November 2024
Barbara O’Neill, Ph.D., CFP®, AFC®
Distinguished Professor and Extension Financial Management Specialist Emeritus
Rutgers Cooperative Extension
You don't need an advanced degree in finance to manage money wisely. Instead, simply pay attention to "evergreen" financial advice that is grounded in research. The internet is chock full of content about money "moves," "tips," "strategies," "steps," and "secrets." Below are eight financial actions to consider:
Control Your Spending- There are two ways to build wealth: earn more money or decrease spending. Many people spend mindlessly and/or impulsively. Financial planners recommend living below your means (i.e., expenses less than income), which will probably require spending cuts and habit changes. For example, ordering water instead of a beverage when eating out or shopping for clothing and home furnishings at a thrift shop.
Save Regularly- Strategies include signing up for an employer savings plan and stock or mutual fund automatic investment plans. Another way to set aside regular amounts is automating transfers from a checking account to a savings account or making automatic deposits for exchange-traded funds (ETFs), mutual funds, and stocks. Also consider investing occasional windfalls such as tax refunds, insurance reimbursement checks, or prize winnings.
Control What You Can- Examples of things that people can control include discretionary spending, the amount of money contributed to an individual retirement account (IRA) or other retirement savings plan, and expenses associated with investing (e.g., selecting mutual funds or ETFs with low expense ratios). Conversely, accept what you cannot control. Examples include Federal Reserve interest rate decisions and stock market volatility.
Control Your Emotions- A common money emotion is fear as illustrated by panic selling of stocks when market indices plummet. Another common emotion associated with investing is greed. When market indices are rising, many investors think they are "smarter than average." They are not. Also, buying penny stocks and day trading often amount to gambling. Smart investors don't gamble. They pick quality stocks and hold them long term.
Control Investment Costs- High expenses reduce investment returns. Not surprisingly, many investors never "beat the market" and, in fact, lag it by 1% to 2% per year. Buying stock inexpensively is possible through index funds. For broad exposure to the market, consider a "total stock market" index fund that tracks the Wilshire 5000 (an index of U.S. companies of various sizes: small, medium, and large). To get even broader stock exposure, consider investing in both a U.S. stock index fund and an international index fund.
Control Your Taxes- Tax-deferred retirement plans provide a "triple play": a federal tax deduction for the amount of the contribution, tax deferral of investment earnings, and, in many cases (most 401(k)s, some 403(b)s, and the thrift savings plan), employer matching. Other ways to legally reduce taxes include Roth IRA conversions, long-term capital gains, contributions to flexible spending accounts and health savings accounts, and claiming adjustments to income, tax credits (e.g., child tax credit), and tax deductions (standard deduction or itemized).
Insure Against Large Risks- Insurance transfers the risk of financial loss to a third-party insurance company in exchange for payment of an insurance policy premium. Examples of potentially large losses that should be insured against include disability resulting in a loss of income, the death of a household earner, major damages to property (e.g., following a fire or natural disaster), and court judgements citing liability for losses experienced by others.
Take Care of Yourself- The ancient philosopher Virgil is quoted as saying "The Greatest Wealth is Health." So very true. Immense wealth is of little value to people who are too ill to enjoy it and poor health results in costly medical bills that drain savings. Take steps to live your healthiest life by following expert recommendations for diet, physical activity, non-smoking, and overall health. The Rutgers Cooperative Extension Small Steps to Health and Wealth™ website contains 25 behavior change strategies to improve both health and personal finances.