You just withdrew money at an ATM, went for a walk around the neighbourhood and, by the time you got home, your wallet’s cleaned out. Then your phone pings with a message from the bank reminding you of another totally unplanned, random purchase. And before you’ve reached the end of your pay cycle, you’re broke and wondering how you got there. Sound familiar? Well, then it’s time for a reality check. Start with accepting that most things you buy are completely unnecessary. Open any closet in your home, and staring at you is most likely a whole mess of things you haven’t used, looked at or even thought about in months. Once you recognize there’s a problem, you can get down to fixing it.
Spell it out
“Women tend to be impulsive buyers. So what you should do is note down your expenditure. Before buying anything, ask yourself if you really need it and whether you have space to keep it,” says Shikha Bhatnagar, executive vice-president, Bajaj Capital. With debit and credit cards and e-wallets, it has now become easier to spend. A study conducted by Dun & Bradstreet, a business services company, found that people spend 12-18 per cent more when they use plastic money instead of cash. Chartered accountant Dhananjay Paranjpe agrees. “Credit cards create liabilities. They commit your future income for what you buy today. Always ask yourself whether what you’re buying will be an asset or just an expense.” What you also need to do is identify areas you are splurging on—whether it’s dining, shopping, or even cabs.
Manage your mood
Psychotherapist Dr. Radhika Bapat believes splurging is a coping mechanism. “The occasional impulse buy is normal by itself. But chronic overspending might be an emotional tool. People come to depend on shopping to be happy, to fill those empty spaces, and to run away from themselves.” According to Dr. Lorrin Koran, professor at Stanford University School of Medicine, “People who overspend may also be suffering from other psychological issues. These include mood swings, anxiety and other impulse control problems or addictions.” Dr. Sonal Sheth, psychotherapist and counsellor at Bhatia Hospital, Mumbai, explains how this manifests. “Moods and money habits are related. When people are depressed, they spend money in order to feel in control. It reduces their sense of gloom,” she says. Shopping is also popular among those with low self-esteem. “Objects give people a sense of security,” says Dr. Vasant Mundra, consultant psychiatrist at Mumbai’s Hinduja Hospital. “From childhood, it has been ingrained in us that rewards are a token of love, so we identify objects with emotions. Rewarding oneself is a way of handling insecurity,” she adds. If you are a compulsive spender and think you might be depressed, make an appointment to see a mental health therapist. Find ways to get that ‘high’ that doesn’t involve spending money. You could call friends over for dinner or spend time with family. On your list of priorities, upgrade experiences and people and downgrade material possessions.
Long-term “Plan in such a way that the moment your salary is credited, a part of it goes into your savings. Only when you instill savings discipline can you cut down on unnecessary spending,” says Surya Bhatia of Asset Managers. He, however, warns that the belt shouldn’t be tightened overnight. “Target 30 per cent savings initially. This can go up to 40 per cent depending on your expenses,” he says. Once you get into the habit, cutting down on spending will be as easy as shopping once was.
You can save hundreds -- or even thousands -- of dollars by employing some of these tips. In the process you may end up better prepared for retirement, too.
A major tax bill has been passed, and in the years ahead many Americans will be paying more than before, while many others will pay less. Folks in both camps will still want to minimize any sums they pay Uncle Sam, so here are some tax tips to help many taxpayers shrink their bills.
Note that many of these actions can be taken throughout the year, not just at the end of the year or come April. For best tax-minimizing results, think about and tend to your taxes all year long.
Tip No. 1: Learn about changes to the tax laws
Few people are eager to read up on taxes, but the new legislation ushers in so many changes that it's worth becoming familiar with many of them, in order to best plan. For example, many tax deductions are ending in 2018. These include:
Personal exemptions. These allowed many taxpayers to shrink their taxable income by a hefty $4,050 per person in 2017. This is gone for the 2018 tax year, though an increase in the standard deduction will partially offset it.
Moving expenses. Some job-related expenses (such as license and regulatory fees and unreimbursed continuing education).
Parking and transit reimbursement. Companies have been allowed to subsidize worker transportation costs up to $255 per month per worker, with the sum deductible by the employer and not counted as income to the worker. With this deduction gone, the job benefit may disappear, too.
The tax brackets themselves have changed, for 2018, with new tax rates and new income levels qualifying for them.
Tip No. 2: Contribute to retirement accounts
One tax benefit that hasn't changed, fortunately, is our ability to use tax-advantaged accounts such as IRAs and 401(k) s to save for retirement. There are two main kinds of IRA -- the Roth IRA and the traditional IRA, with the latter shrinking your current taxable income and giving you an upfront tax break, and the former offering tax-free withdrawals in retirement. For 2017 and 2018 alike, the contribution limit for both kinds of IRAs is $5,500 for most people and $6,500 for those 50 and older. Meanwhile, a 401(k) (which also exists in traditional and Roth forms) has much more generous contribution limits -- for 2017 its $18,000 for most people and $24,000 for those 50 or older, and for 2018 it rises to $18,500 for most people, while the $6,000 catch-up limit is unchanged.
Those allowable investments are quite powerful if your money can grow for many years. The table below shows what you might accumulate over various periods if your investments average 8% average annual growth:
Tip No. 3: Consider your holding periods
Don't sell any stocks without giving some thought to how long you've held them. Don't base your decision solely on taxes, but know that as of now, most of us face long-term capital gains tax rates (for qualifying assets that were held at least a year and a day) of 15%. Short-term capital gains face your ordinary income tax rate, which could be close to twice as high. So if you've held a stock you want to sell for 11 months, consider hanging on for another month and a day.
Tip No. 4: Use your losses to offset gains
You can make lemonade from lemons when you have an investment loss: If you know you'll be facing taxes on capital gains you realized throughout the year, such as via stocks sold at a profit, you may be able to reduce or wipe out the taxes owed on that by offsetting the gains with losses. For example, if you have $8,000 in gains and you sell enough holdings to generate a loss of $6,000, you can pay taxes on only $2,000 in gains.
If you have way more losses than gains, you can wipe out your gains entirely, then shrink your taxable income with up to $3,000 of your losses, and then carry over any leftover losses into the next year. (If you plan to buy back any of the losers you sold, be sure to wait at least 31 days, lest you end up with a "wash sale" that doesn't count.) Keep this strategy in mind throughout the year, as there may be particularly good times to sell various holdings for a gain or loss.
Tip No. 5: Open a Health Savings Account (HSA)
If you have a qualifying high-deductible health insurance plan, you may be able to take advantage of an HSA. You fund an HSA with pre-tax money, lowering your tax bill just as you would with a contribution to a traditional IRA or 401(k). That money can be used tax-free for qualifying healthcare expenses. The money in the account can accumulate over years, too, invested and growing. Once you turn 65, you can withdraw money from an HSA for any purpose, paying ordinary income tax rates on withdrawals. Thus, an HSA is actually a bit of a healthcare expense/retirement hybrid.
Tip No. 6: Use a Flexible Spending Account (FSA)
This is another account that accepts pre-tax dollars and lets you spend them tax-free on healthcare expenses. It's not quite as wonderful as an HSA, though, as you need to use most of your contribution each year, or you lose it. Still, if you plan well, this can save you a lot in taxes. For 2018, the FSA contribution limit is $2,650. If you're in the 24% tax bracket and sock away that much, spending it on eligible expenses, you can avoid paying $636 in taxes.
Tip No. 7: Take your Required Minimum Distribution (RMD)
Fail to start taking your RMDs once you hit age 70 1/2 can be costly, resulting in penalties. Some retirement accounts such as traditional IRAs and 401(k)s require them, expecting you to withdraw certain amounts each year. The deadline to take your distribution each year is Dec. 30, except for the year in which you turn 70 1/2. For that year, you have until April 1 of the following year to take your RMD. (It can be better to take it before the end of December regardless, though, lest you end up taxed on two distributions in one year.) See if your account can be set up so that your RMD is sent it to you automatically each year.
Tip No. 8: Keep track of your spending and receipts
Don't wait until April to start scrounging around for whatever receipts you can find. Make your life easier by having a "taxes" folder or shoebox open all year round, into which you can drop any receipts or other documents that will support your tax return. For example, you should keep receipts from your charitable giving and medical spending to support possible deductions. Track your spending, too. If you find that you're spending a lot on healthcare, which might mean you'll be able to itemize your deductions.
Tip No. 9: Get help
Finally, don't let tax matters overwhelm you. There's no shame in hiring someone to help with your tax strategizing and tax-return preparation. In fact, a good tax pro will know far more about the tax code than you do and may be able to lower your tax bill while suggesting effective strategies. Don't just hire anyone, though. Ask around for recommendations. Consider hiring an "Enrolled Agent," a tax pro licensed by the IRS who is authorized to represent you before the IRS if need
The earlier you start your retirement planning, the better. Consider starting an SIP in equity mutual funds early in your career.
Many youngsters believe retirement is a distant reality, planning for which can be pushed back some years. What this usually means is that those in their 20s often feel they are too young to plan for their retirement! However, retirement planning becomes essential once you understand that eventually you will retire one day and your monthly pay cheque will cease to come. You need to build a substantial corpus during your working life for your money needs during retirement years.
Actually, the earlier you start the better. “Start an SIP in equity mutual funds early, maybe when you are 25. The amount you invest at this stage may not be much but even Rs 1000 invested every month will grow substantially. This amount will compound for the next 35 years and beat inflation - which is the whole point of planning for retirement early on,” said ER Ashok Kumar, CEO and co-founder of Scripbox.
Here are few tips which can help you make a big corpus at the time of retirement.
Start planning from today: The first and the foremost step are to think and implement your idea for investing towards your financial goal of retirement as soon as possible. Unless you start saving, you won’t achieve the wealth you desire to get at the time of your retirement.
Stick to the plan: The longest financial goal is the retirement goal and one needs to stick to the plan till it is achieved even if it takes 30 years to accomplish it. Do not divert your retirement savings to meet any other goal falling in between, unless it is very necessary and you do not have any other source of getting money.
Go for automated savings: The best way to achieve your long-term goal more precisely your retirement goal is to go with automated investing. Instead of investing lump-sum from time to time, SIP’s are the best way forward which can be done through Electronic Clearing Service (ECS). Choosing this option will help you deduct your amount automatically on a predetermined date every month. This process can be held for a fixed number of months or even done on a perpetual basis. Also, the process can be stopped anytime as per investor’s need.
Be debt free: “Make sure you are debt-free and own your primary residence. And keep your expenses in check -- don't spend more than 5% of your savings each year to pay for your living expenses in retirement,” says Kunal Bajaj, CEO & Founder, Clearfunds.com.
Take advice regularly: You should always take advice from a certified financial planners or adviser. They are financial doctors who will always give you a good and genuine advice. The better the advice will be, the easier would be for you to gain from your investments.
Sometimes, people who aspire to be business owners have this idea that they’ll pitch their idea, get millions of dollars in funding and start spending money like pro athletes. But, if they’re anything like the average American, they'll have an average $1,000 in savings (if that).
They’ll also have $17,000 to $137,000 in debt. If these numbers describe you, then borrowing money, applying for a loan, relying on credit cards and finding an investor may not be your best move. Instead, you should bootstrap your business.
My co-founder Dan Foley and I bootstrapped Tailored Ink back in August 2015. We spent a combined $1,000 to get it off the ground and kept our costs low. Flash-forward to today, two years later and we’re swiftly closing in on the $1 million mark. We still haven’t maxed-out our credit cards or applied for a business loan.
Want to know how we did it? Here are some financial habits we learned on our way to becoming successful business owners.
1. Spend within your means.
When I was making $40,000 a year, back in 2012, I was eating frozen TV dinners every single night. Aside from my desktop computer, which cost only $300, there was no furniture in my apartment to speak of. I even slept in a $25 inflatable bed.
Most of my friends and colleagues who had tons of college debt and were making about the same as me were literally pissing money. When they ran out of cash, they would max-out their credit cards.
Despite everything you may have seen on TV, this is not how to behave if you want to become successful. You’ll never accumulate wealth if you spend it as soon as you get it. Debt and loans do not equal wealth.
How do you keep yourself disciplined and spend less money in a credit-dependent and debt-ridden culture? By practicing delayed gratification. It’s the key to financial success. You need to believe that your short-term sacrifices will result in long-term gain. And they will.
2. Save way more than you spend.
With that in mind, you should aim to save as much as possible. Some people will tell you the exact opposite, as in, “Don’t worry about saving until you’re 30.” These are the same people who'll work until they’re 65 and wonder why their savings accounts are so small.
There are plenty of secrets to growing money, but there’s no secret at all to saving it. You just need to tuck in your belt and control your spending. Many financial advisors recommend saving at least 10 percent of income per year, but that’s not enough if you want to be rich one day.
Saving as a business owner is even trickier because you'll have other people to think about. Let’s say you make $10,000 a month at your new business. That sounds pretty great -- but after you pay 20 to 40 percent of that revenue for tax, 25 percent for business expenses and 25 percent for living expenses. . . There won't be a whole lot left.
If you’re running a B2B business, you'll also have accounts receivable to think about. Not all of your clients will pay you on time, if at all.
Dan and I save way more than we spend and put most of what we make back into the business. That way, we can afford to pay all our vendors before we pay ourselves. We keep a two-month runway in our business bank account at all times.
3. Always pay off your debts (or don’t borrow at all).
America has a serious credit problem. We’re brainwashed into believing that borrowing huge sums of money on a regular basis is smart. That’s why we do just that for college, cars, houses and even businesses. It’s why Americans had nearly $1 trillion in credit card debt back in 2015.
If you really stop and think about it, though, this is insane.
Warren Buffett has some pretty strong opinions about debt and loans. “You don’t really need leverage in this world much," he said. "If you’re smart, you’re going to make a lot of money without borrowing.” Buffett indicated that he was especially leery of credit cards. “Interest rates are very high on credit cards," he said. "If I borrowed money at 18 percent or 20 percent, I’d be broke.”
So, just as an example, let’s say you charged $5,000 to your credit card with an APR of 15 percent, and you paid the minimum 2 percent each month. After 14.3 years, you’d have paid out an additional $5,614.44 -- more than you borrowed.
4. Don’t just leave your money in the bank.
Speaking of savings accounts, they’re pretty much worthless. The interest rates at nearly all banks are so low that they’re insulting. Yet most people continue to think that leaving money in the bank is the safest thing they can do.
But you have other, better options. Nearly all banks and brokerages give you similar insurance -- just through different providers. Banks give you insurance for up to $250,000 in cash from the FDIC, while brokerages have the same coverage through SIPC.
In other words, as long as you have less than $250,000, your savings are just as safe in a brokerage as they are in a bank. You can trade stocks, bonds and funds without worrying that someone will steal your money. And if you follow Warren Buffett’s low-risk advice to invest in different index funds, you can earn upwards of 5 percent to 10 percent per year. The S&P 500 Index, for example, returned an average of 11.69 percent per year in the year’s from1973 to 2016. Compare that to 1 percent, which is the highest interest rate generous banks offer.
