It's 2018 and now’s the time to get your finances in order.
To help you and your family make all the right money moves next year, here’s a financial game plan that could help you grow your 401(k), avoid financial ruin and adjust to the new tax rules signed into law by President Trump.
Just as a New Year’s resolution to get fit can fail if you don’t hit the gym, getting ahead financially is tough if you don’t set up a plan and stick to it, says Dana Anspach, founder and CEO of Sensible Money, a wealth management firm in Scottsdale, Ariz.
Doing an annual financial check-up, she stresses, is only worthwhile if you use it as a jumping off point to “build good habits.”
“It’s figuring out the baby steps you can take that moves you and your money in the right direction,” Anspach says. “Every family should put together a playbook for the year.”
Here are steps to take to get you on the road to financial success.
Start with the Basics
Insurance isn’t sexy. In fact, it’s boring. It’s viewed by many Americans as just another bill, not an investment.
But insurance is the foundation of any financial plan, as it protects people from catastrophic losses that can wipe them out. Jan. 1 is the time to make sure your family has enough life insurance to pay for the kids’ college, keep current on the mortgage and fund other living costs in the event you or another breadwinner in the family dies, causing a loss of income.
“Check all of your insurance coverage,” especially if your life has undergone changes, such as having a child, advises Carla Dearing, CEO and founder of Sum180, an online financial wellness company in Louisville, Kentucky.
That means making sure your house, car, health and life is adequately insured against events that could put your family in financial peril.
Other basics not to overlook are making sure your will and estate plan are updated and all your financial accounts have the proper beneficiaries, adds Steve Janachowski, CEO of Brouwer & Janachowski, a wealth management firm in Mill Valley, California.
Tax Plan Tune-Up
The new tax law means most Americans’ tax bills will change. Some will pay more and many will pay less. Many longstanding deductions, such as home mortgage interest and state and local taxes have been cut or eliminated.
Uncertainty, as a result, is high.
“It’s important to understand what the new tax bill means to you,” says Paul Jacobs, chief investment officer at Palisades Hudson Financial Group in Stamford, Connecticut.
Taxpayers should analyze how to best take advantage of any benefits they receive. Perhaps more important, figure out how to minimize financial damage caused by changes to the tax code that reduce take-home pay or make owning a home more expensive.
For example, homeowners in coastal states where housing is expensive and taxes are high might need to rethink their real estate holdings after losing key deductions. Under the new tax law, the deduction for mortgage interest has been capped at $750,000, down from $1 million, and deductions for state and local taxes have been capped at $10,000. These changes could mean owning a home in 2018 and beyond will be more expensive.
While moving from your current home is a big decision that should not be taken lightly, “it may make sense to revisit where you live,” Jacobs says.
People living in high-cost states that are either approaching retirement, in line for a new job in another state or who aren’t happy where they're living now, “might want to consider moving to a low-tax state, such as Florida,” he says.
Simpler moves include reducing the money withheld from your paycheck for taxes if you’re getting a cut, or boosting your withholding if you expect to pay more in taxes.
It also makes financial sense to direct some or all of your tax windfall to your retirement account, or 529 college savings account, which can now be used to pay for private school from elementary school onward, adds Peter Mallouk, chief investment officer at Creative Planning in Kansas City, Kansas.
“Save the extra money before you get used to spending it,” Mallouk says.
With employer-paid pensions no longer the major source of retirement income, personal savings accounts such as 401(k) s and IRAs need annual tune-ups to ensure they're building wealth efficiently.
And given that many Americans have some of their retirement savings invested in the stock market – which has been going up for nearly nine years and posted a 19.4% gain in 2017 – now’s a good time to review these accounts to make sure they are properly diversified and not too risky, says Scott Kubie, chief investment officer at Carson Group, an Omaha-based investment firm.
Many investors’ portfolios today may be more risky than they think. A portfolio that once had 60% in stocks and 40% in bonds, for example, may now have a stock weighting of 70% or more.
“I encourage people to look at their holdings and make sure they are not overexposed to risk that they are not prepared to handle,” Kubie says.
To reduce risk, investors should rebalance their portfolios, or get back to their initial asset mix of, say, 60% stocks and 40% bonds, he says.
One way to do that is to sell assets that have performed well and redirect the money into investments that haven't done as well. If investors don’t want to sell what they currently own, they can get their portfolio back in whack by directing future contributions into the part of their portfolio that originally represented a bigger slice of their overall investment pie.
Another tactic is to invest some cash in overseas stock markets, rather than focus exclusively on U.S. markets, Kubie adds. “Make sure you have some international exposure,” he says.
