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Effective money management is not just about saving and investing; it’s about making your money work for you over time, so the sooner you start, the better. Here are 15 tips to consider when developing a financial plan that takes the time value of money into account: While this is simply an outline, hopefully this article will give you a framework to get started on a sound financial plan.
I’m 57 years old, and while we’ve been fortunate enough, maybe lucky is a better word, to amass a decent portfolio and be in a position for a comfortable retirement, we didn’t follow a comprehensive plan during the early years. If we had practiced all these tips from an earlier age, our position would be significantly better than it is. So please, read on…
Creating and sticking to a budget is fundamental, but it’s equally important to factor in inflation when estimating expenses over time. Make sure to adjust your budget to account for the rising cost of living.
SAVE FOR EMERGENCIES:
Building an emergency fund is essential, but it’s also important to invest that money in an account that will earn interest over time, such as a High Yield Savings account, a money market account, short term CD’s or T-Bills rather than just leaving it in a low-interest savings account. Most advisors will suggest that you try to keep 3 to 6 months of your salary in an emergency fund.
LIVE BELOW YOUR MEANS:
We hear this all the time, and it’s not easy to do, but Living frugally is a discipline that if practiced early on, will pay significant dividends down the road. Equally important is investing that saved money in assets that appreciate in value over time.
Sounds obvious doesn’t it? Investing in a diversified portfolio of stocks, bonds, and other assets can help you build wealth over time, but it’s really important to consider the time horizon of your investments and adjust your portfolio as needed. Starting small is ok, you don’t need thousands of dollars to begin to build your portfolio. You’ll hear this a few times in this post, seek out and work with a qualified financial planner, they will be able to help educate and guide you through this journey.
REDUCE YOUR DEBT:
Paying off high-interest debt, such as credit cards should be a priority, the longer you carry that debt, the more interest payments rack up and they can be significant to the point of crushing your disposable income.
AVOID UNECESSARY EXPENSES:
This different than living below your means. There will be times when funds are tight, and you really want to make that purchase of a new car or or take an expensive vacation. Making a tough choice during these times is a discipline that requires some soul searching and deciding what’s really important, just step back and think about the bigger picture. It’s also essential to consider the long-term impact of those expenses on your financial goals, make the tough decisions early and you will reap the benefits over the long term.
AUTOMATE YOUR SAVINGS:
This is an excellent way to build savings without even thinking about it. Setting up automatic transfers to your savings or investment accounts will help you take advantage of compound interest, which means your money earns interest on interest over time. Most people are pad via direct deposit these days. Talk to your HR rep or whoever oversees payroll. You can have your net pay split up and deposited into multiple accounts, and have it go directly where you want it without any manual transfers. Place a small amount of your take home pay in an account and forget about it for a few months, or even years and resist the urge to tap into it.
INVEST IN REAL ESTATE:
We have made some poor investments over the years, however, investing in Real Estate has been by far the best investment we have ever made. Real estate can be an excellent vehicle for significant long term wealth generation, but it’s essential to factor in the time value of money and what type of real estate to invest in. Take a look at an article I recently wrote titled: Is Now A Good Time To Buy A Rental Property? This will give you an insight into how a rental property can benefit you in more ways than you think, including taxes!
PLAN FOR RETIREMENT:
Start planning for retirement as early as possible and consider the impact of inflation on your retirement savings. Aim to contribute enough to your retirement accounts to account for rising living costs over time and be realistic when deciding on a retirement age.
Educating yourself on investing, financial planning, and related topics can help you make informed decisions that account for the time value of money. Make sure to stay up-to-date on changes in the economy and financial markets.
Don’t ever be afraid to negotiate – for almost anything! If you are the buyer, you have the power – while the cash is in your pocket. The time to negotiate is before any decision or purchase is made. Once money is transferred, the leverage is gone. Negotiating for better deals on purchases or services can save significant amounts of money. Remember, whatever you are buying, there is a seller who wants to make the sale, finding the right price for both of you is worth the effort of doing sound research and practicing the art of negotiating.
MAXIMIZE TAX BENEFITS:
If your job offers it and you’re not contributing to a 401K plan, do it! Do the math, look at your budget and put as much as you can, up to the IRA limit if possible, into this pre-tax savings account. It will lower your taxable income each fiscal year, it will grow into a very nice next egg over time.
USE CREDIT WISELY:
Using credit responsibly can help you establish good credit and take advantage of rewards programs, but it’s crucial to pay off balances in full each month to avoid paying interest over time.
SEEK PROFESSIONAL ADVICE:
I may have mentioned this earlier…. Consulting with financial advisors will help you make informed decisions. To find the right advisor for your needs, consider their credentials and experience, whether they operate under a fiduciary duty, ask about their fees and compensation structure, investment philosophy, communication style, the services they offer, referrals and reputation, accessibility, and personal fit. By taking the time to carefully evaluate potential advisors based on these criteria, you can find an advisor who can provide the guidance and support you need to achieve your financial goals.
Philanthropy can be personally fulfilling and provide tax benefits, but it’s essential to consider the long-term impact of your charitable giving on your financial goals.
By incorporating these 15 tips into your financial plan and accounting for the time value of money, you can work towards achieving financial stability, building wealth, and securing your financial future. Remember, the key to effective money management is to think long-term and adjust your strategy as needed to ensure you are making the most of your money over time.