What’s in your wallet?
Bootstrapping a business isn’t that hard. You just need a basic understanding of how wealth accumulation works, and accept that your money-spending habits may not currently be aligned with success. That’s the hard part.
But if you dream of owning your own successful business one day or becoming a millionaire before you retire, you’re going to have done some soul searching. Are you willing to delay your gratification and make some sacrifices in the near future so you can reap the rewards down the road? Will that sacrifice be worth it to you?
When we're young, we tend to think about retirement as though it's just a really long, really great vacation.
We picture a house near the beach or a golf course. We can get out of bed when we please, stay up all night if we want, and never worry about another missed deadline. A frosty beverage is always at hand, and there's a hammock waiting in the shade.
But as we grow older and retirement gets closer, that enthusiasm often turns to angst. We have to figure out how the heck we're going to pay for the lifestyle we want when the paychecks stop -- and that can be a challenge, even for the savviest of savers.
Here are six mistakes to avoid when planning your dream retirement:
1. You do not have a plan.
Your No. 1 goal in retirement should be to know how much you will have coming in each month from all of your income streams -- and how you'll make that money last. Most prospective clients I meet with have a broker who helps them choose and purchase investments, but they don't have a holistic, written retirement plan that covers five key areas:
· Income (how you will pay yourself)
· Investments (how you will keep growing your money while also keeping it safe)
· Taxes (how you will hold onto more of the money you worked so hard to save)
· Health care (how you will deal with the short- and long-term care expenses that could significantly reduce your nest egg as you grow older)
· Estate (how your spouse, children and favorite charities will be taken care of when you die)
Your plan is your guide to and through a successful retirement.
2. You have never had your portfolio stress-tested.
One of the first questions I ask clients is how much money they're willing to lose if there's a market downturn. They always say zero. Of course, that isn't an option in investing; to earn a return, you must take on some risk. But we usually can land on an amount they can handle, both financially and psychologically. Software (such as the Riskalyze program we use) can help determine your risk tolerance -- and whether that's what your current portfolio is built for. Most people are surprised to see how aggressive their investments are compared with their comfort level. This can be fixed -- but first, you have to know where you stand.
3. You do not have a tax plan.
Investors often underestimate how much they will pay in income taxes after they retire. Some aren't aware that up to 85% of their Social Security benefits can be taxed. Others forget that Uncle Sam owns a portion of their 401(k) or IRA if they aren't in a Roth account, and when they take out their money, they'll have to pay him his share. Many are under the (usually mistaken) impression that they'll be able to live on far less income during retirement. I recommend working with a CPA who understands retirement income tax planning. And it's always a plus if your financial adviser and tax professional are working as a team to maximize tax efficiency.
4. You have an unrealistic income plan.
Many of the income plans my prospective clients come in with use a high rate of return that, at best, is a reach; they use minimum inflation protection rates and low tax rates; and there are no assets set aside for health care costs. A plan like that could leave you in a vulnerable situation. I prefer to build a more conservative plan, and if it turns out you have more money to work with than you thought, its gravy.
5. You do not understand investment fees.
Most investors don't know how much they pay in fees, which can be layered and complicated. When we run software to identify those fees, we find some people are paying as much as 3%. That may not seem like a lot, but if you look at a $1 million portfolio with an 8% rate of return over a 30-year period:
· A portfolio with 3% in annual fees will have $4.0 million.
· A portfolio with 2% in annual fees will have $5.5 million.
According to the 2017 Retirement Confidence Survey, about 24% of workers said they had less than $1,000 saved for retirement, and a whopping 55% had less than $50,000. Only 20% had socked away $250,000 or more -- and even that seemingly hefty sum won't provide for the comfiest of retirements.
Clearly, many of us have not set ourselves up to have the money we'll need in retirement. Fortunately, though, there are some ways to get more money in our golden years.
Here are seven ways you can get more money in retirement.
1. Work a little longer before retiring
Most people probably don't want to put off retiring, but it can be a very effective strategy, giving you a bigger nest egg to retire with and fewer years that it will have to last. You might enjoy your employer-sponsored health insurance for additional years, too, perhaps while collecting a few more years' worth of matching funds in your 401(k).
Not convinced it's worth it? Well, imagine that you save and invest $10,000 per year for 20 years and it grows by an annual average of 8%, growing to about $494,000. That's pretty good. But if you can keep going for another three years, still averaging 8%, you'll end up with more than $657,000! That's more than $160,000 extra just for delaying retiring for a few years. If you're somewhat close to retiring, the table below will show you how much more you might amass over several time periods if your money grows by an annual average of 8%:
2. Work a little – in retirement
Whether you delay retiring or not, you should consider working a little while retired. Sure, it might seem to defeat the goal of living work-free, but many retirees actually find that they miss the structure and opportunities for socializing that their job provided. Many find themselves restless and a bit lonely in retirement, and a low-stress job on the side can be quite helpful.
