Retirement Options For the Self-Employed

Being your own boss is great. You get flexibility and the ability to pursue the things you care about. But as the boss, you also have to deal with all the administrative and financial details an employer might typically take care of—like choosing the right retirement plan.

Though it may require a little more action on your part, there are different kinds of self-employed retirement plans to explore. In fact, some self-employed retirement plans actually have high contribution limits and tax benefits.

And it’s a good thing too, since more people than ever are self-employed or starting their own businesses. According to Fresh Books third annual self-employment report annual self-employment report, 27 million Americans are expected to leave the traditional workforce for self-employment in the next two years.

So what does retirement for self-employed people look like? Well, a little like retirement for the traditionally employed. The general rules of thumb still apply: You can calculate how much you’ll need to save for retirement based on your current age and when you plan to retire.

No matter what your age, it’s a good idea to do the math now, so you can hypothetically see how much money you could be contributing to your retirement and whether you’re on track for your age and retirement goals.

Self-Employed Retirement Plans

In some ways, self-employed retirement plans aren’t too different from regular retirement plans. Certainly, the principles of retirement are the same: set aside money now to use in retirement—ideally providing an income when it’s time to retire.

The most common retirement savings plan, though, is a 401(k), but a 401(k) is, by definition, an employer-sponsored retirement account. For those who are self-employed that’s not an option.

The IRS breaks down a number of retirement plans for the self-employed or for those who run their own businesses, but we’ll lay out the basics here for you to start thinking about.

Traditional or Roth IRA

One of the most popular self-employed retirement plans is an IRA—or an individual retirement account. Anyone can open an IRA either with an online brokerage firm or at a traditional financial institution. And if you’re leaving a regular job where you had an employer-sponsored 401(k), then you can roll it over into an IRA.

If you meet eligibility requirements, you can contribute up to $6,000 annually to an IRA, with an additional $1,000 catch-up contribution allowed for people over 50 years old. (These limits are for 2021—the IRS does adjust them from time to time.)

The main difference between a traditional vs. Roth IRA is when the taxes are paid. In a traditional IRA, the contributions you make to your retirement account are tax-deductible when you make them, and the withdrawals during retirement are taxed at ordinary income rates. With a Roth IRA, there are no tax breaks for your contributions, but you’re not taxed when you withdraw.

Choosing which IRA makes sense for you can depend on a few factors, including what you’re earning now vs. what you expect to be earning when you retire. Additionally, you can only contribute to a Roth IRA if your income is below a certain limit : For 2021, that’s less than $208,000 adjusted gross income (AGI) for a person who is married filing jointly, and less than $140,000 for a person who is filing as single.

Solo 401(k)

A solo 401(k) is a self-employed retirement plan that the IRS also refers to as one-participant 401(k) plans . It works a bit like a regular employer-backed 401(k), except that in this instance you’re the employer and the employee.

For 2021, you can contribute $19,500 (or $26,000 if age 50 or over) in salary deferrals as you would normally contribute to a standard 401(k). Then, as the “employer”, you can also contribute up to 25% of your net earnings, with additional rules for single-member LLCs or sole proprietors. Total contributions cannot exceed a total of $58,000.

From there, it works more or less like a regular 401(k): the contributions are made pre-tax and any withdrawals or distributions after age 59.5 are taxed at the regular rate. You can also set up the plan to allow for potential hardship distributions under specific circumstances, like a medical emergency.

You can not use a solo 401(k) if you have any employees, though you can hire your spouse so they can also contribute to the plan (as an employee; you can match their contributions as the employer). 401(k) contribution limits are per person, not per plan, so if either you or your spouse are enrolled in another 401(k) plan, then the $58,000 limit per person would include contributions to that other 401(k) plan.

A solo 401(k) makes the most sense if you have a highly profitable business and want to save a lot for retirement, or if you want to save a lot some years and less others. You can set up a solo 401(k) with most wealth management firms.

Simplified Employee Pension (or a SEP IRA)

A SEP IRA is an IRA with a simplified and streamlined way for an employer (in this case, you) to make contributions to their employees’ and to their own retirement.

For 2021, the SEP IRA rules and limits are as follows: you can contribute up to $58,000 or 25% of your net earnings, whichever is less. As is the case with a number of these retirement for self-employed options, there is a cap of $290,000 on the compensation that can be used to calculate that cap. You can deduct your contributions from your taxes, and your withdrawals in retirement will be taxed as income.

A key difference in a SEP vs. other self-employment retirement plans is this is designed for those who run a business with employees. You have to contribute an equal percentage of salary for every employee (and you are counted as an employee). That means you can not contribute more to your retirement account than to your employees’ accounts, as a percentage not in absolute dollars. On the plus side, it’s slightly simpler than a solo 401(k) to manage in terms of paperwork and annual reporting.

SIMPLE IRA

A SIMPLE IRA (which stands for Savings Incentive Match Plan for Employees ) is like a SEP IRA except it’s designed for larger businesses. Unlike the SEP plan, the employer isn’t responsible for the whole amount of an employee’s contribution. Individual employees can also contribute to their own retirement as salary deferrals out of their paycheck.

You, as the employer, have to simply match contributions up to 3% or contribute a fixed 2%. This sounds complicated, but the point is it’s designed for larger companies, so that you can manage the contributions to your employees’ retirement plans as well as your own. The trade-off, however, is that the maximum contribution limit is lower.

You can contribute up to $13,500 to your SIMPLE IRA, plus a catch-up contribution of $3,000 if you’re 50 or over. And your total contributions, if you have another retirement employer plan, maxes out at $19,500 annually.

There are a few other restrictions: If you make an early withdrawal before the age of 59 ½ , you’ll likely incur a 10% penalty much like a regular 401(k); do so within the first two years of setting up the SIMPLE account and the penalty jumps to 25%. (There is also a SIMPLE 401(k) that does allow for loan withdrawals, but requires more set-up administrative oversight on the front end.)

Defined Benefit Retirement Plan

Another retirement option you’ve probably heard a lot about is the defined benefit plan, or pension plan. Typically, a defined benefit plan pays out set annual benefits upon retirement, usually based on salary and years of service.

For the self-employed, your defined benefit has to be calculated by an actuary based on the benefit you set, your age, and expected returns. The maximum annual benefit you can set is currently the lesser of $230,000 or 100% of the participant’s average compensation for his or her highest three consecutive calendar years, according to the IRS.
Contributions are tax-deductible and your withdrawals during retirement will be taxed as income. And, if you have employees, then you typically must also offer the plan to them.

Defined benefit plans guarantee you a steady stream of income in retirement and with no set maximum contribution limit, if you’re earning a lot (and expect to keep earning a lot through retirement), they may be a good way to save up money.

These self-employed retirement plans can, however, be complicated and expensive to set up and require ongoing annual administrative work. Not every financial institution even offers defined benefit plans as an option for an individual. You’ll also have to be committed to funding the plan to a certain level each year in order to achieve that defined benefit—and if you have to change or lower the benefit, there may also be fees.

