Last week, I started a short series looking at Money Magazine’s 25 rules to grow rich by. I’m breaking down the advice within the article into five separate blog entries here; you can find part one here and part two here. Here are the next five tips, with a bit of my own commentary thrown in when appropriate.
11. If you don’t understand how an investment works, don’t buy it. Don’t bother with futures options, and don’t let your broker talk you into them, unless you have done some indepent research and you know what you’re getting into.
If a stranger wants a few thousand to invest in his new business, you’re not oging to give him the money without determining what it will be used for, checking his business plan, and making sure there’s a good chance he’ll be able to pay back as promised. The same theory is true for any type of investment, especially those beyond the basic stock or bond.
12. If you’re not saving 10% of your salary, you aren’t saving enough. Saving 10% can be difficult for people with little education, making minimum wage, and living in a high expense area. Some people will need to save much more than 10%, particularly if they started saving later in life and are trying to catch up before retirement. For those extremes, 10% is not appropriate. But for others, it’s a decent starting point. Of course, the more you can put away rather than spend, the better.
13. Keep three months’ worth of living expenses in a bank savings account or a high-yield money-market fund for emergencies. If you have kids or rely on one income, make it six months’. Creating an Emergency Fund is usually the first step once one decides to get financially in gear. Everyone will experience some kind of emergency eventually, so it’s good to have cash stashed. This way, there is no need to rely on credit card or emergency 401(k) loans to help.
One way to painlessly create an Emergency Fund is to handle the deposits automatically.
14. Aim to accumulate enough money to pay for a third of your kids’ college costs. You can borrow the rest or use some of your income to help out when your child is in college. First things first: make sure you are set before you save for your kids’ education. That is the approach that most financial planners suggest.
I’m not quite sure I agree due to the strong emphasis I place on quality education and my belief that too many “real world” jobs can distract students from focusing on school when their brains are the most impressionable for higher-level learning (high school and college). Parents should provide as much financial support for college as practical.
Tuition prices are only increasing, and doing so at a rate much higher than “official” inflation. A high debt burden when exiting college can dissuade students from taking on degree programs that are not predicted to be the most lucrative. It’s important that there continue to be people in the world studying and becoming experts in literature, art, music, education, history and social sciences.
15. You need enough life insurance to replace at least five years of your salary – as much as 10 years if you have several young children or significant debts. I have no life insurance. There’s no one depending on my salary other than myself at this time. Thus, life insurance hasn’t been on my list yet. This rule of thumb sounds good to me, but if anyone has any thoughts on life insurance to share, please feel free to educate me by leaving comments below.
This series will continue with Part 4 in the next day or so. I’ll also finish writing the series on my experiences with the University of Phoenix Online soon. There is much to be said, so it’s taking some time to put all of my thoughts together.
Published or updated October 22, 2006.
{ 3 comments… read them below or add one }
These are great tips. I am waiting for the next set of tips before I comment, because I find one that is a gross blanket statement that may not be very accurate for most people.
As a newbie to the world of personal finance could you explain a little more about the high yield money market fund? Like where do I find one? Thanks!
Life Insurance:
I have sufficent life insurance to pay off all credit cards and house. Then there is also sufficent for about two years of salary replacement. I just wanted to insure that my wife would not have any problem mantaining her current life style. I also have sufficent life insurance on my wife if the reverse was to happen.