Rules of thumb in life are useful.
For example, don’t eat after 8pm, eat slowly for better digestion, write down your ideas before you forget them, don’t be afraid to admit you don’t understand something, start small, think big, buy low, sell high and keep good financial records.
In the financial and retirement planning world, there are a LOT of them. Many rules of thumb are quite good, but many will not ring true for you or your situation. The trick is learning which ones to follow and which ones to disregard.
Rules of Thumb We Like:
1.Pay yourself first
This is a general rule of thumb that can apply to anyone. The concept encourages saving. When you receive a paycheck, tax return or any other source of revenue the easy thing to do is go out and spend that money on wants. If you consider your paycheck as a savings opportunity first, you will be better off in the long run.
2.Max out your employer match
Beyond your employer match, there is nowhere else you’re going to get free money. Contribute to the max and, after that, consider your other options for retirement saving such as an IRA or Roth IRA.
3.Don’t use your IRA or 401k to buy something big
Your 401k or IRA was designed to be used to generate a monthly income when you retire. They were never designed to have a large chunk of money taken out to make a purchase. Taking out a large withdrawal to go buy a car, boat or home can severely impact your taxes come the next April 15th.
4.Don’t mess with the IRS
The IRS doesn’t take kindly to individuals trying to get away with paying less in taxes than they are legally obligated to. It’s best to comply with the laws and be wary of suspicious “tax savings opportunities”. That said, there are ways to legally reduce your taxable income via tax advantageous investments, Roth IRAs, efficient depreciation or charitable giving.
These are rules of thumb we believe are solid principles to live by in your financial life. In our next article we will discuss rules of thumb we strongly encourage you to question.
To be continued…