Monday, February 25, 2008

Money Monday - Budget, Part 5

Last week we talked about funding a FFEF (Fully Funded Emergency Fund) with at least 3-6 months of living expenses. Today we will discuss what to do once you have established your FFEF.

Investing: USA Today reported recently that 56 percent of Americans do not systematically prepare for retirement age by investing. Consumer Federation of America found that, of pepole making less than $35,000 per year, 40 percent said the best way for them to have $500,000 at retirement age is to win the Lotto. To top that, Wealth Builder magazine's poll found 80 percent of Americans believe their standard of living will go up at retirement. Talk about living in a fantasy! You must invest now if you want to spend your golden years in dignity.

Remember, you don't have any debt but a house payment now and you have 3-6 months of living expenses in savings (which is thousands of dollars). With only one payment, you should have plenty of money to invest in your retirement.

When we get to this stage, we plan to invest 10 percent of our gross income. But keep in mind that we are young. Our family should be at this point financially within 18 months and my husband and I will both be under 25 years old. If you are older (over 30), I recommend investing 15 percent.

Why not pay off the house first? Having a paid-for house at age 75 with no retirement savings doesn't get you very far. Why not save for college first? Your children's college degrees won't feed you at retirement. And there's a good chance that Social Insecurity isn't going to cut it (or even be around, for that matter).

An excellent choice for long-term investing is mutual funds. They average a 10-12 percent return on your investment. Research your mutual funds carefully and look for a good track record of winning for more than five years. It's a good idea to vary your mutual funds also (Invest in some Growth and Income funds, some International Funds, some Aggressive Growth funds, etc.)

Always start investing where you have a match. When you company will give you free money, take it. If you don't have a match, or after you have invested through the match, you should next fund Roth IRAs. If you max out your Roth IRAs, go back to investing in 401ks, 403bs, 457s, or SEPPs (for the self-employed) until you have reached 15 percent of your gross income.

I know I said I would talk about saving for your children's college educations today, but I think I will save that for next week.

Also, as I mentioned last week, if you have not yet cast your vote in the "How Much Consumer Debt Do You Have?" poll on the left side of the screen, please do so. I would love to know how many of you are in the same boat as we are and how many of you have already become debt free!

(Much of what I said today is directly quoted from or summarized from the book The Total Money Makeover by Dave Ramsey).

Links to other parts of this series:
Part 1
Part 2
Part 3
Part 4
Part 6
Part 7

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