Working just 12 hours per week at $10 per hour, for example, will generate about $500 per month -- a useful sum. If you're imagining being a cashier at a local retailer or delivering newspapers and you're not excited by that, think a little harder about work possibilities. You might do some freelance writing or editing or graphic design work. You might tutor kids in subjects you know well, or perhaps give adults or kids music or language lessons. You might do some consulting -- perhaps even for your former employer. You could babysit, walk dogs, or take on some handyman-type jobs. These days the internet offers even more options. Make jewelry, soaps, or sweaters and sell them online.
3. Get -- and stay -- debt-free
When you're living on a reduced income, it will be extra hard to pay off credit card debt or other high-interest debt, and those payments can hurt your ability to make other necessary payments. Paying off your debt before you retire will leave you with more money.
It can be OK to be still carrying a mortgage in retirement, but many people aim to have their homes paid off before retiring. Credit card debt is a different matter, though, as it can be financially devastating. Aim to pay that off pronto, no matter whether you're in retirement or are only 37 years old. It's not unusual to be charged annual interest rates of 25% or more, and on $8,000 of debt, that can cost you around $2,000 each year!
4. Make the most of retirement savings accounts
The more you contribute to tax-advantaged retirement savings accounts such as IRAs and 401(k)s, the more money you'll have in retirement. There are two main kinds of IRA -- the Roth IRA and the traditional IRA -- and for 2017 and 2018 alike, the contribution limit for both kinds of IRAs is $5,500 for most people and $6,500 for those 50 and older. Meanwhile, a 401(k) has much more generous contribution limits -- for 2017 it's $18,000 for most people and $24,000 for those 50 or older, and for 2018 it rises to $18,500 for most people, while the $6,000 catch-up limit is unchanged.
Those contribution limits might not seem like a lot of money, but they're quite powerful if your money can grow for many years. As an example, socking away $5,000 annually for 25 years will get you nearly $400,000 -- and you'll likely be able to invest larger sums over time, as you earn more and contribution limits rise. Roth IRAs and Roth 401(k)s (which are increasingly available) can be especially powerful retirement income generators, as they let you withdraw money in retirement tax-free!
5. Buy fixed annuities
Another good way to set up regular income for you in retirement is through annuities. Yes, some annuities, such as variable annuities and indexed annuities, can be quite problematic, often charging steep fees and sporting restrictive terms. But another kind -- fixed annuities -- is well worth considering. They're much simpler instruments and they can start paying you immediately or on a deferred basis.
Below are examples of the kind of income that various people might be able to secure in the form of an immediate fixed annuity in the current economic environment. (You'll generally be offered higher payments in times of higher prevailing interest rates.)
Annuities remove worries about stock market moves and the economy's current condition and keep paying you no matter what is going on in the economy. A deferred annuity can also be smart, starting to pay you at a future point, such as when you turn a certain age. A 60-year-old man, for example, might spend $100,000 for an annuity that will start paying him $957 per month for the rest of his life beginning at age 70. Deferred annuities are a good way to avoid running out of money late in life.
6. Borrow against your life insurance
Here's a retirement-income strategy many don't think of: Borrow against your life insurance. This can work if you've bought "permanent" insurance such as whole life or universal life. It won't work if you've bought term life insurance that generally only lasts as long as you're paying for it. (A note to insurance buyers, though: Term insurance is preferable in many ways.) You'll be reducing or wiping out the value of the policy with your withdrawal(s), but if no one really needs the ultimate payout, this strategy can make sense. Plus, the income is often tax-free.
7. Make the most of Social Security
Finally, think strategically about Social Security. You can increase or decrease your benefits by starting to collect Social Security earlier or later than your "full" retirement age (which is 66 or 67 for most of us), and you can get more out of the program by coordinating with your spouse when you each start collecting. For example, if you and your spouse have very different earnings records, you might start collecting the benefits of the spouse with the lower lifetime earnings record on time or early, while delaying starting to collect the benefits of the higher-earning spouse. That way, you both get to enjoy some income earlier, and when the higher earner hits 70, you can collect their extra-large checks. Also, should that higher-earning spouse pass away first, the spouse with the smaller earnings history can collect those bigger benefit checks.
There are even more ways to maximize your Social Security income -- so learn more about them and see which ones you can act on.
It's often assumed that retirees live on fixed incomes, but that's not entirely true. Social Security checks are increased over time, and there are many ways to increase the income you expect to be living off of in your golden years. Much of your future financial security is under your control.
The $16,122 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.
Here are some solid words of wisdom on generating wealth and being generous with it as well.
You may be looking for an edge in your personal finances -- something that can help you rethink your approach to money and start getting ahead financially. If so, you might benefit from hearing what billionaires have to say and learning from their experiences. So, here are a few lessons on frugality, investing, and generosity from some of the wealthiest people in the world.
1. Live simply and be frugal
Most people don't associate billionaires with penny-pinching, but that's how famed investor and billionaire Warren Buffett approaches his personal finances. Buffet bought a relatively modest house back in 1958 for just $31,000, which was around $275,000 in today's dollars, and he continues to live in it to this day. For context, the median home price in July of this year was $313,700.
Buffett has summarized his views on success and happiness like this:
Success is really doing what you love and doing it well. It's as simple as that. Really getting to do what you love to do every day -- that's really the ultimate luxury ... your standard of living is not equal to your cost of living.