And now that the government has reduced the number of deductions available to tax-payers, the 401(k) is emerging as a key vehicle to shelter income from taxes. A dual income family, for example, that earns $100,000 per year and takes advantage of the pre-tax 401(k) contribution limit of $18,500 could slash their taxable income by $37,000.
“People should try to max out their 401(k),” says Janachowski. “It’s a no brainer.”
What investors should not do is try to time the market, or get out just because some pundits say the market is pricey and is due for a fall, he adds. “Start early and save consistently,” says Janachowski, adding that he believes corporate earnings and stocks will benefit from the cut in the corporate tax rate to 21% from 35%.
Home Affordability Check
With fewer deductions, housing isn’t as financially friendly to homeowners, especially in New Jersey and California and other pricey, high-tax states along either coast. Now’s a good time to see if the house you're living in or the new house you're eyeing or the second home you've been dreaming about is still affordable, says Janachowski.
While the reduction in home-related deductions won’t impact most Americans, it could cause financial pain to those it does affect.
“It will be harder to afford housing because the government isn’t subsidizing it as much,” says Janachowski. “Does it mean you shouldn’t own a home or buy a home? No. A house isn’t only an investment; it is a place to live. But it could hit the second-home market and keep people from moving up to bigger homes.”
In trying to be smart with our money, sometimes we damage our long-term financial future. Here are some such common mistakes, and how to go about avoiding them.
We all intend to do the right thing with our money but sometimes our decisions and actions harm, rather than benefit, our financial situation. Typically this happens when you are in a hurry, or have not thought it through or not tailored a financial action to your specific situation. Here are some common situations where the end result may not be what you wanted, if you don’t take the trouble to do it right.
A budget too tight
You decide to streamline income and expenses to increase savings. But you overdo things and create a budget that may be designed to fail. The typical errors are to overlook tracking the expenses for a few months, so that you don’t know where you spend and don’t know your level of expense for each category of expense. Without this information, you could fail to allocate adequate resources for your expenses. These errors can derail your budget. A very tight budget, to save more, could prove to be unsustainable so that you may not be able to live with it. This would cause your budget to collapse, leading to your savings targets not being met.
If you are not used to living by a budget, ease yourself into it. Start by imposing broad upper limits. At this stage the focus should be on developing the discipline to account for expenses and to limit them. Once that happens, the next stage would be cutting the expenses, in a realistic manner. Don’t get discouraged if you slip a few times. You will learn with experience.
Going long term too early
You realize the importance of accumulating funds for long-term goals and start putting all your savings into provident fund or other long-term investments. This would be a good decision if you have taken care of liquidity and have an emergency fund. Long-term products typically have restrictions on withdrawals. Growth-oriented investments, such as equity, have volatile values that may mean that you incur a loss if you had to redeem them at short notice.
Thus, providing for long-term goals is good if you have made provisions for immediate liquidity needs. Build an emergency fund and invest for short- and medium-term needs along with long-term goals. This will ensure that your long-term goals are not put at risk by a need that was overlooked.
Saying no to debt altogether
You may think that you are protecting your finances by staying away from debt completely. But it may not be so. You may need to take on some debt to meet goals like buying a house. You could choose to stay on rent, but that comes with the risk of inflation pushing rentals beyond your means. A mortgage would also come with tax benefits, which would lower the cost of debt.
Having some amount of debt also means that you can demonstrate responsible debt behavior to get a good credit score, lack of which can result in higher costs if you need a loan urgently.
However, include credit and debt into your finances with discretion. Use debt to leverage your finances. Use facilities like credit cards for regular expenses, to built a credit history.
Penny wise pound foolish
Very often, we focus on one aspect of a decision and ignore its larger impact. Very often we end up cutting costs by cutting corners. For example, if you buy a durable good that is cheap but of poorer quality, you could end up paying more due to frequent replacements. There are also decisions you may consider clever now, but which could cost you dear later. These could include: avoiding insurance, believing that premiums are a waste of money; not maintaining an emergency fund believing that keeping funds in liquid but low-earning products is under-utilization of money; adopting a do-it-yourself approach, believing that paying an adviser is a waste of money. Not to forget: holding all your funds in low-risk products that earn low returns, ignoring the impact of inflation.
Standing guarantee for others
Be sure of financial standing of the person for whom you are standing guarantee in a loan or giving an add-on credit card to. This act of kindness can damage your own finances. You would be responsible for the repayment if a primary borrower defaults on the payment. You could be saddled with repaying a loan that you neither benefited from nor can bear the burden of. Your credit score will be affected by this loan, and you may even find it difficult to access credit when you need it. Excessive spending on an add-on credit card too will strain your finances, apart from affecting your credit history and score.
