We are only given one physical body in our lifetime, so it is up to us to nourish and maintain it. It is up to us to make the effort to eat healthy and stay healthy. If we don’t, it will eventually catch up to us and we’ll struggle much more in our older years. We’ll lose the ability to perform more physical activities or enjoy time with our loved ones. We’ll lose our ability to work or vacation at our fullest. Although some things are inevitable, we still have a chance at staying healthy into our older years if we make the right decisions starting right now. Similarly, I believe that we need to make the right financial decisions that will benefit our health down the line. Regardless of the election results and the political climate, I believe that it is necessary for us to think about how to make the best financial decisions for our future. Therefore, I highly recommend getting an HSA account if it is available through your health insurance provider.
No one really knows which direction the market will go. I saw the stock market drop substantially back in 2008-2009 when I was still in college. Back then, I was part of a student-run investment fund and saw our portfolio lose half its value after a tremendous run in the few years prior. It was definitely a great real-world learning experience and wake up call.
Although it tends to go up in the long run, there are periods of downturn. These periods of downturn have caused significant stress in many of our personal lives and financial turmoil in our wallets. Thankfully, there are ways to decrease the losses that you’ll suffer during a recession, and perhaps even come out on top. Here are some ways to recession-proof your portfolio.
Previously, I had talked about the importance of saving early and retirement vehicles such as a 401K. However, I didn’t go into too much detail about how they work, why they are important, and how they can help you. According to a Vanguard study, the median 401K balance of someone from the ages of 25-34 is just over $9,000. For someone from the ages of 35-44, the median balance is just over $26,000. In my opinion, those are very abysmal amounts especially considering the benefits of using one of these vehicles. If more people understood the importance of a 401K and all the benefits they bring, I’m sure that they would make a greater effort to contribute more. If you don’t have access to a 401K account, don’t worry, there are other tax advantaged retirement accounts that I will mention later.
When I started my 401K, I wanted to spend the least amount of time on it as possible while ensuring that I was making responsible financial decisions. Contributions to my 401K were already automatic, so I didn’t have to think about that. The next step was to avoid having to think about what I was investing in. I didn’t want to spend any time figuring out how to allocate my money between different funds. I was already busy enough with my day job and my post-tax investment portfolio which required researching individual stocks. Therefore, I resorted to using what are known as Target Retirement Funds (TRF).
You may not think about it, but taxes eat away at your investment returns. Most people tend to focus on their rate of return without realizing that legally avoiding taxes through a tax-advantaged retirement vehicle can easily contribute to a 25%+ return depending on their tax bracket. If you have a large dividend portfolio, your dividend income would get taxed every year. Although your qualified dividends will get taxed at a lower rate, those taxes still add up over time. Thankfully, you can use a Roth IRA to avoid taxes on your investment earnings.
With all the resources out there, the personal finance landscape can be extremely confusing and overwhelming. It can take a while for you to peruse a large number of articles, synthesize the information, and absorb the key lessons. Therefore, I have decided to list just the most basic and important key lessons that will get you started. Remember the pareto principle? I’m will apply that principle so you can learn what you need to know ASAP with the least amount of time necessary.
As you start your career, it is wise to start saving and investing your money. You may think that you’re too young to start saving and investing, but the power of compound interest can grow your savings substantially if given enough time. If you are young, time is your greatest asset. In a previous posting, I wrote about why I love exchange traded funds (ETFs). I personally use them to build my portfolio to avoid having to spend too much time researching stocks. They have allowed me to maintain a balanced portfolio that will grow over the long-term and ride out the recessions in the short-term.
In order to have money left over to invest towards retirement, retire early, or just to build wealth, chances are you’ll need to figure out a way to save more money. Of course, cutting that $2 daily cup of coffee will add up in the long run. However, that $2 is probably just a very small percentage of your overall spending. In addition, you’ll end up brewing your own cup of coffee, which will save you money, but there’s the added cost of all the time that you’ll spend every morning grinding the beans, waiting for the coffee to brew, and cleaning up your pot. Not to mention, if all that work doesn’t energize you, you’ll have further depleted your mental power before you even start your work.
Once you start working, it is wise to start saving some of your money for retirement. One of the most popular investment vehicles is the Individual Retirement Account or IRA. It is a personal account that allows you to contribute your savings toward retirement. Regardless of what company you work for, the account is yours. Once you put money in that account, you can purchase a variety of investment vehicles such as stocks, bonds, exchange-traded funds, and mutual funds. For 2015, the IRS limits your contribution at $5,500 for the year. The contribution limit is increased every few years to keep up with inflation. If you can consistently contribute money to your IRA while investing it in high-quality stocks, you’ll position yourself well for retirement. Remember, one of the tried and true ways to build wealth is to save and invest for the long-run, and a tax-advantaged vehicle such as an IRA is a perfect way to do this. In fact, there is even a way to guarantee up to 50% return on your IRA.
WIth all the different retirement vehicles out there, it can be extremely confusing to figure out how to start saving for retirement. Do I use an IRA? What about a 401K? How come my teacher friend has a 403b? What do all these confusing numbers and letters mean!?!!? Don’t worry, I am here to map out the majority of the retirement vehicles that are available and to give you a big picture view. Once you have this big picture view, the retirement vehicle landscape will become much clearer. If you haven’t even thought about saving for retirement, you need to read this post here.
Professional Development and Personal Finance Blog