Buffett also holds on to his vehicles for a long time, as does Wal-Mart founder Sam Walton. And IKEA founder and billionaire Ingvar Kamprad once shared why having lots of money doesn't mean you should indulge yourself to no end:
I'm a bit tight with money, but so what? I look at the money I'm about to spend on myself and ask myself if IKEA's customers can afford it.... I could regularly travel first class, but having money in abundance doesn't seem like a good reason to waste it.
2. Have a long-term investing strategy
There's no better way to build up your wealth than let your money earn even more money for you by investing in stocks or index funds. John Bogle, the founder of The Vanguard Group and the creator of index mutual funds, says many things will try to distract you from your long-term goals, but you have to stay the course: "Do not let false hope, fear and greed crowd out good investment judgment. If you focus on the long term and stick with your plan, success should be yours."
Bogle's words aren't puffery, either. The index funds offered by his company are some of the easiest ways to build long-term wealth because of their historic 10% annual returns and low expense ratios.
3. Be generous
Microsoft founder and billionaire Bill Gates is well known for his philanthropic work, and his views on being generous can inspire all of us to support causes we believe in, no matter what our income levels.
"My wife and I had a long dialogue about how we were going to take the wealth that we're lucky enough to have and give it back in a way that's most impactful to the world," Gates told The Telegraph three years ago.
When it comes to his fortune, Gates has said, "Its utility is entirely in building an organization and getting the resources out to the poorest in the world."
The good news is that the United States is already one of the most generous countries in the world, according to the Charities Aid Foundation World Giving Index report from last year. And according to Giving USA's annual report about philanthropy in America, individual charitable donations increased last year by 2.6% (adjusted for inflation) to $281.8 billion.
4. Pay down your debt, especially credit cards
Before he became a billionaire, the outspoken owner of the Dallas Mavericks, Mark Cuban, said there was one thing he wishes he had known about personal finance when he was in his 20s:
That credit card is the worst investment that you can make. That the money I save on interest by not having debt is better than any return I could possibly get by investing that money in the stock market. I thought I would be a stock market genius. Until I wasn't. I should have paid off my cards every 30 days.
Unfortunately, Americans are racking up more debt than ever before. The Federal Reserve says that Americans now have over $1 trillion in outstanding revolving credit, which tops the previous record set back in April 2008.
Be smart with your money
It's easy to skim through a list like this and assume that just because the people mentioned above are billionaires, their ideas aren't applicable to our own personal finances. But these simple, straightforward approaches to spending, investing, and giving are all practical ideas that any of us can put to use now.
There are many factors to consider when you start investing – such as what to invest in and how much it will cost. But what many people might not realize is that one of the most important considerations is your age.
How old you are determines how long you have to invest, and that can help decide how much investment risk you should take.
Ryan Hughes of pension provider AJ Bell says: ‘The rule of thumb is that the longer timeframe you have the more risk you can afford to take.
‘But, of course, you should never take more risk than you are comfortable with. There is no point investing in a way that will give you sleepless nights.’
Beginning as young as possible can give you a head start. For many people, the investment journey may begin as a child. Parents and grandparents can squirrel away up to £4,128 a year tax-free for children through a Junior Isa.
Not only will starting early give the investment pot longer to grow, it can also get youngsters into a good savings habit for later life. Grandparents who invest £50 a month into a Junior Isa from a child’s birth could see the investment grow to more than £17,500 by age 18 if it grew at 5 per cent a year.
The younger you are, the more risk you can afford to take – for if there is a stock market crash there is more time for your money to recover.
Hughes says of savers starting in their 20s: ‘Investing for retirement could involve someone investing for 40 years, so higher-risk investments such as emerging markets and technology stocks could be appropriate.’
He suggests Fidelity Index World as a core investment choice for a young person’s portfolio. The fund is a cheap way to invest in stock markets worldwide and has returned 47 per cent over the past three years.
He also likes fund Invesco Perpetual Asian which focuses on companies based in China, South Korea and Hong Kong, such as electronics firm Samsung and internet specialist Baidu. It has returned 68 per cent over three years.
A racier choice is Polar Capital Technology fund, which aims to tap into key technology trends. It invests in internet giants such as Amazon and Facebook, plus lesser-known outfits with growth potential such as semiconductor maker Advanced Micro Devices.
The fund has returned 100 per cent over three years.
Rob Morgan, investment analyst at Charles Stanley, likes Franklin UK Smaller Companies fund. He says: ‘Investors sometimes overlook smaller companies. But they tend to be more dynamic and quick to react to growth opportunities.’
The fund, which has returned 45 per cent over three years, aims to find fast-growing companies.
The manager likes software companies and support services firms such as Clipper Logistics and shipping company Clarkson.
Mid-life Money Management
When you reach your 40s, it is time to start taking a more conservative approach.
As you get closer to retirement you may want to start being more cautious and reducing the proportion of your portfolio which is equity-based.
Michael Martin of investment house Seven Investment Management likes Troy Trojan fund as an ‘all-weather option’.
The fund, which has returned 22 per cent over three years, invests in a mix of company shares, government bonds and gold. This should mean the fund offers steady growth regardless of what the economy is doing.