Keep in mind the consequences to your own financial situation before you seek to offer financial assistance to others. Consider if the primary borrower can service the loan herself without difficulty. Give due consideration to your own ability to bear the stress if the obligation passes to you. Similarly, to protect your finances, consider the option of footing the family member’s credit card bill up to a reasonable amount instead of giving an add-on credit card. The person is then liable for all actions and omissions on the credit card and your responsibility is limited to the amount you have offered to foot.
Ready to quit your day job? There's a trend among some personal finance gurus called FI/RE -- financially independent/retiring early. It means being able to reach a point where you have assets (investment accounts or rental property) that earn enough income to cover all of your expenses. In other words, you're rich enough to quit.
But for most people, getting to financial independence means making some big sacrifices and getting very creative with their spending habits.
How to achieve financial independence
It comes down to how you save, spend and invest. Maximize your saving -- many of these people figured out how to save 50 percent of their incomes or more, sometimes by purchasing multifamily homes and taking on enough tenants to make an income.
But the spending side is key as well. The author of the website 1500 days, Carl J. set a goal for himself to bring his assets to $1 million in that amount of time. On his site, he details the step he took to reach his goal: Being financially independent and finally leaving the job he despised by April of this year.
Carl readily admits that he was making a good salary (around $100,000) and that he had been maxing out his savings in a 401(k) account along the way. So he was almost halfway to the goal. But he managed to stock away a significant amount of money and achieves his objective by methodically tracking how much his family was spending and cutting away waste.
"I had no idea how much money we were spending," he told CBS MoneyWatch in an interview. "So we did start keeping track of our spending ... I opened up a Google doc and set up categories, going out to eat, bonus things like alcohol, vacations."
By cutting out excessive spending and revamping their lifestyle, he and his wife were able to save a significant portion of their incomes each year and invest the money instead.
Financial adviser Kyle Mast said he has more and more clients come in to ask about achieving financial independence earlier in life, and while it often involves being more creative to make it happen, it can be done.
"Have a high savings rate, low living expenses ... there's all kinds of ways to travel for free, save money on things like cell phones, just by doing a little bit of research," Mast told CBS MoneyWatch.
Invest to build your assets
But saving will only get you partway to your goal. It's crucial to make your money grow to the point where it can sustain you.
"Save as much as you can, but investing is hugely important and [you need to] figure out how to do it correctly," Carl said. He taught himself how to use personal investing apps as a way to increase the money he was saving.
Financial adviser Lucas Casarez said if people plan to retire early, it's important to do their research and realize how long they'll need that money to last. Remember, you don't want to outlive your retirement savings.
Be aware that if you're under 59½, you won't be able to take money from an account like a 401(k) without paying an early withdrawal penalty.
For those withdrawals, Casarez recommends using nonretirement investing accounts or a retirement vehicle like a Roth IRA, from which the initial contributions can be withdrawn anytime, tax-free.
"Roth accounts are really fantastic tools as far as flexibility," Casarez told CBS MoneyWatch, "Any contributions to a Roth account can be withdrawn without penalty -- though you can't take out the earnings" without penalty.
That said, it's still a good idea to max out your 401(k) contributions while you're working. If you are saving for FI/RE that means up to the $18,500 annual limit not just meeting the employer match.
He cautions that with other types of investing accounts, "Try to mitigate capital-gains taxes. Know what's going to be considered income."
Challenges to consider
Keep in mind, even when you reach financial independence, it can be helpful to continue working part-time in your current line of work or take on a side gig to maintain an extra income stream or access to health insurance.
Health insurance is a big consideration. You won't be eligible to register for Medicare until age 65, so if you leave your job, you may need to purchase insurance in the private market -- which can be much more expensive than a plan you get through your employer, who helps shoulder the cost.
And though the idea of being able to walk away from a day job and not work again may sound like a dream come true, some financial experts caution people to take care when retiring from work completely, especially at a young age.
"The challenge is that if you're going to retire at age 40, you'll probably live until you're in your 90s and you're going to be pretty active," financial adviser Ryan McPherson told CBS MoneyWatch. "Work provides a tremendous amount of structure, social interaction, challenges and a sense of accomplishment," he said. "You can get bored and depressed very easily. Keeping yourself involved in full-time work or volunteering is very important."
Because ‘savings’ and ‘London’ rarely ever feature in the same sentence
It’s no secret that London is home to some of the highest living costs in the world.
The median annual salary for London is £34,473, but there are many people – especially young people – living on well below this.
After rent and bills are paid, the remainders of pay packets go to food and necessities – so how are we meant to save for that big holiday or to get out feet firmly on the property ladder?
