Saturday, April 28, 2007

An Employee's Guide to Achieving Financial Security in America - In several excruciatingly difficult steps

Gentle reader,

Here are some thoughts on making sure that you don't spend your life in a state of continual financial stress. There are a number of steps. I'm afraid the first step is a difficult one. The other steps are difficult also. Hi-ho, let's get started anyway.

The first step is for you to get a very high paying job. How do you do that? Well, it depends on the job but you should definitely spend some time researching jobs that pay well. For some you will need to invest years into college (medicine, law). For some you will need to be extremely smart (Wall Street quantitative analyst). For some you will need to be able to handle large quantities of boredom and stress (management, law). For others you will need the ability to successfully lie to other people (sales, law). OK, I gave lawyers a hard time there. If you have a family and you want a decent house to put them in, you should aim for $100k or above. There aren't many jobs that pay that much these days, you may have noticed. That's what makes this step so difficult. The problem with high-paying jobs is that, usually, the amount of stress you will have to deal with is directly proportional to your salary.

Why such an emphasis on a high-paying job? Well, let's be honest. Inflation has been creeping up (gas, energy, education, little things like that). In particular, housing has gone up by a ridiculous amount over the past 5 years. I find it very frustrating that if I was starting out today I would not be able to afford my own house. I know it's nice for some to have their property value appreciate but not to the point where young people cannot afford to buy a place of their own. So, if you want a decent house you will probably need to make a lot of money.

The second step is for you to live below your means. There are many places you can go to read suggestions (e.g. blogs and finance web sites). I think you should aim to have at least $500 of cash left over every month to save, after all other expenses, including maxing out your 401(k). Maxing out your 401(k) means that you will need to invest around $15k a year, which is over $1k a month. See how step 1 is important? It's difficult to do that on a very low salary, particularly if you have a family. Be wary of the lure of the new car. That will take several hundred dollars a month away for a few years, at least. If you own your own house, your mortgage will most probably be your biggest expense. Don't underestimate heating and cooling as well, depending on where you live. Energy costs are rising far quicker than inflation. Owning a house in general is a constant source of expenses.

The third step is for you to build up an emergency fund. You should aim for around 6 months of expenses, but more is better. Be aware of the fact that if you lose your job, you will probably have to COBRA (continue paying for, by yourself) your health care. That can be EXTREMELY EXPENSIVE for a family. We are talking $1000 a month or more. That cost should be included when you are figuring your monthly expenses. Keep your emergency fund in a high-interest account or treasury bonds, something that is VERY SAFE.

The fourth step is for you to be VERY CAREFUL about your career. You do NOT want to lose your job for an extended period. That is terrible, financially (as well as emotionally). Basic advice here is to avoid companies that are clearly in trouble (unfortunately, most companies will be in trouble at some time, because many businesses are cyclical). If the company you work for is not making a profit, it is cause to be worried and start looking elsewhere. To this point, you must MANAGE YOUR OWN CAREER. Update your skills constantly, make sure that you are competitive. Be aware of current salaries for your type of work. Are you highly paid? BEWARE. You are a target for losing your job unless you are obviously justifying your higher-than-average salary. By the way, it is a fact of life that NOBODY cares about your career as much as you do, so look out for yourself.

Since so few companies offer pensions any more, the fifth step is to invest steadily for your retirement and invest in the right things. Again, you can read books about this. A good one is "The four pillars of Investing" by William Bernstein. Avoid the following mistakes:
* Do not invest all your money in your company's stock! Remember what happened to Enron?
* Do not invest more than a few percent of your savings in any one particular stock. Consider low-cost index funds or ETFs (exchange-traded funds). Google for IYY (Dow Jones total market) or EFA (European large cap).

Also, do not overlook international funds. Many very intelligent investors are sounding warnings about the US economy. Are they right? Beats me. But it doesn't hurt to diversify into European stocks, and maybe consider China and India as well. Once you have picked what you want to invest in, STICK WITH IT. Don't be constantly changing your mind and chasing "hot" sectors. Every day the press focuses on what the stock market has done. Forget about it. You need to invest your money for the long term (20, 30 years). If you are investing steadily (e.g. every month) it is best for you that the stock market goes DOWN for a while anyway, especially when you are starting out. It's like prices being cheap at the supermarket.

Well, that's it, I have run out of advice for now so on to today's quote...

If you're old enough to start thinking about sex, you're old enough to start saving for retirement.
-Phil DeMuth

Until the next time, gentle reader, I remain as always,

your friend,

Buford Twain

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