He also likes Fundsmith Equity fund, run by veteran City investor Terry Smith. His strategy is to invest in companies which are so successful you never need to sell the shares.
The fund favors firms with strong brands such as Pepsico and Microsoft – with two-thirds of its money in US firms. It has returned 87 per cent in the past three years.
Another favorite is Lindsell Train Global Equity fund which invests in ‘boring’ firms renowned for paying a good income.
An increasing number of people keep their money invested even after they stop working. But investment choices should be cautious and focus on paying an income. Hughes says: ‘Generating income is vital. A good quality equity income fund can fulfill this purpose.
He likes Evenlode Income fund, which currently yields 3.4 per cent. The fund invests in firms such as Johnson & Johnson and AstraZeneca, which consistently grow their dividends.
Another favorite is Newton Global Income which invests in dividend-paying firm across the globe. It has a focus on larger businesses such as Microsoft and Unilever and currently yields 3.2 per cent.
A fixed income fund is a sensible choice for income. These invest in government and company bonds. Henderson Fixed Interest Monthly Income invests in the debt of companies including Barclays and Nationwide Building Society.
One-Stop Shop Choices
For many investors, the idea of picking their own investment funds can be daunting. There are now some 2,500 funds available through fund supermarkets such as Fidelity and Hargreaves Lansdown.
Deciding which ones are right can prove challenging. Multi-asset funds are a good one-stop solution.
Charles Stanley’s Morgan says: ‘Multi-asset funds invest across different areas, mixing shares and bonds as well as alternative assets such as property. The result is a diverse portfolio in a single fund, which is helpful for those looking for a low-maintenance investment choice.’
He likes Investec Diversified Income fund as an ‘uncomplicated, conservatively-run’ choice.
Another strategy is to pick a multi-manager fund. These invest in other funds using their expertise to find the best mixture of fund managers to generate returns.
Seven’s Martin likes Jupiter Merlin Balanced which invests in funds such as Woodford Equity Income and Fundsmith Equity.
The S&P 500 didn't gain ground in 2015, so neither did retiree Bruce Stanton's spending money. That summer, the former teacher in Washougal, Wash., dialed back what he withdrew from his retirement account to reflect the lackluster market. Fluctuations in income aren't that rare. During his career as a chemistry teacher, Stanton would sometimes get a big raise and other times get none. "I'm used to going without them," says Stanton, 63.
A challenge for all retirees is creating an income stream that will last a lifetime even if a downturn takes a big bite out of their savings. Some, like Stanton, are tackling this by adjusting withdrawals based on the market's performance.
But market-linked approaches run counter to the long-standing 4% rule, which holds that your money will last for a 30-year retirement if you withdraw 4% of your nest egg the first year and adjust that dollar amount annually for inflation.
Some experts are now arguing for a lower initial rate—such as 3%—since stocks and bonds may deliver below-average returns over the next few decades. Yet for much of history, 4% has been conservative, according to financial adviser Michael Kitces.
So what's a retiree to do? As an alternative to withdrawing a fixed percentage, here's a look at four "dynamic" withdrawal strategies.
Skip rises in down years.
Under the 4% rule, retirees with $1 million would take out $40,000 in the first year. Then they'd typically boost that dollar amount in subsequent years based on the consumer price index (CPI), a common gauge of inflation. So if CPI rises 2%, they'd take out $40,800 in year two.
But to play it safer, you could choose to skip those raises in years following negative returns for your portfolio.
David Blanchett, Morningstar's head of retirement research, says if you skip the inflation bump in down years, the chances your money will last until age 90 will go up by nearly 11 percentage points, assuming an initial 4% withdrawal.
Ratchet higher in up years.
What if you care about flexibility, but instead of sacrificing after down years, you want to reap the rewards of a strong market?
Kitces says if your account ever grows 50% above its starting value after initiating withdrawals—says you retired with $1 million but your balance rises to $1.5 million—you can go ahead and boost your withdrawals by an additional 10% above any inflation adjustments in perpetuity. Assuming you were going to withdraw $45,000 this year, you'd actually be able to tap as much as $49,500. And you wouldn't have to slash withdrawals after subsequent downturns.
According to Kitces, this strategy won't deplete your account under any scenario. The higher spending, though, makes this less than ideal if you want to leave legacies to your heirs.
Set a floor and a ceiling.
This hybrid approach, pioneered by Vanguard, starts out by establishing an annual rate of withdrawals—say, 4%. Then you set a ceiling that's no more than 5% higher than the prior year's income level, and a floor that's no more than 2.5% lower.
Here's how that would work: Assume you start with $1 million, and say you plan to withdraw 4%, or $40,000, at year's end. But market forces boost the value of your nest egg by 20% to $1.2 million. How much would you be able to tap at the end of year two? Well, you'd start by applying that 4% rate again to your new balance, which comes to $48,000. Then you'd see if that amount falls within your ceiling and floor. In this case, a 5% ceiling on $40,000 would be $42,000, which is below the $48,000 mark—so you'd go with the lower figure.
This ceiling-and-floor approach had a 92% success rate, meaning in more than nine out of 10 possible scenarios, retirement funds aren't depleted even after 35 years, according to Vanguard. By contrast, the traditional 4% rule with annual inflation adjustments resulted in a 78% success rate.
This also mimics human behavior: People tend to splurge when the market is up, and dial back when it's down, says Francis Kinniry, a principal in Vanguard Investment Strategy Group.
Use RMDs as your guide.
Once you reach age 70½, you have to take required minimum distributions (RMDs) from your traditional IRAs. Its Uncle Sam's way of getting his hands on money that's been tax sheltered for years.
To calculate your RMD, you divide your IRA balance by an IRS-provided figure that represents an actuarial estimate of the remaining life span of someone your age. At 70, your denominator is 27.4; meaning that under certain circumstances someone your age may live until nearly 97½.
As it happens, you can "take advantage of the actuarial strategy behind RMDs to guide your spending," says Wade Pfau, professor of retirement income at the American College of Financial Services. No one under 70½ must take RMDs, but there are equivalent lifetime expectancy figures. For a 65 year old, it's 31.9.
If you retire at 65, you'd divide your nest egg by 31.9. With a $1 million account, that's $31,350, meaning rather than tapping 4% of your nest egg, you'd be taking 3.1%, a relatively conservative approach.
Investors who aren't looking to leave a lot in their accounts for heirs might alter the formula slightly to boost their income.
For instance, you might modify your RMD amount by a factor of 1.1. Here, you'd multiply that $31,350 figure by 1.1, and at 65 you could withdraw close to $34,500 on that $1 million account.
Poor spending habits can snuff out your savings, just like the moon snuffs out the sun in a solar eclipse. The sun comes back out, but will your savings?
Today many of us in the US got a celestial treat: the first total solar eclipse in nearly a century. At the place where I work there is a high concentration of technical people, so we were all geeking out outside and enjoying the show, complete with pinhole cameras, polarizing sheets, colanders, and eclipse glasses.
Spending habits can be the difference between night and day
Just like the moon covers up the light of the sun, poor spending habits can cover up your savings, and then some.
Spending less than you earn is what responsible personal finance boils down to. Nothing else is sustainable in the long run.
Here are eight spending habits that are best to avoid if you want to save money and have good personal finance:
· Large student loans. A college degree is an income-booster, generally. There are also insanely expensive ways to go to college, just as there are cheap ways to go to college. Coming out of college with a load of student loans — which, by the way, are notoriously difficult to get discharged — can substantially cut into your ability to save for years. (Or, even worse, failing out of college with debt. Ouch!)
· Lavish, over-the-top weddings. Having gone through a wedding myself, I fully understand the desire to have a great day. It should be an once-in-a-lifetime event (kind of like a really good solar eclipse). At the end of it all, though, you'll be just as completely married after a $3,000 wedding as you will after a $50,000 wedding. The only difference is the bill. And if it comes with a five-figure credit card debt afterwards — well, the honeymoon will be over more quickly than you realize. Opt for a budget wedding and you'll be happy you did (and your guests probably won't think any less of you, either).
· Buying as much house as the bank will approve you for. When I was getting our loan approval for our current house, I was flabbergasted by how much they would lend me. If I remember, it was an amount that would result in a mortgage payment of nearly half of my take-home pay. That was way, way too much for me! But … the banks know that you'll move mountains to make that mortgage payment, so they don't really care too much if you are strained financially by it. Our mortgage payment is something more like 15% of our take-home pay. The less the better!
· An addiction to new vehicles. Buying new vehicles is a nice luxury if you can afford them and pay cash, but borrowing for them is like throwing thousands of dollars down the drain. New vehicles lose 15% or more the second they're driven off of the lot, and there's basically no way to get that back, ever. Buying used cars has the advantage that the first owner paid the depreciation for you. They'll still go down in value, but not nearly to the extent that they did the first year. (Buying used is a great saving tips in general, too!)
· Eating out all the time. Eating out once in a while for special occasions is a nice treat, but when it's one or two meals a day, every day of the week, it takes its toll on your bank account. Learn some simple meals that you can make yourself (here's my favorite soup for starters).
· Mountains of credit card debt. I get it: Sometimes credit card debt is unavoidable. Stuff happens beyond people's control: a serious accident, or a serious illness, or both. But a lot of it is completely and utterly avoidable with some good spending habits and some self-restraint. Simply don't buy stuff that you can't afford.
· Crazy-expensive vacations. Though it's unwise to cheap out too much on a vacation, it's equally unwise to vacation beyond your means. The vacation hangover is usually bad enough without a giant bill or humongous credit card balance to pay off.
· Expensive toys with lots of maintenance. Think boat (which is an acronym for Bring on another Thousand), or a swimming pool, or a vacation home, or a time share. These toys have a lot of fees and maintenance costs that are ongoing; buying the toy is just the down payment.
· Expensive toys with lots of maintenance. Think boat (which is an acronym for Bring on another Thousand), or a swimming pool, or a vacation home, or a time share. These toys have a lot of fees and maintenance costs that are ongoing; buying the toy is just the down payment.
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