Finances, Part One

Whether you have money or not, no one wants to hear about it. Americans in general are uncomfortable discussing money. If you have money problems, keep it to yourself. If someone suggests going somewhere that you can’t afford, don’t say you can’t afford it. That’s your business, not theirs, and, frankly, it’s like saying you have diarrhea. It may be true, but no one wants to hear about it.

There are plenty of good books out there on finances (a few will be suggested in the next post), so I’ll be brief.

Have a will. And a living will, to express your wishes in case you are incapacitated physically. You will also want to designate someone financial durable power of attorney to make financial decisions for you in case of incapacitation as well as designating someone health care power of attorney for making health care decisions in case of your incapacitation.

Get Long-Term Disability Insurance. One in eight people end up needing it. It can be devastating financially if you are not prepared for this.

Life Insurance. You probably don’t need it if you have no dependents. If you feel so compelled, carry a small policy ($15,000-25,000) to pay for your funeral.

Have Health Insurance. If full coverage is too expensive and you never go to the doctor, you still want to consider catastrophic health insurance. Check over the policy to make sure it would really give you enough coverage in case of a major illness (cancer) or accident (serious car accident).

Invest in Retirement Funds. If your employer offers a 401k, invest at least the highest amount that your employer will match. In your twenties, you should be saving 10% of your income for retirement. In your thirties, increase this to 12%. Take advantage of your full IRA deduction if you are in a high tax bracket. If you’re in a low tax bracket, put your IRA money into a Roth IRA. Buy funds that are no-load and have low management fees (under 1%) and no custodial fees. Funds that are not actively managed tend to be lower in fees such as index funds. Diversify: own foreign stocks, small or medium cap stocks, large cap stocks, bonds, real estate, etc. Be sure you’re invested in value (blue chip, reliable stocks that may show slower but steadier growth than growth funds) as well as growth funds. Know your tolerance for risk and invest accordingly. The younger you are, the more you should have in stocks and less in bonds. Re-assess your investments once a year. If one of your funds hasn’t done as well as the average fund in its class, think about investing that money elsewhere. (You can find this information on the Morningstar.com Web site.) If your portfolio is unbalanced, move your money around to put it back in balance. For example, say you want 15% of your retirement funds to be in foreign stocks, so you invested 15% of your retirement money over the last year in foreign stocks. Over the course of the year foreign stocks did really well and your foreign stock fund now comprises 25% of your portfolio. If you still want foreign stocks to only be 15% of your portfolio, you’ll want to move some of the money invested in those stocks into the other funds that didn’t do so well over the past year. The stock market is volatile but you are investing for the long term, so there is no need to follow the stock market every day (unless you really like doing it and it doesn’t make you anxious).

Up On Friday: Finances, Part Two