How to Become Financially Secure in today’s Economy
Quick Facts:
- Financial Planners don’t always work in their client’s best interest, especially if they are working on commission based sales
- Unless a Financial Planner has a CFP (Certified Financial Planner) or other well known designation, they might know little outside of the products they are selling
This is a continuation post from yesterday in regards to Financial Security. I’m going to touch upon what it takes to be financially secure. This isn’t everything you can do but is a good base and I suggest you look at other solid sites like Investopedia.com or consult a financial advisor or financial planner.
Get Rid of All Bad Debt
The first step is to lower your debt, especially bad debt. A couple days ago, I wrote about getting you a guaranteed 25% return on investment by paying down your credit card balance. If you have any debt that you’re paying moderately high interest, probably over 6-7% in our current interest rate environment, pay it down immediately unless you’re confident you can pull off a greater return.
Having said that, say you are very confident in your investment or trading strategy and you think you can get 10% year over year on your investments, you’d still be better off paying off any debt under 6-7% as you are essentially paying the debt down with after tax money. A good rule of thumb is that you need to earn two dollars for every dollar you spend. Again, this isn’t accurate because there’s marginal tax rates and whatnot, but it’s a good way to think. So you’d need a 12-14% return just to cover the interest and not even scrape the principle.
The Rainy Day Fund for Emergency
Second, once you’ve lowered your debt start saving. With unemployment so high all over the world (9.6% in the US and 8% in Canada), job security is a big issue for everyone. You should have rainy day fund that has 3 months worth of your current monthly paycheque. So if you’re making $3,000 you should have $9,000 tucked away in a high interest savings account or a very liquid investment like a GIC or money market funds. These funds need to be in a very liquid and very low risk investment, as you could need them at anytime.
The 401k in the US and the RRSP in Canada
This is when you should be looking to invest in your 401k in the US and your RRSPs in Canada. Our governments are trying to helps us plan for our future (not only our retirement) by giving us these plans so be sure to take full advantage of them! Never expect social security and pensions to take care of your retirement, it just isn’t going to happen, you need to be responsible for your own retirement, otherwise you will not live a happy retirement.
If you work for a company, chances are they will help you invest in your registered plans. Be sure to take full advantage of this, as some companies may match a portion of your investments into certain plans, you might even get stock options or something similar that makes it even more lucrative. Check your benefits for details, you could be missing out on thousands of dollars on an annual basis!
Non Registered Funds but Very Important Funds
Now you need to start building your investment portfolio. Stocks are a great place to start. I’m not a huge fan of mutual funds but you can always start with mutual funds until you get to a certain point. Mutual funds are ok because they diversify your portfolio and are professionally managed. The downfall is that they charge fees, have set rules that they have to abide by that could hurt your investments, and you could be paying taxes on mutual funds even if you are losing money!
Something you can do is do some research by looking at some of the reputable mutual funds and see what they invest in. You should be able to get this information through any mutual fund’s website or your online discount brokerage with little problem. Most likely, you’ll find a breakdown of the mutual fund’s biggest holdings as a percentage, which should be good enough. You can mimic this and buy what you think are the best investments. Again, if you have time learn what it takes to invest in stocks or consult a financial advisor.
Having a solid plan and Periodically Reviewi and Readjust
It can be overwhelming to do all this at once, so don’t. Take your time and expect to grasp it over time, it’s never too late. Once you have a plan, think about your goals. How much will you need in retirement? What are some things that you would like to do in your retirement (travel, hobbies, cottage)? How much can you put away on a monthly basis? Are you sure can’t cut some expenses to put more money away?
You should try and have a number, which you always change, so that you know what you’re working towards. The number might be overwhelming at first as it could be in the millions depending at which life stage you are in, but don’t fret and chip away at it little by little.
Theirs is no magic formula for everyone. I hope this gave you a bit of an idea as to what you need to do. Investing is a very complicated and often misunderstood topic. There’s so many ways to invest your money and it can really get overwhelming, but there’s no need to invest in everything. Put money where you are comfortable and put a set percentage of money in areas that have a little more risk so that there is growth potential.
Tokyo Tower photo by Sprengben on Flickr.
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02 November 2010
