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Making plans for financial security
Now that you've identified the right goals, here are some game plans that will achieve them.
Here are examples of plans you might draw up to meet three of the most common objectives: getting out of debt, paying for college, or financing your retirement.
If you struggle to meet credit-card payments every month, then face it: You probably need to shed or consolidate some of that debt.
For example, suppose you owe $3,000 in outstanding credit-card debt at a 16% interest rate and a $10,000 car loan at 9%. To pay off both these obligations in a year, you'd need to pony up $1,147 a month.
But if you are a homeowner with equity in your property, you could borrow $13,000 on a home-equity loan at the same 9% and retire those other bills. Then your cost to pay off the home-equity loan in a year would be slightly lower - $1,137 a month - because you're no longer paying high credit-card rates of interest.
Moreover, because you can deduct the interest on most home-equity loans, you'd reduce your taxable income by $642 that year - a $212 saving for someone in the 33% federal tax bracket. In effect, the government would help pay off your expenses.
Of course, this kind of strategy works only if you also stop charging new items on your credit cards.
Tuition, room and board at a private college can cost upward of $30,000 a year, and that bill is projected to reach about $80,000 by the time this year's crop of newborns enters college.
Your children may qualify for financial aid either in the form of a scholarship or a loan, and many students work their way through college.
But if you want to spare your kids the burden of graduating in debt, there are a couple of good savings vehicles available to you. Most states now offer so-called 529 Plans - contributions go into in pre-selected mutual funds, grow tax-free each year, and withdrawals to pay tuition are also tax free.
You could also open a Coverdell Education Savings Account (previously called an Education IRA) that lets you put $2,000 a year, after taxes, into a bank account or other investments; earnings on that type of account are totally tax-free, provided the money is used for tuition when it's withdrawn.
It's amazing how far these plans will get you. For example, if you started putting $2,000 a year today into a Coverdell account earning 8%, after 18 years you'd have more than $80,000.
A popular rule of thumb says that retirees need only 70% of their pre-retirement income to maintain their lifestyle, since they no longer have to pay for such costs as commuting or for work clothes.
However, other costs go up in retirement, such as utility bills (if you're home all day), the price of hobbies and travel - and, of course, the cost of health care. In fact, some retirees find they need as much income in retirement as they spent while working.
Unfortunately, traditional pensions pay only a fraction of your salary, and Social Security won't make up the difference. In addition, the younger you are, the less certain you can be about how much money you'll receive at age 67 from any of the retirement plans you have today.
Why? Because Social Security benefits may be revised, and employers are free at any time to change their pension-plan formulas. (They can't do so retroactively - every retirement dollar that you've already qualified for is yours to keep.) Of course, