Rules of the Financial Road

If you are looking to improve your money management this year, take a look at a few of these rules to help map the financial road ahead.  These are excerpted from the Jonathan Clements Money Guide 2015, which covers financial topics from college funding to estate planning.

1. Check your retirement progress by taking your nest egg and applying a 4% annual portfolio withdrawal rate, equal to $4,000 a year for every $100,000 saved. 

2. Don’t automatically claim Social Security at age 62. It often makes sense to delay benefits so you get a larger monthly check.

3. Never buy a home unless you expect to stay put for at least five years or longer. Between mid-2006 and early 2012, the S&P/Case-Shiller U.S. National Home Price Index plunged 27.4%. Enough said.

4. Planning to remodel your home in 2015? If you’ll get a lot of pleasure from the improvements and you can afford the cost, go ahead. But don’t kid yourself that you’re making an investment.

5. Never use a custodial account to save for college costs. Instead, open a 529 college savings plan or a Coverdell education account. Both will give you tax-free growth and shouldn’t hurt financial aid eligibility.

6. Don’t let your children take on more student loans than they can reasonably handle, given their expected career and likely earnings.

7. Insure against the big financial risks in your life, while skipping the small stuff. Extended warranties, trip-cancellation insurance and low auto-insurance deductibles? Just say no.

8. If you aren’t rich, buy term life insurance to protect your family. If you’re super-rich, consider cash-value life insurance to save on estate taxes.

9. Worried about layoffs? Limit your fixed living costs to 50% or less of your pretax income. Fixed costs include expenses such as mortgage or rent, property taxes, debt payments, groceries, utilities and insurance premiums. At the 50% level, you know that—with money from your emergency fund—you could get by on half your old income if you lose your job.

10. Think about which expenditures gave you a lot of pleasure in 2014 and which were quickly forgotten. Use that to guide your spending in 2015.

11. Always contribute at least enough to your employer’s 401(k) plan to get the full matching contribution. Even if you leave your employer, immediately cash out your 401(k), and pay taxes and penalties, you’ll likely still come out ahead.

12. Expect modest returns from stocks and bonds. The worst that will happen is you’ll save too much.

See Jonathan Clements, 31 Rules for the Financial Road Ahead, Market Watch, Jan. 3, 2015.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.