Other Retirement Options for the Self-Employed

While these are the most common self-employed retirement account options and the ones that offer tax benefits for your retirement savings, there are other options self-employed individuals might consider, like a profit-sharing plan if you own your own business.

Plus, don’t forget: You also have Social Security funds in retirement. Full retirement age for Social Security is considered 67 years old.

The IRS does offer what it calls annual check-ups to check on your retirement account and to go through a checklist of potential issues or fixes. However, you may want some additional human guidance, especially if you have specific questions.

The Takeaway

When you’re an entrepreneur or self-employed it can feel like your options are limited in terms of retirement plans, but in fact there are a number of options open, including various IRAs and a solo 401(k).

Looking to open a new retirement account? SoFi Invest® offers traditional, Roth, and SEP IRAs. Plus, you’ll get access to a broad range of investment options, member services, and our robust suite of planning and investment tools.

Find out how to save for retirement with SoFi Invest.

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5 Ways to Make Bread at Home Quickly on a Busy Schedule

For most of our married life, my husband and I haven’t bought any bread. We occasionally grab a loaf of something if it looks especially appetizing or it’s on sale for a competitive price, but in general, we bake all our bread.

Over the years, we’ve learned that bread-making is a gratifying way to cut your grocery bill. Our homemade bread costs us about half as much per loaf as we’d pay at the store, and it’s also tastier and healthier.

At first, I was worried baking from scratch would take too much time or effort. But we’ve found that it can easily become part of our weekly routine with just a little planning. We’ve learned several different ways to fit baking into a tight schedule and turn fresh-baked bread from a once-in-a-while luxury into a regular habit.

Ways to Bake Bread on a Busy Schedule

In a traditional cookbook, like “Joy of Cooking,” bread recipes involve several steps — mixing, kneading, proofing, and shaping — before you even get the bread into the oven. For most people, going through all those steps every time you need a loaf of bread isn’t practical.

Fortunately, you don’t have to do it that way. Several alternative methods make it possible to bake a healthy homemade loaf with just a few minutes of work — so you can enjoy cheap, tasty homemade bread, even on a busy schedule.

1. Baking in Batches

Baking bread the old-fashioned way is a lengthy process. You have to mix the dough, knead it, let it rise, punch it down and knead it a second time, then finally shape and bake it. From start to finish, it takes over three hours.

But most of that isn’t hands-on time. Once you’ve mixed and kneaded, you can set it aside to rise on its own. You don’t have to babysit it. Even while it’s baking, you can leave the room and do other things, as long as you’re around to take the bread out of the oven when the timer goes off. Overall, baking a loaf of bread only requires about 25 minutes of active work.

You can cut the time even more by making several loaves at once and freezing the ones you can’t use right away. Batch cooking works best if you have a separate freezer to store all those extra loaves, but even the freezer section in your fridge can hold one extra loaf. That way, you only have to find the time to bake once or twice per month. With less than half an hour of work, you can keep yourself stocked with homemade bread all month long.

One downside of baking bread in batches is that you only get to enjoy one loaf while it’s fresh. But bread keeps pretty well in the freezer as long as you wrap it snugly to keep it from drying out. A homemade loaf that’s been frozen and thawed still tastes closer to fresh bread than a preservative-filled mass-produced loaf.

According to Good Housekeeping, the best way to freeze homemade bread is to slice it first, then wrap individual slices in plastic wrap and store them in a freezer bag. Write the name of the type of bread on the bag so you can identify it without unwrapping. If you squeeze out as much air as you can from the bag without crushing the bread, slices will keep this way for up to eight months. You can thaw a slice by microwaving it for 15 to 30 seconds or, if you want toast, pop it directly into the toaster.

However, you can also freeze whole loaves. The best way to do it is to wrap the bread in foil first, then plastic wrap. To reheat the loaf, remove the plastic wrap and put it in a 400-degree F oven, still wrapped in foil, for 15 to 20 minutes. Then remove the foil and return it to the oven for a few minutes to crisp the crust.

Good Housekeeping only recommends freezing and reheating an entire loaf if you plan to eat the whole thing within one sitting. Otherwise, it will go “rock-solid stale.”

Pro tip: Before you go grocery shopping for everything you need to make homemade bread, download the Fetch Rewards and Ibotta apps. Each of these will allow you to save money on the different ingredients you’ll use.

2. Stand Mixer or Food Processor Mixing & Kneading

If your primary reason for baking is to have fresh-baked bread every time, batch baking isn’t ideal. However, you can cut down on the work of baking individual loaves by mixing your bread dough in a stand mixer or food processor. That cuts all the work of kneading by hand, so it only takes about five minutes of hands-on time to prepare a loaf of bread.

The method varies slightly, depending on what kind of machine you’re using. With a stand mixer, Taste of Home recommends mixing the dough with the beater attachment and then swapping the beater for a dough hook attachment. Run the mixer on low speed for about three minutes, or until it comes away cleanly from the sides of the bowl. Then keep going for another three or four minutes until the dough feels smooth and stretchy.

Using a food processor is even easier, according to America’s Test Kitchen. However, the editors say it isn’t the ideal tool for mixing most bread types. Its vigorous action can damage the gluten strands that give bread its light structure. It works best for pizza and other flatbreads that don’t need a light texture.

To mix dough in a food processor, put in the dry ingredients, start the machine, then add the liquid as it’s running. The editors recommend using a regular metal blade, not the dull plastic dough blades that come with some food processors. They also suggest using chilled water to counter the heat generated by the machine, which could deactivate your yeast.

As with the mixer, you want to knead until the dough is smooth and elastic. In a food processor, it takes only minutes for dough to reach this stage. Avoid overworking the dough, which will make your bread tough.

After machine-mixing, you can proof, shape, and bake it just as you would with hand-kneaded dough. You do less hands-on work that way, but you still have to wait several hours for your bread compared to pulling a ready-made loaf from the freezer.

3. Bread Machines

If making bread by hand even once per month is still too much work, a bread machine can make the job even easier. With this kitchen tool, making great bread is as easy as putting all the ingredients into a pan and pushing a few buttons. The machine takes care of kneading, proofing, and baking it, so you don’t need to tend to your bread dough throughout the day.

Better still, most bread machines have timers, so you can set them to have your bread ready whenever you want it. You can load up the machine before you go to bed at night and have a warm, fresh-baked loaf ready for breakfast in the morning. Plus, most machines also have a dough setting you can use if you need or prefer to shape before baking, such as when making pizza dough, focaccia, or cinnamon rolls.

It only takes only a few minutes to measure all the ingredients into the pan. You don’t need to knead or proof the dough or even preheat the oven. And you can use this technique to bake any yeast bread you can make by hand: whole-wheat bread, rye, pumpernickel, whole-grain, and even sourdough.

As for the cost, it’s actually a bit cheaper than baking bread by hand. According to The Spruce Eats, a bread maker uses between 500 and 1,000 watts of power, which adds up to between 0.5 and 1 kilowatt-hour (kWh) per hour of baking time. Baking the same loaf in a 2,400-watt electric oven would use 2.4 kWh. So using a machine helps you use less energy.

