Thirty years ago, when I got my first job on a personal finance magazine, I called my father to tell him the good news. I could sense that his emotions were mixed.
He was happy for me, of course. But he was a little concerned for the rest of America, now that I was in a position to dispense financial advice. After all, this was a man who had not only changed my diapers, but seen my bank statements. And it was a toss-up which were messier.
The job was at Sylvia Porter’s Personal Finance magazine, which is now defunct. Fortunately for me, I’d been hired as managing editor — a role that was more about getting the magazine out the door on time than actually understanding its subject matter. Later, after I began to pick up a thing or two about personal finance, I became economics editor at Consumer Reports, a senior editor at Money and editor-in-chief of Reader’s Digest New Choices, which covered money matters and other topics for the 50+ crowd.
(MORE: Paying Bills: You're Doing It Wrong)
Over time, I applied the advice that I heard in my own humble financial life. As a journalist I’m far from being in the fabled and lately-reviled top 1 percent. I am probably not even in the top 1 percent of journalists. Still, I’m better off than I might otherwise have been.
So I thought I’d share with you below the five most useful pieces of money advice I’ve heard over the past three decades (plus one of my own). I intend to pass these tips along to my children and theirs, if any will listen.
1. Invest in no-load mutual funds. Those are the kind that don’t impose a sales charge. In particular, opt for no-load index funds, which also have low annual expenses and provide diversification.
Sales commissions and excessive fees are a needless drag on your returns and even seemingly modest ones can really add up over time.
The U.S. Department of Labor gives this telling example in a booklet for 401(k) investors; it’s equally useful for mutual fund investors: Suppose you invest $25,000 and earn an average of 7 percent a year on your money. After 35 years, if your fees and expenses total 1.5 percent a year, you’ll end up with $163,000. However, if they are 0.5 percent, you’ll have $227,000 —a $64,000 difference.
Today, there are many fine funds with annual fees well under 0.5 percent. Exchange-Traded Funds (or ETFs) are another low-cost option now, but they weren’t around when I started investing.
(MORE: Women and Money Management)
2. Fund that 401(k) plan. I have become a big fan of employer-sponsored 401(k) retirement plans and think they’re gotten a bad rap in recent years.
They are not responsible for Americans’ low level of retirement savings; nor were they ever intended as the only way for us to save. But with the decline in traditional, defined-benefit pension plans, the 401(k) may be the best game in money town.
Not only do your contributions come out of your paycheck automatically, your employer may even match a portion of them. So fund your 401(k) to the max if your employer offers one and you can afford it and reap any employer match you have coming to you.
This might not be enough to ensure a plush retirement, but it’s a start. The maximum 401(k) contribution for 2014 is $23,000 for anyone over 50 and $17,500 for younger workers.
3. Buy enough of the right kinds of insurance and none of the wrong kinds. Insurance represents a huge chunk of what most households spend in a typical year. The trick is making sure you’re adequately insured for the important risks while not wasting your money on policies that are of marginal value at best.
Most of us need just a few types of insurance: Life insurance, when others depend on us for their support; health insurance; car insurance (if we own an auto) and homeowner’s or renters insurance.
To that list I might add an umbrella policy for added liability protection and disability insurance if you work and your employer doesn’t provide enough. But that’s pretty much it. (Long-term care insurance? That depends on a variety of factors, such as your family's longevity and how much you have in savings.)
In the case of life insurance, the old advice to “buy term and invest the rest” has served me well.
(MORE: Help for Older Americans With Money Woes)
I have had an adequate amount of term life insurance since my children were born, paid a reasonable price for it and plan to drop the coverage after my kids are safely on their own. Meanwhile, I’ve saved the money I would otherwise have put into costlier whole or “permanent” life insurance.
Among the types of insurance I would consider of marginal (or no) value are accidental death insurance, which covers you only if you die in a certain way (such as a plane crash), and disease-specific policies, which only pay benefits if you get a particular ailment.
I’ll also throw in extended warranties, which are basically life insurance for appliances, electronic gadgets, furniture and other products. I must confess I was talked into a couple of those before I knew better, but I never used them and, thus, learned my lesson.
Instead of insuring against every possible peril in life, build a decent emergency fund. That way you can handle the unexpected TV repair, medical co-pay, vet bill or whatever misfortune comes along.
How much should you aim to set aside? Common financial wisdom suggests three to six months of living expenses, tucked safely away in a stable and liquid account such as a money-market fund.
If you’re willing to accept a little extra risk, you could put a portion there and the rest in a mutual fund with more growth potential, such as a balanced fund, which invests in a mix of stocks and bonds. The danger is that the market could be in a slump when you need the money and your shares might have fallen in value.
4. Be careful with credit cards. Yes, credit cards can be fine if you have the discipline to pay them off before interest accrues and if they don’t encourage you to go crazy at the mall. Plus it’s hard to go through daily life these days without some form of plastic in your wallet.
But I have seen far too many seemingly intelligent people run up hefty credit card balances and then pay interest for months on purchases they’d long since forgotten. Even after writing about this stuff for decades, I am amazed by the interest rates some card issuers charge (some now come with a 28.8 percent rate).
One of the better things that ever happened to me was being turned down for a credit card when I was in my 20s.
I was pretty indignant about it at the time, but eventually got what was then called a travel-and-entertainment or charge card, which had to be paid off in full each month. As a result, I haven’t paid a penny in interest to this day and have also kept a closer eye on my spending than I might have been inclined to.
I’m not saying this credit card strategy is right for everyone, but it’s worked for me.
5. Open a 529 college savings account as soon as you have a kid. A recent survey found that only 30 percent of Americans even know what a 529 plan is. What a shame. These programs, introduced in 1996, are the easiest way for most of us to save for our children’s education.
Earnings in your 529 account are tax-deferred and the money you later withdraw won’t be subject to federal or state taxes as long as it’s used for qualified educational expenses. Also, if you invest in the 529 plan sponsored by your state, you’re generally eligible for a deduction on your state taxes.
By contributing to my state’s 529 plan since my kids were toddlers, I hope to get them through college with little or none of that crushing student loan debt that’s in the news so much these days.
And now, a piece of advice of my own: Don’t be intimidated. The financial world has more than its share of confusing jargon or, as my old boss Sylvia Porter liked to call it, “bafflegab.” But personal finance really isn’t that complicated.
If you can read and still remember some basic, grade-school math (or at least own a calculator), you can figure it out. Trust me.
I hope none of this sounds smug or self-congratulatory. I have made my share of money mistakes along the way, heaven knows. A list of my screw-ups and regrets would be a lot longer than this one.
But looking back now, as I approach retirement age, I find myself grateful for the on-the-job financial education I’ve received almost by accident. If I had gone to work for a car enthusiasts’ or cooking magazine I’d probably know how to fix a muffler or whip up a really good muffaletta.
But, as I have also learned in life, you can’t have everything.
Greg Daugherty is a personal finance writer specializing in retirement who has written frequently for Next Avenue. He was formerly editor-in-chief at Reader’s Digest New Choices and senior editor at Money.
Care to share some of the best money advice you’ve ever received? Please use the Comments box below.