SMITH BRAIN TRUST – Over your lifetime, you'll earn quite a bit of money. But it might never feel like a lot, depending on how you spend, save and prioritize. If personal finance leaves you feeling clueless, you're by no means alone, judging from the results of the Organisation for Economic Coordination and Development's recent global survey about financial literacy.
The survey of nearly 52,000 adults across 30 countries showed that only 60 percent of people had a set household budget. Fewer than half of people shopped around when choosing a financial product. And barely 40 percent of people could determine whether a $100 savings account compounding at an annual interest rate of 2 percent a year would grow to more or less than $110 over five years. November is Financial Literacy Month, and Smith School professor Albert "Pete" Kyle has some smart saving advice for every decade of your money-making life. He's also part of the Center for Financial Policy's Consumer Finance Speaker Series.
In Your 20s
When you're still in college, teach yourself self-discipline in spending and get by with as little debt as possible. "That means don't go to bars too much," Kyle says. It also means avoiding pricey coffee drinks and expensive snacks.
Get yourself a credit card, and pay it off at the end of every month, if at all possible. "This is as important as any university course you'll take," Kyle says.
When you leave college and you're interviewing for jobs, ask about the potential for advancement within the company and choose a job that has a pathway for growth.
Pay close attention to the kinds of retirement benefits that companies offer.
Most employers offer defined-contribution plans – not defined-benefit plans. Defined contribution plans generally are well-suited to younger workers, since the benefit is portable, and most people move on from their first job after a few years. But the "great beauty" of defined-contribution plans, Kyle says, is the ability to deduct savings from your income, potentially lowering your tax rate.
When choosing from the funds your employer offers, look for the cheapest fees and an asset mix that's virtually all equities. And consider target-date retirement plans, which automatically rebalance your retirement plan between stocks and bonds as you get older, to keep the proportions optimal.
Maximize your contributions to your 401(k), if you can afford to. If your employer doesn't offer a 401(k) or similar investment tool, max out your IRA, or Roth IRA, contributions.
If you have done that, and still have money to squirrel away, Kyle suggests a money-market account or short-term bond mutual fund.
In Your 30s
Welcome to your 30s. Recently married? Planning a family? Buying a house? It's a huge decade for your money.
Hopefully, you spent your 20s establishing yourself in your career and being a disciplined saver, because Kyle recommends you skip the starter-home stage, and move right into the big family house. You'll need a few bedrooms, a yard, a good school district and a reasonable commute.
And you'll want to stay in this house for at least 10 years, if you hope to get the most out of the investment and to make the closing costs and associated fees worth it, he says.
If you buy the house, don't renovate, he says, unless you have some expertise and can do some work yourself. Hiring professionals is a massive expense and rarely pays off financially. "If have a lot of fun doing it, then fine," says Kyle. "Or if your occupation gives you a comparative advantage, then that makes sense. But otherwise it's not a good financial decision."
If you decide to buy a house in your 30s — first-time home-buyers in the U.S. are 33 years old on average, according to Zillow — opt for a fixed-rate mortgage, Kyle says. And consider holding the mortgage for longer. "Low interest rates are not a reason to get a mortgage, but they might be a reason to take out a longer-term loan," he says.
Homeownership isn't always a shrewd financial decision – the stock market has at times delivered stronger returns than the housing market – but owning a home can force savings discipline for some people, and that's a good thing.
Before you start house-hunting, determine whether it's worth it for your area to rent or to buy. Here's a good calculator.
In Your 40s
Your earning potential has grown, and your kids are in school, or at least out of diapers.
Ideally, set aside 15 percent of your household income, or more, buying into mutual funds or acquiring individual stocks, in addition to your company 401(k).
Mutual funds generally offer built-in diversification. But there can be a tax advantage of buying individual stocks, because you can sell the ones that decline in value to offset the capital gains on the ones that rise.
If you decide to buy individual stocks, open a retail account with low trading costs and invest in a different company every month, diversifying across sectors. In a year's time, you'll have a diverse portfolio.
"Look for what offers value, what's been beaten down, and offers good cash flow, good returns, high dividends," Kyle says. "And always be a contrarian."
Resist the temptation to obsess about the stock market. And never be a momentum trader, Kyle warns. "Don't buy because the market went up," he says. "And don't sell because the market went down. If the market goes down 20 percent, you should be thinking: How much more am I going to buy?"
In Your 50s
This is where the bulk of your savings is likely to happen. You're making more money now, and your kids have flown the nest.
You can contribute more to your savings plans, and you may be able to afford to save more. This is also a good time to start trimming your living expenses.
Kyle suggests setting aside some money in junk bonds, which pay a nice return, but he suggests putting them in your tax-protected retirement account. Invest in stocks outside of your retirement account. That way you're sheltered from the punitive tax rates on bonds. Capital gains on your stocks are taxed more lightly.
For some couples, it's time to downsize, selling the big family home and perhaps moving into a smaller apartment, closer to work. Some will buy their retirement home somewhere else, and steal away for vacations and long weekends.
In Your 60s
Delay retirement, if you can, because every year you work past the minimum retirement age "pays off double," Kyle says. That's because you continue to save with every working year, and you hold off drawing down from your retirement funds.
Finalize your estate plan to make sure your spouse and children are provided for, and update your will. If you don't already have a will, now's the time.
And do your homework on long-term care insurance. There are a myriad of plans out there, but some charge high premiums for little coverage, Kyle warns. And sign up for Medicare once you stop working full-time.
In Your 70s
If you still enjoy your work, keep doing it, or consider a way to do a modified version of it – working part-time or volunteering.
Research retirement communities and elder care facilities for your later years. Begin to transfer assets to your children to avoid tax.
You've been disciplined and have saved for decades, so splurge on travel and experiences.
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