Bread machines come with a book of bread recipes designed for use with that particular machine. If you want to branch out, you can buy cookbooks devoted to bread machine recipes or find them online at cooking sites like Taste of Home or Allrecipes.

As you get used to how your bread machine works, you can adapt standard bread recipes to work in it, adjusting the amounts of flour and liquid as needed. According to King Arthur Baking, there’s no one-size-fits-all method for converting traditional bread recipes to machine form. However, there are a few helpful rules of thumb.

  • Know Your Capacity. When adapting a bread recipe, it’s not the size of the loaf in pounds that matters. It’s the amount of flour. For instance, if the recipes in your bread machine’s manual call for three to four cups of flour, look for recipes with the same amount of flour.
  • Add Ingredients in Order. If you look at the recipes in your manual, you’ll see that they consistently add ingredients in a specific order, such as liquids first, then flour, then other dry ingredients. When adapting a recipe, add the ingredients to the machine in the same order rather than the order specified in the original recipe.
  • Use the Right Cycle. The basic bread cycle and medium crust setting work for most bread types. The quick cycle only works if you’re using rapid-rise yeast (a type of instant yeast) rather than active dry yeast. You can substitute two and a quarter teaspoons of instant yeast for a packet of active dry yeast in any recipe. The whole-wheat cycle is strictly for whole-grain breads.

Bread machines have two downsides: cost and space. Bread machines range in price from around $70 to over $300. If you use yours to make all your bread, you can save anywhere from $1 to $5 per loaf, depending on what kind you make. If you go through about a loaf per week, your new bread machine could pay for itself in a little over three months — or it could take more than six years.

You must also find space in your kitchen to store your new specialty appliance. A bread machine typically takes up about as much room as a small trash can.

4. Slow Cooker Breads

If you don’t want to make room in your kitchen for one more gadget, you might be able to bake bread with a device you already own. By adapting your bread recipes, you can make bread in a slow cooker.

Most slow cookers can reach about 200 degrees F on their high setting, which is the proper internal temperature for a loaf of bread. It’s not as fast as baking bread in the oven, but if you heat the dough long enough, it will bake all the way through.

Unlike a bread machine, a slow cooker can’t do the mixing and kneading for you. However, once you’ve done that part of the job by hand, you can set your dough in the cooker and bake it right away. Because it takes so long to bake, you don’t need to let it rise first.

A large ovular slow cooker can hold a regular bread pan tucked inside. With round cookers, you can bake the bread directly in the crock to produce the classic round shape called a boule. Lining the crock with parchment keeps the dough from sticking.

According to the Kitchn, it takes an average of two hours on high to bake a loaf of bread in a slow cooker. But baking times can range from one to three hours, so experiment to see what works for your particular model.

The best way to tell when your bread is done is to check its internal temperature, which should be between 190 degrees F and 200 degrees F. A finished loaf should be set on top — not spongy — and slightly browned on the bottom.

The Kitchn article warns that bread baked in a slow cooker is slightly different from oven-baked bread. The loaves come out a little flatter than usual, and they don’t develop a firm, chewy crust. If you prefer a softer-crusted bread, that’s a good thing. But if you like it a little crispier, you can give the loaf a quick zap under your oven’s broiler.

Baking bread in the slow cooker only requires about seven minutes of hands-on work per loaf. Like using a bread machine, slow-cooking your bread saves energy, making each loaf a few cents cheaper than one baked the traditional way. That makes slow-cooker bread a suitable choice for summertime, when you don’t want to heat your kitchen by running the oven.

According to the Kitchn, you can adapt just about any bread recipe to a slow cooker. Just get the dough ready, shape it into a loaf, and let the slow cooker do the rest. If you want recipes specifically designed and tested for slow cooker baking, Prevention offers half a dozen that should give you reliable results.

If you have an Instant Pot pressure cooker rather than a standard slow cooker, you can also find bread recipes that work with this tool. Some, like the olive oil-rosemary bread from Cooking Carnival, instruct you to use the Instant Pot for proofing the dough and transfer it to the oven for baking. Others, like the no-knead bread from Pressure Cook Recipes, use the Instant Pot for baking the bread as well.

In either case, this method is a bit different from slow-cooker baking. If you want to bake breads in your Instant Pot, stick to recipes specifically designed for that device.

5. No-Knead Breads

There’s one more way of baking your own bread that requires no special equipment at all — and almost no work. It’s called a no-knead bread.

With this method, popularized in the 2008 cookbook “Artisan Bread in Five Minutes a Day,” you mix a large batch of moist dough, leave it out for a couple of hours at room temperature to let it rise (a process called bulk fermentation), and store it in the refrigerator for a couple of weeks.

When you want fresh bread, pull off a section of dough, shape it into a loaf, give it about 40 minutes to rise (depending on your kitchen’s temperature), and then bake it. It takes about 15 minutes to mix the dough and only a minute or two to shape it. So each loaf only averages around five minutes to make.

The no-knead method has several advantages over other methods:

  • No Special Equipment. You don’t need a bread machine or even a slow cooker. All you need is an oven, a refrigerator, a big bowl to store your dough, and a pan to bake it in.
  • Less Work. There’s no need to spend 10 minutes kneading the dough every time you bake. You also don’t have to cover your unbaked loaves or set them aside in a draft-free place to rise. Just form a loaf, let it rest, and put it in the oven.
  • Hard to Mess Up. With regular bread recipes, you’re supposed to keep an eye on your dough and take care not to let it rise too much. With the moist dough used in the no-knead method, extra rising time won’t do any harm.
  • Ready When You Are. Because you mix the dough ahead of time, you can make a fresh loaf of bread whenever you feel like it. A small loaf can be ready in as little as an hour.

You can find a sample bread recipe using this method on the BreadIn5 website. It’s a basic white bread that requires only all-purpose flour, water, salt, and yeast. The recipe says to bake it on a bread stone or cast-iron pizza pan, but a cast-iron Dutch oven also works well. The finished bread has a chewy texture and a flavor that grows closer to sourdough the longer you’ve had the dough.

This site regularly posts other free recipes you can make with the no-knead method. Some examples include a holiday tea ring made with enriched dough and an easy sourdough starter you can combine with flour to make a basic sourdough bread.

There are even recipes that combine the no-knead method with the slow cooker method for the ultimate in minimal-effort baking. Examples include pull-apart monkey bread, a sweet brioche, and a gluten-free loaf.


Final Word

If you like the idea of being a home baker but aren’t sure you can spare the time, remember it doesn’t have to be an all-or-nothing situation. You can bake exactly as often as you want. For example, you could whip up a loaf of homemade bread occasionally for a special occasion, such as Thanksgiving dinner. Or you could bake bread when you have plenty of free time and buy it when you’re on a tighter schedule.

Even if you can’t do all your own bread-making, it’s worth doing it whenever you have time. No store-bought loaf can provide the many benefits of home-baked bread. It’s cheap and flavorful, and knowing you made it yourself is a pleasure money can’t buy.

Source: moneycrashers.com

How Much Money Should You Have Saved For Retirement By 40?

At some point or another, you’ve probably asked yourself, “how much money should I have saved by 40?”

It’s a valid question that can be daunting to think about. The good news is you’re probably already saving money for retirement. The bad news is, you might not be saving enough money to retire when you want.

There are different ways to save money for retirement. The sooner, the better—so that it can start adding up. And that’s exactly what an increasing number of people in their 20s and 30s have been doing.

A Bank of America report found that almost one in four millennials (ages 24-41) have $100,000 or more saved as of winter 2020—a nearly 17% increase compared to that same report in 2015. The rising numbers are promising, but are these savings even enough? We’ll dig deeper into the numbers.

How Much Should I Have Saved by 40?

A general rule of thumb is to have the equivalent of your annual salary saved by the time you’re 30. By your 40s, many financial advisors recommend having two to three times your annual salary saved in retirement money.

In your 50s, conventional wisdom holds that you should have six times your annual salary in your retirement savings by the end of the decade.

How Can I Get My Retirement Money On Track?

If you feel you don’t have enough money saved yet, it’s never too late to get back on track. As you reach your 40s, it’s likely that your income increases, but so do the obligations tied to your money.

You might be saving money for your kids’ college; you probably have mortgage payments and existing debt; you may even be taking care of aging parents. It’s a lot of financial multi-tasking and you have to prioritize.

The key is to establish money goals and create a budget. Tracking your income and spending can help you figure out how much money you need to save for each goal and what kind of investments or savings make sense to achieve your goals.

This can be made much easier by using SoFi Relay to know where you stand with your money, what you spend, and how to hit your financial goals. With SoFi Relay you can track all of your money in one place, plus get credit score monitoring, spending breakdowns, financial insights, and more.

A key priority to think over is paying off any high-interest debt, including credit card debt. Be sure to make the payments on any existing loans to avoid any late fees or penalties for missed payments. It may be worth reviewing any loans you currently hold to see if you could potentially refinance to a lower interest rate.

If you don’t have an emergency money fund yet, consider putting that at the top of your priority list. You could plan to have three to six months’ worth of expenses saved.

Once you have high-interest debt paid off and an emergency money saved, you can allot a larger portion of your funds to save for retirement and other money goals. If you’re playing catch-up with your retirement money, try contributing any financial windfalls toward your retirement savings.

Saving and Investing Money by 40

If you already have a 401(k), there are a number of strategies to max out your 401(k) that are worth looking into. For example, it might make sense to contribute at least enough to qualify for any employer matching your company offers. Why lose out on the “free” money that your employer is willing to contribute to your retirement savings?

Try setting monthly or weekly savings targets to help you stay on track for retirement. You can even set up automatic transfers or deposits, so you don’t have to think about it.

As you’re rethinking how much money you need to save for retirement, it also makes sense to look at your lifestyle goals. That includes figuring out when you might want to retire, what kind of lifestyle you want in retirement, and how much money you might have coming in during retirement.

Where to Save Money for Retirement

Next, you’ll also need to figure out which retirement plan is right for you. There are many ways to save for retirement, even beyond the popular employer-sponsored 401(k). Other options include a traditional IRA or a Roth IRA (to see how much you can contribute to a Roth IRA, check out our Roth Contribution Calculator).

Some people choose to put their retirement savings in more than one type of account. This is useful if you want to set aside more than the yearly contribution limits on 401(k) plans—whether because you’re a high-income earner, or you started saving later in life, or you’re trying to achieve financial independence at a younger age. In that case, it might make sense to leverage a Traditional IRA, Roth IRA, or after-tax account to save beyond the 401(k) limits.

Investing in a Roth IRA now, with post-tax dollars, can also be useful if you want to withdraw money in retirement without paying taxes on the money. In contrast, 401(k) contributions are tax-deferred, meaning you will be taxed on funds you withdraw in retirement. That said, there are income limits on Roth IRAs, so this might not be an option depending on your salary.

After-tax accounts can be appealing to individuals who plan to achieve financial independence at a younger age and retire early. Unlike qualified plans, which place penalties on withdrawing funds before a certain age, an after-tax account is a pool of money that you can withdraw from without having to worry about penalties if you access the account before age 59 ½.

The Takeaway

While there are conventional rules of thumb as to how much money you should have saved by 40, the truth is everyone’s path to a comfortable retirement looks different. One piece of advice is universal, however: The sooner you start saving for retirement, the better your chances of being in a financially desirable position later in life.

Interested in boosting your retirement savings? You can open a Traditional IRA, Roth IRA, or after-tax account with SoFi Invest® to supplement your 401(k) or other qualified retirement plan savings.

Find out how SoFi Invest can help you start saving for your future.



SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Source: sofi.com

Should I Move the Money in My 401(k) to Bonds?

Should I Move the Money in My 401(k) to Bonds? – SmartAsset

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An employer-sponsored 401(k) plan may be an important part of your financial plan for retirement. Between tax-deferred growth, tax-deductible contributions and the opportunity to take advantage of employer matching contributions, a 401(k) can be a useful tool for investing long term. Managing those investments wisely means keeping an eye on market movements. When a bear market sets in, you may be tempted to make a flight to safety with bonds or other conservative investments. If you’re asking yourself, “Should I move my 401(k) to bonds?” consider the potential pros and cons of making such a move. Also, consider talking with a financial advisor about what the wisest move in your portfolio would be.

Bonds and the Bear Market

Bear markets are characterized by a 20% or more decline in stock prices. There are different factors that can trigger a bear market, but generally they’re typically preceded by economic uncertainty or a slowdown in economic activity. For example, the most recent sustained bear market lasted from 2007 to 2009 as the U.S. economy experienced a financial crisis and subsequent recession.

During a bear market environment, bonds are typically viewed as safe investments. That’s because when stock prices fall, bond prices tend to rise. When a bear market goes hand in hand with a recession, it’s typical to see bond prices increasing and yields falling just before the recession reaches its deepest point. Bond prices also move in relation to interest rates, so if rates fall as they often do in a recession, then bond prices rise.

While bonds and bond funds are not 100% risk-free investments, they can generally offer more stability to investors during periods of market volatility. Shifting more of a portfolio’s allocation to bonds and cash investments may offer a sense of security for investors who are heavily invested in stocks when a period of extended volatility sets in.

Should I Move My 401(k) to Bonds?

Whether it makes sense to move assets in your 401(k) away from mutual funds, target-date funds or exchange-traded funds (ETF) and toward bonds can depend on several factors. Specifically, those include:

  • Years left to retirement (time horizon)
  • Risk tolerance
  • Total 401(k) asset allocation
  • 401(k) balance
  • Where else you’ve invested money
  • How long you expect a stock market downturn to last

First, consider your age. Generally, the younger you are, the more risk you can afford to take with your 401(k) or other investments. That’s because you have a longer window of time to recover from downturns, including bear markets, recessions or even market corrections.

If you’re still in your 20s, 30s or even 40s, a shift toward bonds and away from stocks may be premature. The more time you keep your money in growth investments, such as stocks, the more wealth you may be able to build leading up to retirement. Given that the average bear market since World War II has lasted 14 months, moving assets in your 401(k) to bonds could actually cost you money if stock prices rebound relatively quickly.