In light of Financial Capability Week this week we spoke to Andrew Johnson, Advice Manager at Money Advice Service who has revealed his 13 top tips for saving when you live in London.
1. Loose change adds up
By the end of the week, many of us have a few coins left over in pockets and purses – and even down the back of the sofa. Gather up these odd coins each week and put them in a jar. Even just a £1 a week in loose change will give you a cushion of over £50 by the end of the year. Looking after the pennies really can mean the pounds look after themselves.
2. Keep track of what you spend
Sometimes it’s hard to know where the money goes. Try keeping a spending diary for a week or two where you write down everything you spend from the smallest stick of chewing gum to filling the tank with petrol. This will help you identify items you might be able to cut back on.
3. Reconsider your smoking habit
If you smoke 15 cigarettes a day, that’s costing you almost £2,000 a year. If you’d like to kick the habit and boost your savings into the bargain, get the NHS on your side. Use the NHS cost of smoking calculator to help you give up smoking.
4. Make sure you’re getting the best deal on your bills
Shop around for the best deals for your phone, internet and fuel bills and review your suppliers every year to see if you’re still getting a good deal.
5. It’s all about the side-hustle
There are no simple ways to increase your income. Possible options might be take on extra work – perhaps a job you could do from home, such as child minding, or turning a hobby into a small business, selling things you make. If you have a spare room, you might think about taking in a lodger.
How to find places in your budget where you can save
6. Do up a budget
The best way to assess what you are spending and get control over your finances is to complete a budget. Our free Budget Planner puts you in control of your household spending and analyses your results to help you take control of your money. Alternatively try keeping a spending diary for a week or two where you write down everything you spend from the smallest stick of chewing gum to filling the tank with petrol. This will help you identify items you might be able to cut back on.
7. Have a goal
Having a savings goal can help determine which account is best for you. If you have more than one goal you could use different accounts for each one.
8. See if your bank offers bonus rates
Some accounts may offer a high bonus rate which is designed to tempt you in – but bonuses drop off after a certain period. If you don’t have time to keep switching, avoid accounts offering bonus rates and look for a rate that’s been more stable historically.
9. If you don’t know where to start with bank accounts, try comparison websites
Best buy tables and comparison websites are a good starting point for anyone trying to find a savings account tailored to their needs. Not all comparison websites will give you the same results, so make sure you use more than one site before making a decision.
10. Set up a savings account
If you want to earn a bit more interest then consider a regular savings account but remember, with these types of accounts or fixed term accounts you might not be able to access your money immediately without paying a penalty.
What is the best way to create a budget?
11. Review your budget every few months
Life is unpredictable so try to review your budget and your spending if there’s a change, or at least every couple of months. You might get a pay rise, which means you can save more, or you might find your household bills increase.
12. Put time aside to manage your money (like you put time aside to go to the gym, see friends etc.)
Taking the time to manage your money better can really pay off. It can help you stay on top of your bills and save £1,000s each year.
13. Use an app to help you budget
There are also some great free budgeting apps available and your bank or building society might have an online budgeting tool that takes information directly from your transactions. Just grab as much information as you can about your income and spending (bills, bank statements…) and get started.
It’s never too late to start getting smart about money.
Maybe you’ve made it this far with few problems … you’ve done pretty well all alone just by winging it. Good for you.
But retirement planning isn’t about the past 30 years of your life — it’s about the next 30. And that’s harder. There are decisions you can’t undo, and mistakes are tougher to recover from when you don’t have a paycheck to back you up.
Here are five big money mistakes people make every day that a comprehensive retirement plan can help you avoid:
Written by Bill Smith, the host of the television and radio show "Retirement Solutions." Author of "Knock Out Your Retirement Income Worries Forever." He is the CEO of W.A. Smith Financial Group and Great Lakes Retirement Inc. His firms specialize in retirement income planning, wealth management, wealth preservation and estate planning.
Big Mistake No. 1: Choosing your retirement date based on age alone.
People often decide to retire at a certain age because it coincides with some well-known retirement milestone. They’ll settle on 65, for example, because that’s when Medicare kicks in, or 66 because it’s their full-benefit age for Social Security. Some even say 59½, because that’s when they can access their retirement accounts without any extra penalties. But before you decide when to retire, it’s crucial to assess your income needs and if you’ll have enough to meet them. If you retire before you’re 62, will you have enough money to draw from until your pension and/or Social Security payments kick in?
Remember, if you’re taking money from a tax-deferred account (such as a 401(k) or a traditional IRA), Uncle Sam will want his share. If you need $5,000 a month, you’ll have to withdraw closer to $6,500 just to net that amount. At the very least, you’ll spend down an enormous portion of your money very quickly, and you could put your entire retirement at risk. Which takes us to …
Big Mistake No. 2: Investing all your money in stocks.
If there’s a downturn in the market while you’re depending on your investment accounts for income, it could be devastating — especially if all your money is in equities. If those stocks drop 10%, 20% or more, and you have to sell them to pay your bills; you’re going to run out of money before you know it. The term “sequence-of-returns risk” should strike fear into every retiree’s heart. And don’t forget, those dividends that sound so good when you’re buying in aren’t guaranteed if things go bad.
Yes, with this bull market, it’s tempting to stay with stocks, but in retirement, a diverse portfolio is vital.
Big Mistake No. 3: Waffling on whether to buy an annuity.
There are pros and cons to annuities — the key knows what’s best for you and your unique situation. And that’s another reason why it’s important to have a plan. This isn’t a decision you should make based on what others tell you. Your adviser can help you determine whether you need an annuity based on whether you’ll require guaranteed income at some point in your retirement. And if it would benefit you to have one, he can help you decide how large that annuity should be.
Big Mistake No. 4: Losing track of an old 401(k) account.
This is another one of those things that gets away from people because they get busy. It isn’t that you forget about it completely — it’s just not getting any attention anymore because you aren’t adding to it. Which means the account probably isn’t being updated to reflect your risk tolerance as you near retirement? Also, if the account isn’t part of your overall plan, it may not include the proper investment vehicles to help you accomplish your goals.
You may think of it as benign neglect, but someone should be managing that money — either you or your financial adviser — whether you roll it over into an IRA or not. You absolutely don’t want to just leave those dollars out there, waiting for something bad to happen in the markets.
Big Mistake No. 5: Being unrealistic about rates of return.
People hear that the S&P 500 has averaged a 9.6% return since 1930, and that’s what they expect to earn. That number, of course, is deceiving. There are good years and bad years, and the typical investor will react to each in just the wrong way — selling low out of fear and buying high out of greed.
Unfortunately, many retirees have that 8% or 9% return in mind when they decide their withdrawal rate in retirement. If they only get 5% or 6%, they either have to adjust their budget accordingly — which takes discipline — or take on more risk. It’s better to project a more conservative number that works within your overall plan — maybe 4% or 5%. If you get higher returns, great — but if you don’t, you’re far less likely to run out of money.
Final take: 4 keys to retirement success
Retirement should be something you can look forward to with confidence, and winging it won’t give you that. Here are some keys to success:
1. Take market risk seriously when it comes to investing retirement money.
2. Don’t rule out any kind of financial product without having a true understanding of how it would fit into your plan.
3. Take control of all your retirement dollars; make sure you’re not forgetting about anything.
4. Seek help from a professional who can guide you. A retirement specialist can help you build a plan and will assist you as you make your way to and through this next stage of your financial life.
For those seeking ways to build wealth (or just to get rich quick), there’s no shortage of advice out there.
Personal finance sites abound online, and self-styled radio talk show experts dispense wisdom with varying degrees of accuracy.
But one study found that your fundamental attitudes about money can be a predictor of your ability to accumulate wealth.
The study, published in the Journal of Financial Planning, looked at the correlation between certain behaviors and four “money scripts” — or, put another way, four money personalities.
And, spoiler alert: Only one of the four money scripts is particularly conducive to getting wealthy.
But Tom Murphy, a certified financial planner and CEO of Murphy and Sylvest, said the good news is, like anything, once you recognize that you look at money a certain way, you can take steps to change.
“Recognizing why you are doing what you’re doing is strongly correlated with changing it,” he said. “Lots of times, once people understand their money personality, how they deal with money, they can actually go in and change their behavior.”
Murphy said that money beliefs shaped by childhood trauma are, of course, much harder to overcome.
Nevertheless, parents who are conscious about the way they talk about money to their children — even in tough times — can help teach fundamental lessons about saving.
“Here’s how you teach the right lesson: When the child wants something, you tell them that’s fine, but they have to use their own money, and in two weeks, when it’s broken ... then they don’t have it anymore,” Murphy said. “Give the child the opportunity to make a bad decision.”
He gave similar advice about investing: If you manage small amounts of money as a kid, you have a better sense for how it works when you’re an adult.
“They either like it or they don’t — that’s a hugely valuable lesson to learn,” Murphy said. “And lots of people don’t learn that until their 20s or 30s.”
So which money personality do you have? Here’s how the four break down:
1. Money avoidance: Money avoiders believe money is morally corrupting — that rich people are greedy and therefore they, themselves, don’t try to amass wealth when they get it.
2. Money worship: Money worshippers believe that money will solve all their problems, and that their happiness and power is tied exclusively to having enough money.
