Are you Being Naughty or Nice with Your Critical Money Decisions?
Why does Santa check his list not once, but twice? It’s to make sure he’s made the right decisions. If you can get the big decisions right in your financial life, wealth will follow.
Here’s a list of the 10 most important money decisions you will ever make.
#1 - How much ownership should I take with my finances?
In this busy world, it may be tempting to put off your financial planning until later or assign the task to someone else. But is this wise?
Consider your physical health for a moment. Would you let someone else choose what’s best for you if you got ill? Would you let someone else make key decisions for you like electing surgery or taking medication without your say? Probably not. Then why would you give up control of your financial health?
How engaged you are in growing your wealth truly matters, so take charge now. Start by reviewing or creating your financial plan. By taking responsibility for your own financial well-being, you increase your odds for success.
#2 - How much should I save?
This is the biggest driver of your investment growth. After all, if you don’t save, you can’t invest. Aim to sock away at least 10% of your salary every year—more, if possible.
Not good at saving? Then you probably shouldn’t buy that new gas-guzzling SUV, pay for top-of-the-line cell phone or cable plans, or eat out daily. Make it your goal to spend less and save more in 2017, so you can set yourself up for financial security.
#3 - How much should I put into stocks?
The more you invest in a diversified mix of stocks over your lifetime, the higher your return will likely be in the long run.
So what’s considered long term? According to the September edition of JP Morgan’s “Guide to the Markets,” the 10-year rolling return since 1950 of the S&P 500 ranges from -1% to 19%, so 10 years might serve as a good guide. In addition, you should expect negative returns in the stock market at least 1 out of every 5 years; so, each time you hit a pothole in your investments, don’t jump ship.
While there is a greater chance of short-term losses with stocks, the game of stock investing will be won by the patient and disciplined.
#4 – Should I be an investor or a speculator?
It’s not an easy choice. Research has shown that “market timing” most often does not work. But the daily headlines telling you to “buy this stock” and “sell that one” can challenge your investment discipline.
It’s also easy to fall prey to “hot stocks,” even when you know reliable investing results depend on diversification. The trick is to keep the speculative portion of your investments as small as possible. That way, if they do go cold, your temporary losses will be minimal.
#5 - Where should I live?
Think carefully before picking the mansion over the modest home. If you buy the biggest house you can afford, you’ll have less money available to pay for college or retire early. And here’s something else to ponder: wealth is often found in neighborhoods with old cars and tall trees.
Just look at Warren Buffet. He lives in a 5-bedroom, 2.5-bath house in an old neighborhood in Omaha, Nebraska. Not in a beachside mansion or country manor surrounded by acres of land. The lesson here? Just because you’ve got money doesn’t mean you have to flaunt it. When you’re sitting on a sizable nest egg in retirement, you’ll be glad you didn’t.
#6 - How can I manage my taxes more effectively?
You are surrounded by investment account options that offer many tax advantages—like IRAs, Roth IRAs, 401(k)s, 529s and health savings accounts (HSAs). Yet very few people maximize these tax shelters. This is a mistake.
When you use them, tax shelters can help you keep more money in your pocket so you can create a more stable financial future. For more on this, read my recent article on tax shelters.
Also, tax strategy should be reviewed carefully with a CPA or enrolled agent in order to ensure smart tax moves.
#7 - How many kids should I have?
The Department of Agriculture now predicts it will cost $250,000 to raise a child. In California, this figure is closer to $350,000. Eighteen years of childcare, medical bills, groceries, clothes and shoes, summer camps, and piano lessons can really add up.
And don’t forget about college. Four years at a top university can run well over $150,000. As you’re thinking about how large a family you want, keep this in mind: Having kids can be exceptionally rewarding, but it’s also enormously expensive.
#8 – Should I pay off my credit cards every month?
Carrying credit card debt is an act of financial foolishness. Yet so many of us do it. The average credit card debt in the U.S. is $15,675 at an average interest rate of 15.1%. Ouch! Debt of that size will derail all your other smart financial moves, so put a stop to it before it snowballs out of control. Buy only what you can afford each month, and pay your bills immediately.
#9 – How should I prepare for financial emergencies?
A rule of thumb from the CFP Board is to have 3-6 months of your spending set aside in liquid, cash type investments like a Money Market Fund or CD. You should also regularly review your insurance coverage like medical, disability, umbrella, life, home and car to make sure it reflects your current needs.
#10 - Where should I get financial advice?
Newspapers and money programs are designed to entertain, so it’s easy to get caught up in the hoopla. Sensible investing, on the other hand, is often rather dull. Rather than following “hot stories,” read books and articles from the best investment gurus on the planet like Charlie Munger, David Swensen, and Warren Buffett.
Aside from the misleading financial media, people often turn to family or friends for investment ideas. Unless your cousin is investment legend Jack Bogle, you may want to look elsewhere.
And then there are local financial advisors, who very well might be a great place to start. Just make sure their motives are in line with yours, and be sure you understand how they are paid.
Do they make more money by generating trades?
Are they compensated to sell certain products over others?
Are they limited to certain products through their firm that carry high fees, such as mutual fund fees over 1%?
If so, you may want to look for an independent, fee-only “fiduciary.” This is a professional who has specific credentials such as CFP (certified financial planner) or CFA (chartered financial analyst). Before investing, be sure you’re clear about the fees you’re paying for both the advisor and his or her recommendations.
As the year comes to a close, take a few moments to consider the critical financial decisions that you have made. The decisions above should not be taken lightly: these are the most important money decisions you’ll ever make. If you are married or someone else is active in your financial life, sit down together and review where you stand. Santa might bring you plenty of nice things, but only you can give yourself the gift of a strong financial life.