On the other hand, if you’re in your 50s or early 60s then you may already have begun the move to bonds in your 401(k). That might be natural as you lean more toward income-producing investments, such as bonds, versus growth-focused ones.

It’s also important to look at the bigger financial picture in terms of where else you have money invested. Diversification matters for managing risk in your portfolio and before switching to bonds in your 401(k), it’s helpful to review what you’ve invested in your IRA or a taxable brokerage account. It’s possible that you may already have bond holdings elsewhere that could help to balance out any losses triggered by a bear market.

There are various rules of thumb you can use to determine your ideal asset allocation. The 60/40 rule, for example, dictates having 60% of your portfolio in stocks and 40% dedicated to bonds. Or you may use the rule of 100 or 120 instead, which advocate subtracting your age from 100 or 120. So, if you’re 30 years old and use the rule of 120, you’d keep 90% of your portfolio in stocks and the rest in bonds or other safer investments.

Consider Bond Funds

Bond mutual funds and bond ETFs could be a more attractive option than traditional bond investments if you’re worried about bear market impacts on your portfolio. With bond ETFs, for example, you can own a collection of bonds in a single basket that trades on an exchange just like a stock. This could allow you to buy in low during periods of volatility and benefit from price appreciation as you ride the market back up. Sinking money into individual bonds during a bear market or recession, on the other hand, can lock you in when it comes to bond prices and yields.

If you’re weighing individual bonds, remember that they aren’t all alike and the way one bond reacts to a bear market may be different than another. Treasury-Inflation Protected Securities or TIPS, for example, might sound good in a bear market since they offer some protection against inflationary impacts but they may not perform as well as U.S. Treasurys. And shorter-term bonds may fare better than long-term bonds.

How to Manage Your 401(k) in a Bear Market

When a bear market sets in, the worst thing you can do is hit the panic button on your 401(k). While it may be disheartening to see your account value decreasing as stock prices drop, that’s not necessarily a reason to overhaul your asset allocation.

Instead, look at which investments are continuing to perform well, if any. And consider how much of a decline you’re seeing in your investments overall. Look closely at how much of your 401(k) you have invested in your own company’s stock, as this could be a potential trouble spot if your company takes a financial hit as the result of a downturn.

Continue making contributions to your 401(k), at least at the minimum level to receive your employer’s full company match. If you can afford to do so, you may also consider increasing your contribution rate. This could allow you to max out your annual contribution limit while purchasing new investments at a discount when the market is down. Rebalance your investments in your 401(k) as needed to stay aligned with your financial goals, risk tolerance and timeline for retiring.

The Bottom Line

Moving 401(k) assets into bonds could make sense if you’re closer to retirement age or you’re generally a more conservative investor overall. But doing so could potentially cost you growth in your portfolio over time. Talking to your 401(k) plan administrator or your financial advisor can help you decide the best way to weather a bear market or economic slowdown while preserving retirement assets.

Tips for Investing

  • It’s helpful to review your 401(k) at least once per year to see how your investments are performing and whether you’re still on track to reach your retirement goals. If you notice that you’re getting overweighted in a particular asset class or stock market sector, for example, you may need to rebalance to get back on track. You should also review the fees you’re paying for your 401(k), including individual expense ratios for each mutual fund or ETF you own.
  • Consider talking to a professional financial advisor about the best strategies to implement when investing in bear markets and bull markets as well. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors online. It takes just a few minutes to get your personalized advisor recommendations. If you’re ready, get started now.

Photo credit: ©iStock.com/BraunS, ©iStock.com/Aksana Kavaleuskaya, ©iStock.com/izusek

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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The 5 Things Single Parents Need to Consider about Life Insurance

August 28, 2017 &• 5 min read by Abby Hayes Comments 0 Comments

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As a parent, one of the scariest things to think about is what your children will do if something happens to you someday. This can be even scarier if you’re a single parent without a partner to fall back on.

But here’s the thing: you are the sole provider for your children. It’s even more important that you take time to consider all the future possibilities. Here’s what you need to know about life insurance, including how much coverage to get and how much it’s likely to cost.

How Much Coverage Do You Need?

The biggest life insurance question is usually about how much coverage you need. There are all sorts of rules of thumb for this issue. Some say you need seven times your current annual income, while others say more or less.

But how much coverage you need really depends on how the benefit would need to be used if you were to pass away. Ultimately, this depends on a few factors, including the following:

  • How old your children are right now
  • Who would care for them if you were to pass away
  • What that caregiver would need to be able to care for your children
  • How much debt you currently have
  • Whether or not you want to pay for your children’s college costs

Let’s break this down, then, into the five things you’ll need to consider to get the most out of your life insurance policy.

1. Talk to Potential Caregivers

If you don’t already have plans for alternative caregivers for your children, now is the time to make them. Your life insurance decisions will largely hinge on the circumstances of those who would care for your children in the event of your death.

For instance, let’s say you have four kids who would live with your parents if you passed away. If your parents have already downsized into a retirement home, they’d probably need to move to care for your children. In this case, you need to account for their additional moving and housing expenses in your life insurance policy. If they’ve already retired, you may need to consider the other ways that caring for your children would impact their ability to cover their own living expenses.

But what if you have only one child who would move in with family friends if you passed away? If your friends already have a few kids of their own, they may not need to move or add on to their home to accommodate your child. In this case, you may not need quite as much life insurance coverage.

It’s a good idea to have an up-front conversation with potential caregivers. What would they need in order to care for your children appropriately? These are difficult conversations to have, but they’re an essential part of this equation.

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2. Think about Your Kids’ Needs

How much insurance you require also depends on your kids’ ages and needs. If you have younger children, you’ll need more coverage—and you’ll need it to last longer. If your kids are older, though, you can probably purchase a shorter policy with less coverage.

Beyond just their ages, you’ll want to consider your kids’ particular needs as well. Are they currently attending a private school that you’d want them to continue attending? Or maybe you have a child with special medical needs. Make sure your policy is large enough to cover those costs.

If you want to fund your children’s college attendance with your death benefit, you’ll need quite a bit more coverage. If you can’t afford to cover college tuition right now, you could also look at college funds as the icing on the cake. In a couple of years, if you’re in a better place, consider upping your policy or adding a second one to cover these costs.

3. Consider Your Current Financial Situation

Even those without children should have enough life insurance coverage to tackle leftover debts and other end-of-life expenses, but it can be even more important for single parents. You’ll want to be sure your children aren’t dealing with a burden of debt while also grieving your loss. If possible, you’ll want to cover the full amount of your debt so they don’t need to.

Keep in mind the costs of end-of-life services, like a funeral service and burial, as well. These can run as much as $10,000 and be a real financial burden if you forget to plan for them yourself.

4. Add It All Up, and See What You Need

Now it’s time to determine how much total life insurance coverage you need. Here’s an example, based on the recommendation that you cover seven times your annual salary.

Sherry is a single mom of a four-year-old and a ten-year-old. She makes about $40,000 per year. If she passed away, her parents would care for the kids, and they’d need to move into a larger home to do so. She has about $25,000 in debt, outside of her mortgage, and she would want to fund both kids’ college funds with her life insurance. Here’s where she stands:

  • Income Replacement: $280,000
  • Additional Housing Costs: $50,000
  • Debt: $25,000
  • End of Life Expenses: $10,000
  • College Funds: $200,000
  • Total Life Insurance Needs: $565,000

That sounds like a lot, right? Before you decide you can’t afford insurance, though, take the next step.

5. Check Out Term Life Insurance Coverage

Over half a million dollars in life insurance coverage seems like a lot, but many people actually overestimate the actual costs of such insurance, especially for healthy, relatively young individuals.

The key is to get term insurance (unless you have a good reason to have more expensive whole life insurance coverage) for only as long as you need it. The longer your term, the more expensive your coverage. Sherry should probably have a 15-year policy, which would cover her until her children are both adults. And if Sherry is in good health, a policy like this could cost well under $50 per month. That’s much better, right?

Once you know how much coverage you need, it’s time to shop around. Plenty of online quoting systems can get you an estimate on your costs in just a few minutes.

These steps aren’t fun to think about. But having an affordable life insurance policy you know will protect your loved ones is worth a bit of discomfort. Check out our Personal Finance Learning Center to ensure you’re on the right track to keep your children safe and secure when you’re no longer here.

Image: Juanmonino

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75 Personal Finance Rules of Thumb – The Best Interest

Share the Best Interest

A “rule of thumb” is a mental shortcut. It’s a heuristic. It’s not always true, but it’s usually true. It saves you time and brainpower. Rather than re-inventing the wheel for every money problem you face, personal finance rules of thumb let you apply wisdom from the past to reach quick solutions.

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I’m going to do my best Buzzfeed impression today and give you a list of 75 personal finance rules of thumb. Some are efficient packets of advice while others are mathematical shortcuts to save brain space. Either way, I bet you’ll learn a thing or two—quickly—from this list.

The Basics

These basic personal finance rules of thumb apply to everybody. They’re simple and universal.

1. The Order of Operations (since this is one of the bedrocks of personal finance, I wrote a PDF explaining all the details. Since you’re a reader here, it’s free.)

2. Insurance protects wealth. It doesn’t build wealth.

3. Cash is good for current expenses and emergencies, but nothing more. Holding too much cash means you’re losing long-term value.

4. Time is money. Wealth is a measure of how much time your money can buy.

5. Set specific financial goals. Specific numbers, specific dates. Don’t put off for tomorrow what you can do today.

6. Keep an eye on your credit score. Check-in at least once a year.

7. Converting wages to salary: $1/per hour = $2000 per year.

8. Don’t mess with City Hall. Don’t cheat on your taxes.

9. You can afford anything. You can’t afford everything.

10. Money saved is money earned. When you look at your bottom line, saving a dollar has the equivalent effect as earning a dollar. Saving and earning are equally important.

Budgeting

I love budgeting, but not everyone is as zealous as me. Still, if you’re looking to budget (or even if you’re not), I think these budgeting rules of thumb are worth following.

11. You need a budget. The key to getting your financial life under control is making a budget and sticking to it. That is the first step for every financial decision.

12. The 50-30-20 rule of budgeting. After taxes, 50% of your money should cover needs, 30% should cover wants, and 20% should repay debts or invest.

13. Use “sinking funds” to save for rainy days. You know it’ll rain eventually.

14. Don’t mix savings and checking. One saves, the other spends.

15. Children cost about $10,000 per kid, per year. Family planning = financial planning.

16. Spend less than you earn. You might say, “Duh!” But if you’re not measuring your spending (e.g. with a budget), are you sure you meet this rule?

Investing & Retirement

Basic investing, in my opinion, is a ‘must know’ for future financial success. The following rules of thumb will help you dip your toe in those waters.

17. Don’t handpick stocks. Choose index funds instead. Very simple, very effective.

18. People who invest full-time are smarter than you. You can’t beat them.

19. The Rule of 72 (it’s doctor-approved). An investment annual growth rate multiplied by its doubling time equals (roughly) 72. A 4% investment will double in 18 years (4*18 = 72). A 12% investment will double in 6 years (12*6 = 72).

20. “Don’t do something, just sit there.” -Jack Bogle, on how bad it is to worry about your investments and act on those emotions.

21. Get the employer match. If your employer has a retirement program (e.g. 401k, pension), make sure you get all the free money you can.

22. Balance pre-tax and post-tax investments. It’s hard to know what tax rates will be like when you retire, so balancing between pre-tax and post-tax investing now will also keep your tax bill balanced later.

23. Keep costs low. Investing fees and expense ratios can eat up your profits. So keep those fees as low as possible.

24. Don’t touch your retirement money. It can be tempting to dip into long-term savings for an important current need. But fight that urge. You’ll thank yourself later.

25. Rebalancing should be part of your investing plan. Portfolios that start diversified can become concentrated some one asset does well and others do poorly. Rebalancing helps you rest your diversification and low er your risk.

26. The 4% Rule for retirement. Save enough money for retirement so that your first year of expenses equals 4% (or less) of your total nest egg.

27. Save for your retirement first, your kids’ college second. Retirees don’t get scholarships.

28. $1 invested in stocks today = $10 in 30 years.

29. Inflation is about 3% per year. If you want to be conservative, use 3.5% in your money math.

30. Stocks earn 7% per year, after adjusting for inflation.

31. Own your age in bonds. Or, own 120 minus your age in bonds. The heuristic used to be that a 30-year old should have a portfolio that’s 30% bonds, 40-year old 40% bonds, etc. More recently, the “120 minus your age” rule has become more prevalent. 30-year old should own 10% bonds, 40-year old 20% bonds, etc.

32. Don’t invest in the unknown. Or as Warren Buffett suggests, “Invest in what you know.”

Home & Auto

For many of you, home and car ownership contribute to your everyday finances. The following personal finance rules of thumb will be especially helpful for you.

33. Your house’s sticker price should be less than 3x your family’s combined income. Being “house poor”—or having too expensive of a house compared to your income—is one of the most common financial pitfalls. Avoid it if you can.

34. Broken appliance? Replace it if 1) the appliance is 8+ years old or 2) the repair would cost more than half of a new appliance.

35. Used car or new car? The cost difference isn’t what it used to be. The choice is even.

36. A car’s total lifetime cost is about 3x its sticker price. Choose wisely!

37. 20-4-10 rule of buying a vehicle. Put 20% of the vehicle down in cash, with a loan of 4 years or less, with a monthly payment that is less than 10% of your monthly income.

38. Re-financing a mortgage makes sense once interest rates drop by 1% (or more) from your current rate.

39. Don’t pre-pay your mortgage (unless your other bases are fully covered). Mortgages interest is deductible, and current interest rates are low. While pre-paying your mortgage saves you that little bit of interest, there’s likely a better use for you extra cash.

40. Set aside 1% of your home’s value each year for future maintenance and repairs.

41. The average car costs about 50 cents per mile over the course of its life.

42. Paying interest on a depreciating asset (e.g. a car) is losing twice.

43. Your main home isn’t an investment. You shouldn’t plan on both living in your house forever and selling it for profit. The logic doesn’t work.

44. Pay cash for cars, if you can. Paying interest on a car is a losing move.

45. If you’re buying a fixer-upper, consider the 70% rule to sort out worthy properties.

46. If you’re buying a rental property, the 1% rule easily evaluates if you’ll get a positive cash flow.

Spending & Debt

Do you spend money? (“What kind of question is that?”) Then these personal finance rules of thumb will apply to you.

47. Pay off your credit card every month.

48. In debt? Use psychology to help yourself. Consider the debt snowball or debt avalanche.

49. When making a purchase, consider cost-per-use.

50. Make your spending tangible with a ‘cash diet.’

51. Never pay full price. Shop around and do your research to get the best deals. You can earn cash back when you shop online, score a discount with a coupon code, or a voucher for free shipping.

52. Buying experiences makes you happier than buying things.

53. Shop by yourself. Peer pressure increases spending.

54. Shop with a list, and stick to it. Stores are designed to pull you into purchases you weren’t expecting.

55. Spend on the person you are, not the person you want to be. I love cooking, but I can’t justify $1000 of professional-grade kitchenware.

56. The bigger the purchase, the more time it deserves. Organic vs. normal peanut butter? Don’t spend 10 minutes thinking about it. $100K on a timeshare? Don’t pull the trigger when you’re three margaritas deep.

57. Use less than 30% of your available credit. Credit usage plays a major role in your credit score. Consistently maxing out your credit hurts your credit score. Aim to keep your usage low (paying off every month, preferably).

58. Unexpected windfall? Use 5% or less to treat yourself, but use the rest wisely (e.g. invest for later).

59. Aim to keep your student loans less than one year’s salary in your field.

The Mental Side of Personal Finance

At the end of the day, you are what you do. Psychology and behavior play an essential role in personal finance. That’s why these behavioral rules of thumb are vital.

60. Consider peace of mind. Paying off your mortgage isn’t always the optimum use of extra money. But the peace of mind that comes with eliminating debt—it’s huge.

61. Small habits build up to big impacts. It feels like a baby step now, but give yourself time.

62. Give your brain some time. Humans might rule the animal kingdom, but it doesn’t mean we aren’t impulsive. Give your brain some time to think before making big financial decisions.

63. The 30 Day Rule. Wait 30 days before you make a purchase of a “want” above a certain dollar amount. If you still want it after waiting and you can afford it, then buy it.  

64. Pay yourself first. Put money away (into savings or investment accounts) before you ever have a chance to spend it.

65. As a family, don’t fall into the two-income trap. If you can, try to support your lifestyle off of only one income. Should one spouse lose their job, the family finances will still be stable.

66. Every dollar counts. Money is fungible. There are plenty of ways to supplement your income stream.

67. Savor what you have before buying new stuff. Consider the fulfillment curve.

68. Negotiating your salary can be one of the most important financial moves you make. Increasing your income might be more important than anything else on this list.

69. Direct deposit is the nudge you need. If you don’t see your paycheck, you’re less likely to spend it.

70. Don’t let comparison steal your joy. Instead, use comparisons to set goals. (net worth).

71. Learning is earning. Education is 5x more impactful to work-life earnings than other demographics.

72. If you wouldn’t pay in cash, then don’t pay in credit. Swiping a credit card feels so easy compared to handing over a stack of cash. Don’t let your brain fool itself.

73. Envision a leaky bucket. Water leaking from the bottom is just as consequential as water entering the top. We often ignore financial leaks (e.g. fees), since they’re not as glamorous—but we shouldn’t.

74. Forget the Joneses. Use comparisons to motivate healthier habits, not useless spending.

75. Talk about money! I know it’s sometimes frowned upon (like politics or religion), but you can learn a ton from talking to your peers about money. Unsure where to start? You can talk to me!

The Last Personal Finance Rule of Thumb

Last but not least, an investment in knowledge pays the best interest.

Boom! Got ’em again! Ben Franklin streaks in for another meta appearance. Thanks Ben!

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75 Personal Finance Rules of Thumb

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A “rule of thumb” is a mental shortcut. It’s a heuristic. It’s not always true, but it’s usually true. It saves you time and brainpower. Rather than re-inventing the wheel for every money problem you face, personal finance rules of thumb let you apply wisdom from the past to reach quick solutions.

Table of Contents show

I’m going to do my best Buzzfeed impression today and give you a list of 75 personal finance rules of thumb. Some are efficient packets of advice while others are mathematical shortcuts to save brain space. Either way, I bet you’ll learn a thing or two—quickly—from this list.

The Basics

These basic personal finance rules of thumb apply to everybody. They’re simple and universal.

1. The Order of Operations (since this is one of the bedrocks of personal finance, I wrote a PDF explaining all the details. Since you’re a reader here, it’s free.)

2. Insurance protects wealth. It doesn’t build wealth.

3. Cash is good for current expenses and emergencies, but nothing more. Holding too much cash means you’re losing long-term value.

4. Time is money. Wealth is a measure of how much time your money can buy.

5. Set specific financial goals. Specific numbers, specific dates. Don’t put off for tomorrow what you can do today.

6. Keep an eye on your credit score. Check-in at least once a year.

7. Converting wages to salary: $1/per hour = $2000 per year.

8. Don’t mess with City Hall. Don’t cheat on your taxes.

9. You can afford anything. You can’t afford everything.

10. Money saved is money earned. When you look at your bottom line, saving a dollar has the equivalent effect as earning a dollar. Saving and earning are equally important.

Budgeting

I love budgeting, but not everyone is as zealous as me. Still, if you’re looking to budget (or even if you’re not), I think these budgeting rules of thumb are worth following.

11. You need a budget. The key to getting your financial life under control is making a budget and sticking to it. That is the first step for every financial decision.

12. The 50-30-20 rule of budgeting. After taxes, 50% of your money should cover needs, 30% should cover wants, and 20% should repay debts or invest.

13. Use “sinking funds” to save for rainy days. You know it’ll rain eventually.

14. Don’t mix savings and checking. One saves, the other spends.

15. Children cost about $10,000 per kid, per year. Family planning = financial planning.

16. Spend less than you earn. You might say, “Duh!” But if you’re not measuring your spending (e.g. with a budget), are you sure you meet this rule?

Investing & Retirement

Basic investing, in my opinion, is a ‘must know’ for future financial success. The following rules of thumb will help you dip your toe in those waters.

17. Don’t handpick stocks. Choose index funds instead. Very simple, very effective.

18. People who invest full-time are smarter than you. You can’t beat them.

19. The Rule of 72 (it’s doctor-approved). An investment annual growth rate multiplied by its doubling time equals (roughly) 72. A 4% investment will double in 18 years (4*18 = 72). A 12% investment will double in 6 years (12*6 = 72).

20. “Don’t do something, just sit there.” -Jack Bogle, on how bad it is to worry about your investments and act on those emotions.

21. Get the employer match. If your employer has a retirement program (e.g. 401k, pension), make sure you get all the free money you can.

22. Balance pre-tax and post-tax investments. It’s hard to know what tax rates will be like when you retire, so balancing between pre-tax and post-tax investing now will also keep your tax bill balanced later.

23. Keep costs low. Investing fees and expense ratios can eat up your profits. So keep those fees as low as possible.

24. Don’t touch your retirement money. It can be tempting to dip into long-term savings for an important current need. But fight that urge. You’ll thank yourself later.

25. Rebalancing should be part of your investing plan. Portfolios that start diversified can become concentrated some one asset does well and others do poorly. Rebalancing helps you rest your diversification and low er your risk.

26. The 4% Rule for retirement. Save enough money for retirement so that your first year of expenses equals 4% (or less) of your total nest egg.

27. Save for your retirement first, your kids’ college second. Retirees don’t get scholarships.

28. $1 invested in stocks today = $10 in 30 years.

29. Inflation is about 3% per year. If you want to be conservative, use 3.5% in your money math.

30. Stocks earn 7% per year, after adjusting for inflation.

31. Own your age in bonds. Or, own 120 minus your age in bonds. The heuristic used to be that a 30-year old should have a portfolio that’s 30% bonds, 40-year old 40% bonds, etc. More recently, the “120 minus your age” rule has become more prevalent. 30-year old should own 10% bonds, 40-year old 20% bonds, etc.

32. Don’t invest in the unknown. Or as Warren Buffett suggests, “Invest in what you know.”

Home & Auto

For many of you, home and car ownership contribute to your everyday finances. The following personal finance rules of thumb will be especially helpful for you.

33. Your house’s sticker price should be less than 3x your family’s combined income. Being “house poor”—or having too expensive of a house compared to your income—is one of the most common financial pitfalls. Avoid it if you can.

34. Broken appliance? Replace it if 1) the appliance is 8+ years old or 2) the repair would cost more than half of a new appliance.

35. Used car or new car? The cost difference isn’t what it used to be. The choice is even.

36. A car’s total lifetime cost is about 3x its sticker price. Choose wisely!

37. 20-4-10 rule of buying a vehicle. Put 20% of the vehicle down in cash, with a loan of 4 years or less, with a monthly payment that is less than 10% of your monthly income.

38. Re-financing a mortgage makes sense once interest rates drop by 1% (or more) from your current rate.

39. Don’t pre-pay your mortgage (unless your other bases are fully covered). Mortgages interest is deductible, and current interest rates are low. While pre-paying your mortgage saves you that little bit of interest, there’s likely a better use for you extra cash.

40. Set aside 1% of your home’s value each year for future maintenance and repairs.

41. The average car costs about 50 cents per mile over the course of its life.

42. Paying interest on a depreciating asset (e.g. a car) is losing twice.

43. Your main home isn’t an investment. You shouldn’t plan on both living in your house forever and selling it for profit. The logic doesn’t work.

44. Pay cash for cars, if you can. Paying interest on a car is a losing move.

45. If you’re buying a fixer-upper, consider the 70% rule to sort out worthy properties.

46. If you’re buying a rental property, the 1% rule easily evaluates if you’ll get a positive cash flow.

Spending & Debt

Do you spend money? (“What kind of question is that?”) Then these personal finance rules of thumb will apply to you.

47. Pay off your credit card every month.

48. In debt? Use psychology to help yourself. Consider the debt snowball or debt avalanche.

49. When making a purchase, consider cost-per-use.

50. Make your spending tangible with a ‘cash diet.’

51. Never pay full price. Shop around and do your research to get the best deals. You can earn cash back when you shop online, score a discount with a coupon code, or a voucher for free shipping.

52. Buying experiences makes you happier than buying things.

53. Shop by yourself. Peer pressure increases spending.

54. Shop with a list, and stick to it. Stores are designed to pull you into purchases you weren’t expecting.

55. Spend on the person you are, not the person you want to be. I love cooking, but I can’t justify $1000 of professional-grade kitchenware.

56. The bigger the purchase, the more time it deserves. Organic vs. normal peanut butter? Don’t spend 10 minutes thinking about it. $100K on a timeshare? Don’t pull the trigger when you’re three margaritas deep.

57. Use less than 30% of your available credit. Credit usage plays a major role in your credit score. Consistently maxing out your credit hurts your credit score. Aim to keep your usage low (paying off every month, preferably).

58. Unexpected windfall? Use 5% or less to treat yourself, but use the rest wisely (e.g. invest for later).

59. Aim to keep your student loans less than one year’s salary in your field.

The Mental Side of Personal Finance

At the end of the day, you are what you do. Psychology and behavior play an essential role in personal finance. That’s why these behavioral rules of thumb are vital.

60. Consider peace of mind. Paying off your mortgage isn’t always the optimum use of extra money. But the peace of mind that comes with eliminating debt—it’s huge.

61. Small habits build up to big impacts. It feels like a baby step now, but give yourself time.

62. Give your brain some time. Humans might rule the animal kingdom, but it doesn’t mean we aren’t impulsive. Give your brain some time to think before making big financial decisions.

63. The 30 Day Rule. Wait 30 days before you make a purchase of a “want” above a certain dollar amount. If you still want it after waiting and you can afford it, then buy it.  

64. Pay yourself first. Put money away (into savings or investment accounts) before you ever have a chance to spend it.

65. As a family, don’t fall into the two-income trap. If you can, try to support your lifestyle off of only one income. Should one spouse lose their job, the family finances will still be stable.

66. Every dollar counts. Money is fungible. There are plenty of ways to supplement your income stream.

67. Savor what you have before buying new stuff. Consider the fulfillment curve.

68. Negotiating your salary can be one of the most important financial moves you make. Increasing your income might be more important than anything else on this list.

69. Direct deposit is the nudge you need. If you don’t see your paycheck, you’re less likely to spend it.

70. Don’t let comparison steal your joy. Instead, use comparisons to set goals. (net worth).

71. Learning is earning. Education is 5x more impactful to work-life earnings than other demographics.

72. If you wouldn’t pay in cash, then don’t pay in credit. Swiping a credit card feels so easy compared to handing over a stack of cash. Don’t let your brain fool itself.

73. Envision a leaky bucket. Water leaking from the bottom is just as consequential as water entering the top. We often ignore financial leaks (e.g. fees), since they’re not as glamorous—but we shouldn’t.

74. Forget the Joneses. Use comparisons to motivate healthier habits, not useless spending.

75. Talk about money! I know it’s sometimes frowned upon (like politics or religion), but you can learn a ton from talking to your peers about money. Unsure where to start? You can talk to me!

The Last Personal Finance Rule of Thumb

Last but not least, an investment in knowledge pays the best interest.

Boom! Got ’em again! Ben Franklin streaks in for another meta appearance. Thanks Ben!

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

This article—just like every other—is supported by readers like you.

Share the Best Interest

Tagged rules of thumb

Source: bestinterest.blog