3. Money status: Those who follow the money-as-status script believe that their self-worth is equal only to their money. They tend to believe that it’s important to buy new things as a marker of status, rather than because they really need them.
4. Money vigilance: People who are money-vigilant emphasize frugality and saving — and they’re also a little bit secretive about how much money they have.
You can probably guess which one tends to produce the most wealth over time: No. 4, or money vigilance.
But Murphy said lots of people hold a mix of these beliefs — and can exhibit combinations of unhealthy behaviors, like compulsive gambling or giving too much of your money away to charity. Even hoarding money and being unwilling to spend any can be emotionally detrimental.
Still, Murphy said that, above all, it’s important to pay attention.
When I first started investing, I had many questions. Fortunately, I had helpful and experienced investors around me who were able to guide me through my first steps as a stock market investor. However, others may not be so fortunate and may, as a result, be put off from investing due to fears of making a mistake.
Because of this, I thought I would answer three common questions that new investors might have.
How much should I invest in my first stock?
This may be the first question that many new investors might have. In reality, there is no simple answer to this question. It depends on a multitude of factors such as your risk appetite, portfolio size, and investment strategy.
Having said that, I believe that all investors should still follow a few rules of thumb before making a decision on this.
First, our investment size should be large enough such that the commission charges do not exceed 1%.
For instance, investors should try not to make a transaction below $1000 while using brokerages that charge a minimum of $10 per transaction. Overlooking the effects of these transaction fees could be detrimental to our overall portfolio returns.
Second, investors should diversify their portfolio adequately and each stock should ideally not exceed 10% of your entire portfolio. This is to ensure that any bad investments cannot overly affect your total portfolio returns.
Where can I get stock ideas?
Recently, I wrote an article on three good ways we can screen for stocks. Firstly, by screening for stocks those are undervalued or trading at low premiums. Investors can also take a top-down approach and seek out growing industries, before narrowing their options to specific companies within that industry.
Finally, and maybe the best option for new investors would be to use a stock recommendation service that provides monthly new stock picks for investors. It is important to choose a reasonably priced stock recommendation service that has a long history of beating the market.
Should I actively manage my own portfolio or use professionals?
Before deciding whether to manage your own portfolio, it is important that we understand our own investment capabilities.
Investing requires patience, good control of emotions, and an understanding of businesses and stocks. New investors who are looking for above average returns and have the confidence and knowledge on stocks should consider managing their own portfolio. This is because we can have better control over our finances and can avoid paying hefty management fees.
Unfortunately, there are also often numerous retail investors who over-estimate their capabilities or are prone to investing mistakes due to greed and fear. This has led to retail investors underperforming the index by a considerable amount.
For instance, between 1990-2000, the S&P 500 index returned 7.81% annually. On the contrary, retail investors averaged only 3.49%. If you fear that you are unable to make good investment decisions due to poor control of emotions, seeking a professional for help may be your best option.
The Foolish bottom line
New investors will unsurprisingly have many questions before they start investing. Hopefully, this article adds a little bit of insight for new investors who are just starting out on their investment journey.
Saving money and cutting costs is often as exciting as watching paint dry.
But finance guru and Sugar Mamma founder Canna Campbell has revealed her seven top tips to get you enthusiastic and confident about growing your bank account.
The Australian video blogger says getting yourself into a healthy routine with money is the best starting point for saving money and making every dollar count.
In her latest YouTube video, Canna shared seven simple ways you can cut costs and squeeze every penny so you can sit back and watch your savings flourish.
1. Have a Deadline
Canna says setting yourself a reasonable but clear deadline for your savings goal is the first step towards maximizing your money.
If you have a goal of saving $10,000 in five months, the finance expert recommends pinpointing a specific date on your calendar for your deadline - which instills a sense of urgency in your mind every time you see it.
'That way you feel feel a lot more accountable and realize that time is ticking for your end date,' Canna said in her video.
2. Have a Budget
The second step in Canna's seven saving tips is to outline a tight budget for your spending money.
Setting a budget helps savers identify spending habits and provides a clear picture of what you really value.
Knowing what you are spending your money on every month is also a great way to realise what needs to be culled and what is necessary.
'Budgeting is a good way to show you problem areas and opportunities for saving money,' Canna adds.
3. Make a Dedicated Savings Account
Without a dedicated savings account to watch your money grow, Canna warns it is difficult to stop yourself from recklessly spending.
Designating a specific account, preferably with a nickname which mentions your goal, is a surefire way to prompt yourself to keep accumulating cash.
Canna says a savings account gives your goal direction, flow and purpose.
'A feeling of progress fuels continued commitment and dedication. Try to make sure the account is low fee or no fee at all too,' she adds.
4. Regularly Contribute
Creating a healthy routine and frequently depositing into your nest egg can excite you and encourages yourself to keep going because of how elated you feel as you watch it rise.
Creating a healthy routine and frequently depositing into your nest egg can excite you and encourages yourself to keep going because of how elated you feel as you watch it rise.
Canna also recommends putting aside every single extra dollar you may have leftover each month so your spending habits don't suffer.
'Every time you get a pay rise put the extra cash into your savings account so you aren't tempted to change your lifestyle,' she explains.
5. Remove Temptation
It may sound like a no-brainer, but removing any and all temptation to spend money from your daily routine is also an essential habit for maximum saving.
If you are inclined to duck into the shops whenever there is a sale or peruse your favourite fashion website, Canna says avoid this like the plague.
Instead, she says you should direct your free time to activities which centre around your savings goal.
'So if you are saving for a property, spend your time perusing property sites or going to open homes,' Canna suggests.
6. Review Progress Carefully
As your savings journey wears on Canna says it is good practice to review how you are tracking every so often.
It is a good idea to regularly check your account so you can feel a sense of elation or progress when you have a reasonable chunk of money.
Reviewing your progress can also give your ideas on what else you could be doing to bolster your savings or if there is any other saving opportunities.
'Little things really add up,' Canna says.
7. Reward Yourself
Lastly, Canna recommends giving yourself rewards and pit-stops every so often on your savings journey.
'We're all human beings with normal emotions, so sometimes saving can be painfully slow or painfully boring,' she said.
'But other times it can be amazing or exhilarating to give yourself a sense of achievement.'
Taking the time to reward good behavior it important but Canna also advises not to take too long of a hiatus otherwise you may fall off the bandwagon completely.
'Break down your goals into bite-size, manageable pieces and you will watch your savings grow.'
In the coming weeks, hundreds of thousands of excited 18-year-olds will be heading to university. It is daunting for both the new generation of undergraduates and their parents.
University will be a long list of firsts – and many of these will involve money. Having a bank account with an overdraft (and very likely the offer of a credit card, too) will be just the start. There will be rental contracts and deposits, student loan borrowing and, for some, the eye-opening experience of doing a grocery shop.
What is the most useful financial advice a parent or grandparent can impart? Here are five suggestions.
Many 18-year-olds will never have budgeted properly in their lives, and having to meet essential food, housing and other costs could come as a shock.
Helen Saxon, the chief money analyst at moneysavingexpert.com, said: “They’ll need to sit down – and maybe parents can help in these remaining weeks – and work out how much cash they’ll have coming in, including their student loan, anything parents are giving them and any earned income from work.
“If parents impart one tip to their son or daughter, make it this: don’t spend everything at the outset. They may want to join every university society, but unless they’ll be doing paid work during term the money they have at the outset needs to last.”
Ms. Saxon said it would be helpful to plan their spending in terms of weeks or months. It’s important to point out that spending on socialising is fine – and a big part of university life – but it needs to be affordable.
The allure of an overdraft
A student bank account with a 0pc overdraft can be an incredibly useful safety net. But the dangers of an overdraft – which can seem like free money – are obvious.
Ms. Saxon said treating the overdraft as a “buffer” rather than accessible funds is imperative. “That overdraft is a safety net, and needs to last all year,” she added. “While 0pc overdrafts are useful and should help with cash-flow, they should not be treated as available funds. An overdraft is a loan that must be repaid.”
Telegraph Money’s favorite student current accounts are the Santander 123 account, which pays 3pc interest on balances between £300 and £2,000, and Nationwide FlexStudent, which has an overdraft rising to £3,000 by your third year and pays 1pc on credit.
The HSBC student account is great for freebies – it comes with a £60 Amazon voucher and a year’s free membership to Amazon Prime, but pays only 1.5pc on credit balances.
Unless their parents are wealthy and generous, most students will have cash crises at university – and a credit card could seem the answer. It’s incredibly important, however, to make sure borrowers understand that credit isn’t interest-free in the same way as a student overdraft.
Highly organized borrowers can make use of credit cards and, by paying them off soon enough, avoid costs while benefiting from the perks – but that’s a steep ask of a student.
The HSBC Student Visa Credit Card, connected to the student account (see above) provides up to £500 of credit with an interest rate of 18.9pc. It also offers cashback on some purchases, and the chance to win NFL tickets.
The Nectar Low Rate Credit Card, offered by Sainsbury’s, has an interest rate of just 5.94pc with a credit limit of £1,200. The student can collect Nectar points too, which could help them save on the weekly shop.
Understand your student loan
Getting to grips with this controversial and complex arrangement now could help indebted graduates down the line.
In the post-2012 student loans system, those graduates earning less than £21,000 (the threshold for repayments) are charged interest at RPI, currently 3.1pc. Those earning more than £41,000 are charged RPI plus 3pc – so 6.1pc – with a sliding scale in between.
Bizarrely, the maximum possible interest applies to the debt while they are studying, meaning that it will do nothing but grow. Student debt is cancelled after 30 years of repayment, so for many the size of the ultimate borrowing will not be relevant.
Safeguard your credit rating
Numbers disclosed by Telegraph Money last month showed that the typical student has a credit score 15pc lower than the national average.
While a student loan won’t show up on a credit report, other outstanding debts do so loans and credit cards need to be managed. ClearScore, the firm behind the research, found a quarter of students have a personal loan.
A quarter of students had also admitted to defaulting on a debt – most likely a mobile phone contract – and this too can wreak havoc. Regularly spending on a credit card while paying it off can actually help a credit rating. But using it to fund their lifestyle could land them in hot water.
The easiest trap to fall into is with utility bills. Half of students reported being listed on bills alongside housemates. In most cases, providers won’t treat you as financially linked, but if you set up a joint bank account to pay bills then a default could hurt your credit rating.
Ewan Armstrong, 20, a human biosciences student at Exeter, shares his experience
I decided not to have an arranged overdraft when I started uni a year ago: I have always dreaded feeling indebted. Instead, I keep a buffer of at least £100 in my account as a self-imposed overdraft that I promise myself I will never touch.
I have friends who’ve developed the terrible habit of refusing to check their account balance. This out-of-sight, out-of-mind mindset will catch up with them in the long run. I look at my balance and account summary on the NatWest app every other day.
A recent phenomenon among students is Monzo cards. It’s a debit card but one that tells you how much you’re spending on groceries, eating out, transport or bills.
I make most of my transactions via contactless or Apple Pay on my phone. Not even needing to enter a Pin runs the risk of making it easier to spend more, and I have found myself leaving the supermarket having paid contactlessly and not knowing exactly what I’ve spent.
Even so, I think the danger of thoughtlessly paying via contactless is offset by how using cards makes it easier to track spending.
There’s a perception that students can’t or shouldn’t invest money. But without a doubt the money-related achievement I’m proudest of is finding an app called Moneybox.
It rounds your card purchases up to the nearest pound and invests the pennies into a fund depending on your stated level of risk (for example, it invests 15p after you buy an 85p coffee). It has seamlessly invested about £1 a day for me over the past year. Aside from being an easy introduction to the world of investing, finding £300 tucked away in an app is every student’s dream.
1. Maintain three to six months of savings in your account. “As a contractor or part-time worker, your income will tend to ebb and flow,” Gugliuzza says. “Having an emergency fund with enough savings to cover three to six months’ worth of your critical expenses can help ensure you can pay your bills, even during times of low employment.” Figure out what this necessary dollar amount is and make sure your bank account is ready to go before you take the full leap into the gig economy.
2. Keep a handle on your debts. As part of the gig economy, you’re still responsible for paying taxes on what you earn, and bad news: You don’t have an in-house HR or accounting department to make that happen for you. “If you’re doing contract work and don’t want taxes withheld from your pay, you’ll need to make quarterly estimated state and federal tax payments,” Gugliuzza says. You’ll save yourself a lot of stress comes tax time if you are careful to put away a portion of each payment you receive and flag it as a tax payment before you accidentally spend it. Consider reaching out to a professional now to walk you through the specifics of the tax code in the area where you live.
3. Understand how much you need to save. While you may be feeling somewhat removed from your pals who are working in more traditional jobs (go on with your bad self!), the truth is that many of your financial needs are still the same as theirs. Take some time to establish some goals for what you’ll need to save for retirement or other long-term goals. There are plenty of tools and calculators available online to help you crunch these crucial numbers on your own.
4. Investigate investment opportunities. You can still take advantage of investment opportunities, even if you’re not working in a traditional full-time job. A 529 college savings plan can help you stash away funds to further your own education (and is a good way to save for your children’s future tuition as well). You should also do your homework on IRAs, which can help you grow your retirement nest egg so you’ll be sittin’ pretty when the time comes for you to quit that side hustle life. There are a lot of misconceptions out there about IRAs — for one thing, that you need to work a corporate nine-to-five to invest in one — so be sure to do your research!
5. Seek expert advice. There’s no shame in asking for help, especially if you’re new to working in the gig economy. A financial or business adviser will be able to help you figure out what your specific goals are, and they can help you put together a plan to make them happen. An action plan like this should make it a whole lot easier for you to follow through on the other four tips — and to do it effectively.