $300 pair of shoes in your closet or $300 cash?" Don't miss other habits of people great at saving money.
Budgets are freeing, not constricting
Says financial educator Tiffany Aliche, "Keeping a budget allows you to say yes to your goals in a strategic way. If you have a budget, you can save for the vacation, house, or car you want to get. You can look at it as 'No McDonald's,' but I see it as 'Yes to a trip to Paris.' A budget is not a NO plan, but a YES plan with actual steps towards achieving your goals." Learn how to make a budget.
Budget with the 50/20/30 rule
Lynn Toomey, co-founder of Your Retirement Advisor, suggests following this easy budgeting rule:
- Use 50 percent of your income for non-discretionary necessities like food, rent/house payment, utilities, and transportation.
- Put aside 20 percent of your income for an emergency fund (three to six months' salary is a good target), retirement, savings, and to pay off any debts.
- Use 30 percent of your income for discretionary (non-essential) spending such as entertainment, vacation, and gifts.
Penny-pinching is not the road to wealth
Spending less doesn't mean you'll have more. Saving is a good way to stabilize your finances, but you still need to invest. "Pretend there are two islands," advises Aliche, who is also known as The Budgetnista: "Financially Stuck Island and Wealthy Island." She says that your savings can be like a car—you can't drive off Financially Stuck Island without a bridge. Investing is the bridge to financial success. "To get from one island to another, you need to get in your savings car and drive it over your investment bridge."
It's OK to put yourself before your kids
"Everyone wants their kids to go to college," says Aliche, "but it's more important for you to save enough for retirement. Because the best gift you can give your child is not a free ride to school, but rather not to be a financial burden on them when it's time to start their own family. Kids can get student loans or go to community college for two years; no one is going to lend you money without collateral when you're retired." Check out this timeline to help you save for retirement.
Financial advisors aren't only for wealthy people
Millions of Americans have trillions invested in stocks, bonds, mutual funds, and other Wall Street investments, but just because you can easily make trades yourself doesn't mean you should. "Why not do what you do best to earn money and let a trained professional invest it for you?" asks Brian Saranovitz, president of Your Retirement Advisor. "A recent Vanguard Investments study indicated that integrating proper retirement strategies can add as much as 3 percent efficient return to a retirement portfolio."
Adds Aliche, "You need to purposefully seek out knowledge. If you break a leg, you know that you need to go to a doctor. With personal finance, people got the notion that they could just fix it themselves. When it comes to investing, don't be afraid to seek professional help."
Get a clear picture of yourself at 80
Barring tragedy, you will live to a ripe, old age. Aliche recommends naming your 80-year-old image of yourself. "Mine is Wanda. I imagine Wanda sitting on the front steps in her yard. People feel disconnected from their older self. The more you can picture her, the better. I don't want to see her mopping floors at 80. When I'm making a decision, I think, 'How will this affect Wanda?' If I dip into my retirement funds to buy an expensive car, that's going to hurt Wanda." If it's easier, pretend you're living with your grandfather or grandmother. "You're not going to tell Granny, 'You have to go to work. We need the money,'" she says. Try a free Retirement Planner to help you calculate when you can retire without jeopardizing your lifestyle.
You can never have too much retirement savings
Says Lynn Toomey, co-founder of Your Retirement Advisor, "Life is good. Retirement is better, if you are prepared." She points out that retirement is laden with potential costs, such as healthcare, longevity, market volatility, and inflation. "Even if you think you're saving enough and have assets, it still may not be enough. The earlier you start saving and investing, the longer compound interest can work its magic to help you achieve a successful retirement." Check out items that could sabotage your retirement budget.
Consider fixed index annuities in retirement
"Imagine sitting at a blackjack table in your favorite casino and the dealer says, 'At my table, you can never lose! If I win, we push, and if you win, you win at least half of your bet!'" says Mike Zaino, president and CEO of TZG Financial in Charlotte, NC. "How long would you sit at that table? That's how fixed index annuities (FIAs) work. They provide upside potential with downside protection.
"Your money mirrors an index up to a cap (and in some instances, there is NO cap) when the market experiences gains, but your principal is protected from the downside volatility with a zero floor. If you like the idea of never losing a penny of your hard-earned retirement dollars, while still having the upside potential of participating in market gains and being able to name your beneficiaries, a fixed index annuity is a great choice. Plus, an annuity is the only financial product that can guarantee you a lifetime of income, no matter how long you live."
"As you approach retirement, you'll want to transition your heavily weighted stock portfolio toward less risky, more guaranteed income sources such as those offered by fixed indexed annuities," advises Saranovitz. "FIAs coupled with a lower percentage of globally diversified stocks in your portfolio blend growth and risk reduction for maximum retirement portfolio sustainability."
Don't blow your tax refund
"What are you planning on doing with your tax refund?" asks Asks financial advisor Zaino. "If you're like most Americans, the world of instant gratification is beckoning. It could be extremely damaging to your retirement account, however, especially given the time value of money and what Albert Einstein called 'The eighth wonder of the world"—compound interest.
"Based on last year's data, the average refund should be about $2,800. Let's say you save your money in a vehicle that earns you 6 percent annual interest and you have the discipline to continue to deposit $2,800 every year for the next 30 years. That would yield $250,726. At 7 percent, you'd have $304,319. That's an EXTRA quarter-million dollars in YOUR retirement account—just for being disciplined and not blowing your refund." Don't miss the smartest way to spend your tax refund.
Taxes can really hurt your retirement
Many of people have tax-deferred investments like 401(k)s on which you pay no taxes until retirement—when tax brackets are assumed to be lower. But retirees are taxed on their retirement income when they start drawing money out of their 401(k)s and IRAs, and they can really take a bite from seniors living on fixed incomes. Warns financial advisor Saranovitz, "You must have a tax-efficient withdrawal strategy from your portfolio." For example, you could move taxable stock investments into bonds before retiring; buying municipal bonds from your home state could help you avoid paying federal, state, and local taxes.
You don't have to die to benefit from life insurance
"Nobody ever told me that life insurance could do things for me when I was alive," admits Kirby Thomas, owner of Life Insurance Today US, a nationwide provider of life insurance for consumers. Some life insurance policies offer an "accelerated benefits" option in which the death benefit is payable while the insured is still alive.
"Possible 'living benefits' include terminal illness, critical illness, chronic illness, and critical injury," explains Thomas. "I recently recommended this option for a woman buying insurance for her 75-year-old mother. By buying a policy with the proper riders, instead of the daughter incurring debt to pay for Mom's future treatment, the life insurance could be used instead. The death benefit would be reduced by the amount accelerated, and the balance paid to the daughter when she lost her Mom."
According to Zaino, "Life insurance can be used for replacing a stream of income for a surviving spouse, providing heirs on an estate with liquidity, replacing the value of an asset, paying estate taxes, maximizing your pension or Social Security benefits, college funding for the kids and grandkids, buying out a business partner, protecting a business for the replacement value of a key employee, satisfying debt, funding charitable gifts, providing for a special needs child or adult, equalizing an inheritance, longevity planning, and balancing investment risk."
Consider life insurance for your children
Although this seems a touchy subject, the reason for having a life insurance policy on a child is about cash accumulation, explains industry pro, Thomas. "Compound interest works best when you have a lot of cash or a lot of time. Kids have a lot of time.
"When buying an Indexed Universal Life Insurance policy for a child, the cost is very low and remains the same over the life of the policy, while the cash continues to grow. The parent owns the cash and can borrow from it. The parent can also assign ownership to the adult child one day, along with the cash, just in time for adult things like a down-payment on a home. Or the child can create retirement income with the policy."
Building good credit takes a long time, but it can be ruined overnight
If you miss a single payment, it could take seven years to have that black mark removed from your credit report. In the meantime, you could be paying more in interest than you have to for every loan, including your mortgage. According to the credit bureau Equifax, a single missed payment can result in as much as a 90-110 point decrease on a FICO credit score of 780.
Even if you're responsible about paying bills, an identity thief could ruin your good credit behind your back. Advises Toomey, "Check your credit report often to correct any mistakes and to look for fraud." Check your credit score and read your credit report for free within minutes.
Asking for your credit limit to be raised can improve your credit score
Keep your credit utilization—the amount of credit you use compared to your credit limit—low to boost your all-important credit, advises Diana. "You can borrow less, or you can ask for a raise in your credit limit." A recent study from CreditCards.com found that only 28 percent of respondents have ever asked for an increase in their credit limit. However, a whopping 89 percent of those who asked for a credit limit increase received one.
Unless they have a high annual fee, don't close your old credit cards
"The longer your stable credit history, the better it reflects on your credit score," explains Diana. "The age of accounts is averaged over all of your credit accounts, so closing an older account that is infrequently used actually harms your credit score in two ways: It lowers your credit limit, which raises your credit utilization; and it lowers your average account age. If you have an old card with a decent credit limit, use it at least annually to keep it open. But don't forget to pay the bill on time!" Look out for other sneaky things that could lower your credit score.
Don't ever co-sign a loan
"Co-signing a loan isn't just vouching for someone's character," explains Toomey. "Understand that if the borrower doesn't pay, then you're responsible for every single missed payment. If they don't pay, it's your credit that will be ruined." Learn more about how co-signing a loan affects your credit score.
Ask current lenders for a better rate
"Banks, credit unions, and other lenders are keenly aware of their competition," says Diana of MoneyTips.com. "If your credit score qualifies you for a better rate from another credit card issuer or lender, ask them to match the rate. There's no downside to asking; the worst they could do is refuse." Follow these simple tips to negotiate like a pro.
Being debt-free should not be your goal
Says Aliche, creator of the Live Richer Challenge, "People focus on getting out of debt. If they use that money to grow wealth instead of getting rid of debt, they could be debt-free faster. Do you pay off your student loans to get debt-free, or invest money in your business to grow and secure wealth for yourself? If you focus on being debt-free, that's all you'll be. If you focus on building wealth, then you can be wealthy and debt-free."