by Ram Lee of Seven Bridges Advisors
Most people know they should try to maximize their contribution to their retirement savings account, whether their company’s 401k plan or their own IRA. Many people, however, do not do so. The ability to invest money pre-tax is a great benefit the tax code gives to everyone. For many people this will require making a budget to determine how they can increase their pretax contributions to their retirement savings account on a monthly basis. While it may require some adjustments to spending on discretionary items like going out and recreation, your much older self will thank you for putting money away every month.
Most Americans will have an investment problem to solve at some point in their lives. Whether it’s how to invest their retirement savings account or how to invest a small inheritance or other one-time windfall.
The average person should spend the time to become basically familiar with the following terms:
- Mutual Fund
- ETF (exchange traded fund)
- Expense Ratio for funds
- Price-to-Earnings ratio
- Dividend and dividend yield
Being an expert is not necessary. Most average investors should simply have a diversified and long-term oriented investment holding. Still, knowing something about the various terms will allow for at least the most basic understanding of investment commentary.
There are many discounts available in many different aspects of people’s monthly expenses. It could be calling the cable company or utility and seeing if there is a plan that will save money based upon actual needs and usage. Searching online for promotion codes and discounts only takes a minute when purchasing goods or services online. Similarly, make sure you are aware of any points you accrue in loyalty programs (hotel, airline, etc.). The use of these points varies quite a bit in terms of value.
For example, a plane ticket that costs $250, and requires 25,000 point miles has a conversion value of one cent ($0.01) per point. That is $250 divided by 25,000 points. Whereas if you can use 25,000 points to buy a ticket that costs $500, that is a conversion value of two cents ($0.02) per point. While it sounds small, that is a 100% difference in value for the points, depending upon how they are used.
Many Americans carry credit card debt, but do not realize the cost of it. All money is fungible (can be substituted for each other). That means, if you can take out a second mortgage at a lower rate than your credit card debt, then it makes sense to do so, and save the extra interest expense of high credit card debt interest rates.
Likewise, holding onto investments while paying credit card debt generally does not make sense. If your credit card debt costs over 20% per year, then it usually makes sense to sell investments to pay down your credit card debt. While your investments may earn a positive, negative, or zero return, your credit card debt is assured to cost your interest rate. So, unless you are completely confident that your investments will definitely earn more than the cost of your credit card debt, it makes sense to pay off credit card debt. Paying off credit card debt that costs more than 20% is similar to getting a guaranteed 20% return on your money.
Paying attention to some basic financial aspects of your life will pay off for many years down the road. Understanding how to maximize your financial life regarding retirement, investing, discounts, and debt can make a difference for long term financial health.