Some financial advice just doesn’t grow old. Many recommendations I’ve made for years are as applicable as ever for the 21st century, and they bear repeating. Here are some of the best financial moves to consider as you move into 2016:
1. Understanding and managing your thoughts, feelings, and beliefs about money is as important as understanding how money works. Our brains are hardwired to make poor financial decisions. Exploring your money history and learning to identify your unconscious beliefs about money can change your financial behaviors forever. It is crucial to gaining and keeping control of your finances and becoming comfortable using money as the valuable tool it is.
2. Building an emergency reserve to cover living expenses for six months to a year if you lose your job or experience a business slump isn’t just a good idea, it’s a necessity. If you are retired, having one to three years of cash available to cover living expenses can help you avoid taking money out of investments when their value has declined.
3. Retirement will happen, sooner than you think. Start early—as in the day after college graduation—and be consistent in investing at least 20 percent of your paycheck in your 401k, IRA or SIMPLE plan.
4. Learn to appreciate the word “budget.” Creating a plan to track and manage income and spending is an essential skill to survive and thrive financially. Numerous free or inexpensive tools, like Mint.com and Quicken, can help.
5. Run from consumer debt. If you can afford a credit card payment after you purchase something, you can afford to save first and buy with cash. Personally, I use credit cards for almost every purchase for both convenience and cash back or travel rewards. However, it’s imperative to pay the card off every month, without fail.
6. A house is a home, not an investment. Don’t buy more home than you can afford, and don’t buy without a down payment.
7. No asset goes up forever. Price declines, even crashes, are a normal part of investing. It’s essential to understand that the value of your portfolio will fluctuate. Be prepared to ride out downturns. Selling in a down market is “the big mistake” that will cost you dearly.
8. The fundamental strategy for managing market ups and downs is asset class diversification. This doesn’t mean having money in different banks, with different brokers, or in different mutual funds. It’s about having a good balance of mutual funds that invest in U. S. and International stocks, U. S. and International bonds, real estate investment trusts, commodities, market neutral funds, Treasury Inflation-Protected Securities, and junk bonds.
9. There are no free investments. Pay attention to the fees and taxes associated with any investment, as well as how the advisor recommending any investment is compensated.
10. Pay yourself first. The most successful savers and investors I know simply take all their fixed expenses, taxes, and retirement contributions off the top of every dollar earned, then spend the rest. That means learning to live on 30% to 50% of every dollar you earn. This may sound unreasonable or even impossible for anyone who is just starting out, raising a family, or getting by from month to month. Certainly, it isn’t easy. But one of the most valuable financial habits to create, beginning with your very first paycheck, is to save something for the future instead of spending everything that comes in.
You may well have heard this advice before. There’s a reason for that: it works. The details of managing money may evolve, but classic money wisdom never goes out of style.