Americans are overconfident about their finances, feeling more secure than their actions warrant, according to the latest Financial Literacy Survey conducted by Harris Poll for the National Foundation for Credit Counseling and NerdWallet. While more than nine out of 10 people feel “very” or “somewhat” confident about their most recent financial decision and two out of three give themselves an A or B in financial knowledge, six out of 10 are spending money each month without a budget, an equal amount aren’t able to save or buy a car because of student loans, and more than four in 10 aren’t saving for retirement. Ouch.
Becoming a genuine financial expert means taking a step back and arming yourself with the knowledge to build a solid foundation for investment confidence.
Knowing how much to save is the most fundamental question in personal finance. While many financial advisers recommend following a rule of thumb such as saving 10 to 20 percent of your budget per month, Forbes recommends developing a customized savings plan based on how much you will need to invest to fund your annual living expenses.
The first step in the Forbes strategy is to estimate how much you’ll need to save up to fund the lifestyle you want given your projected annual expenses, whether your goal is to retire at a traditional age or to achieve financial freedom early. Once you’ve set this goal, calculate how long it would take you to reach it assuming your current savings rate and annual rate of return, and then make any necessary adjustments you need to achieve your goal within your desired time frame. Forbes suggests setting a goal based on the assumption that you’ll be spending 4 percent of your savings per year in retirement, and they provide spreadsheet and calculator tools to help you do the math.
While building your nest egg, it’s also important to build your credit so you can achieve your major purchasing goals. FICO’s consumer myFICO site explains the variables that go into credit scoring, which include your history of repaying debs, amount owed in relation to your income, mix of credit cards and loans, and frequency of submitting credit applications. For a more advanced understanding of credit, consider specialized educational resources. For example, Moody’s Analytics offers a Corporate Credit Ratings Analysis seminar.
For most people working in a traditional job, a 401(k) plan should be the foundation of your investment strategy. Daily Finance provides a good overview of 401(k) basics, explaining how you can roll over your money into a new 401(k) or an IRA if you leave your job. For those seeking 401(k) alternatives, NetCredit outlines other fundamental options such as traditional, Roth, and SEP IRAs, annuities, and index funds.
Your 401(k) plan or equivalent normally forms one component of a complete investment plan designed to achieve your major financial goals, chief of which should be saving for retirement. A complete retirement income plan should include a diversified mix of withdrawals from an investment portfolio, fixed-income annuities and variable annuities. A financial adviser can help you select a specific investment mix appropriate to your goals, income and risk preference.