On July 4th, I appeared on The Willis Report on Fox Business News. I weighed in on the topic of declaring your financial independence, something near and dear to my heart. (Sorry I don’t have video, here’s a transcript and a related story on the topic.) The advice below may strike you as pretty common sense, but I follow it religiously, and it helps me live a value-driven life, without stressing a lot about money:
1) Thou shalt not live beyond thy means: Get a budgeting tool that works for you so you know exactly what’s coming in, exactly what’s going out — and then make choices and set goals for the money based on what you value most. Be creative; fun is often free (see my previous post regarding Bananagrams and country club fireworks, and #2 below.)
2) Thou shalt set aside 3-6 months of funds for emergencies. Once you have a handle on step number 1, it is easier than you think to get to step number 2. Be frugal in things that don’t make much of a difference in your lifestyle (stick with generic household brands, call your insurer once a year and try to get your auto and homeowners premiums reduced).
And make the most of freebies! My friend Julia Scott over at the BargainBabe has some terrific stuff on tap today…free ice cream, free bowling, even a free bra. Lots of coupons too. Use your savings to build a rainy day fund that will give you peace of mind.
3) Thou shalt pay off any balance on thy credit cards in full and on time each month. Just do it.
4) Get the best deal on major financial products. Don’t spend your precious time saving 25 cents on a can of tuna. Worry about getting competitive bids from at least three lenders when you take out a mortgage or a car loan. Learn how to take care of your credit score, which will get you the lowest interest rates on loans and save you tens of thousands of dollars over time. Get the big purchases right. They matter.
5) Save early and often for retirement and the cost of college for your kids. Try to do it in a tax-advantaged vehicle, such as a 401(k) and IRA for retirement, and a 529 savings plan for college. It is enormously hard to catch up if you don’t get in the habit early on, and the earlier you start the more compounding works to your advantage.
Let’s say that starting at age 22, you set aside $5.50 a day ($2,000 a year) in a Roth IRA, and stop at age 30. Assume your savings grow at an average of 9 percent a year and you don’t touch the money until you’re 65. You’ll have more than $500,000 for retirement — and you’ll have a bigger nest egg than someone who starts at age 31 and contributes for 35 years! That is the power, the beauty, the majesty of compounding at work! (Yes, I was one of those dorky 22-year-olds who embraced retirement planning.)
Don’t understand investing? Spend an hour with a fee-only investment planner who can help you choose appropriate funds for your age and risk appetite. Tell this planner you want to use index funds and other investments that have very low fees. Do not choose a planner who earns a commission for getting you to invest in specific products.
Okay, lecture is over, class dismissed. Have a great weekend.
What rules have proven invaluable to you in achieving financial independence and peace of mind? Comment here or email me at laura at laurarowley dot com.