4a. Take advantage of free money at work by contributing to your retirement plan up to the amount your company matches. This one is controversial, and if you are in a deep debt hole, should potentially be dropped from the list. But if your debt is manageable and you have a clear plan to pay it off reasonably soon, take advantage of employer matching in your 401(k) or other retirement plan if it's available. Beyond the amount matched, additional contributions take a lower priority.
4b. Fund a Roth IRA. If you don't have a retirement plan at work, set up a Roth IRA. One of these accounts, funded in your twenties or thirties, is an incredible deal. You'll get 30+ years of compound growth, then get to take that money out tax-free!
5. Choose your investing strategy. Whether you're investing at work or in a Roth IRA, you need a clearly-defined strategy. SMI offers three primary strategies to follow: Just-the-Basics, Core & Explore and Upgrading. All three are founded on core principles that should be a part of any investing plan, and each can be adapted to your situation.
Subscribers can read more about these strategies, as well as how to match them to your investment temperament, in our "New Reader Guide" and/or "Jumpstart to Successful Investing" bonus reports. Once you get your long-term strategy up and running, continue to follow it no matter what the markets may be doing. In other words, don't let current events (and the emotions surrounding them) interrupt your monthly contributions.
6. Start a college savings account. If you already have a child, the clock is ticking on their education saving. There is definitely a right way and a wrong way to do this, so educate yourself. It's easier than it seems: use Section 529 plans and Coverdell Education Accounts (formerly known as Ed IRAs). Avoid the old tools you've heard about: EE bonds, custodial accounts, and so on. And don't buy into the idea that you need to save a gazillion dollars for college either. Worst case, there will likely be loans or part-time jobs available to make sure Junior can still go to college. Don't be paralyzed by the huge numbers you read about; just start saving what you can.
The Middle-Age Couple
As bittersweet as having the kids leave home may be, for most couples it marks a financial turning point from peak spending years to peak saving years. Coinciding with the decline in child-related expenses are the highest earning years for most workers, and in some rare cases, the paying off of a mortgage. At any rate, there's probably more surplus money available now than ever before, and it's a good thing. The day-to-day expenses of child-rearing have likely left you feeling a little behind regarding your retirement plan. It's catch-up time now. Your priority list includes:
1. Revise your budget to reflect your new level of income and expenses. This really should be an annual event anyway, but I'll include it in case you've neglected to do so. Take a new look at your short and medium term goals as well. It's getting down to crunch time, so if you're serious about meeting those goals, you don't have as much of a cushion as you once did. Use that as motivation rather than letting it discourage you.
2. Take a financial inventory of your household. What debt do you have outstanding? What needs are coming up – additional school payments, cars that need replacing, home repairs you've put off? At this stage of life, debt should be pared back to bare minimums. Pay off those credit card balances, car loans, and other consumer debt. You likely have the cash flow now that you can eliminate or reduce interest expense on big-ticket items, like car purchases, through advance planning and saving. Build your emergency saving account balance up to where it should be if it's not there yet.
