With the current economic climate everyone is looking for money management tips that will help ensure financial security. We all want to save money and get the best value for our dollar, yet it often seems as if we struggle just to make ends meet, leaving little left at the end of each month. If you feel this way, then it may be time to step back and re-evaluate your finances, or adopt a different point of view with regards to your money and the way you spend it.
1. Don’t put too much focus on qualified retirement plans. The benefits of qualified retirement plans are well campaigned, and financial advisors are constantly encouraging us to set aside funds for the future. However, when investigated thoroughly and considered logically, it becomes clear that many of these alleged advantages are untrue and simply do not make sense. Basically, investing in a qualified retirement plan is not as great as it sounds. While it may force us to save, it also requires that our money be locked away until we reach retirement. Often, the terms and conditions make it extremely difficult to access our own money, and large penalties could be applied to early withdrawals. A lot of emphasis is placed on promoting the tax benefits of these retirement plans, but in reality, what many believe to be tax savings is simply only tax deferral. Pay now or pay later, but you will pay.
When wisdom is applied, it may make more sense to forego the 401K retirement plan and use the extra money to pay off those high interest credit cards or purchase larger ticket items, such as a car, without having to borrow funds. Otherwise, you are earning little interest in one pocket, while paying truckloads from the other.
2. Plug leaks. To manage money wisely, it is important that we identify financial leaks, or areas that seem to erode and eat away at our finances. While not everything is within our control, there are ways that we can save money despite inflation or difficult economic times.
a. Find legitimate ways to decrease – not defer – taxes.
b. Make wise purchasing choices. While we may feel the desire to keep up with technology, it is important to determine the difference between needs and wants.
c. Make wise insurance choices. Before purchasing any policies, it is necessary to determine your wants and goals. Shop around to find the best rates and make sure that you are getting the most value for your money. It is possible to pay too much for automobile insurance or throw away money into term life insurance policies that will never reap any benefits.
d. Make wise investment and loan choices. Many people will take out a personal loan at a higher rate of interest than they are receiving from their retirement funds. It seems counterproductive to borrow $10,000 at 8% interest while a retirement account for the same amount of money is earning only 3%. Basically, instead of incurring debt, we could use our own money and save interest charges.
It is possible to choose inflation proof investments and financial products that will counteract changes in interest rates and stock markets. Making wise, informed, educated decisions will protect our investments and make our money work to our advantage.
3. Don’t focus on paying off a mortgage. Too often we are convinced that we should set a goal to pay off our mortgage in as little time as possible. And, while many people may applaud this decision, it is not always the best financial choice. Locking ourselves into large mortgage payments can create great stress with questionable benefits. A better option may be to keep the payments smaller and invest the difference in something that will provide a higher rate of return. Working to pay off our mortgage means that our cash is tied up in the equity of our home and, should the need arise, we may be forced to sell our house or refinance in order to access the funds. It would be more beneficial if we lengthened the term of our mortgages and kept the extra money in a liquid account where it was available for our use. Also, although a home is an investment, the question is whether the appreciation value will equal the return of other potential investments. And since mortgage interest is tax deductible, why not maximize this benefit by taking advantage of longer amortizations?
4. Consider an interest only mortgage. An interest only mortgage allows for lower monthly payments than a traditional 30-year mortgage which gives us more money each month to invest or pay down higher interest debts. And, there will be more tax deductible mortgage interest over a longer period of time. Extending the term of the mortgage will mean that extra interest is paid; however, this option will free up more money to be put into better investments with a return that will offset the additional interest. An interest only mortgage makes sense because instead of having all our money locked into the equity of our homes, it is available for our use should a more lucrative opportunity arise.
When it comes to our money, too often we are guilty of simply doing what is expected without really researching the pros and cons and determining if we a making the best choices possible. If your financial situation has become frustrating or unrewarding, maybe it is time to take a different approach. By following simple money management tips and making wise choices, it is possible to enjoy financial success and prosperity.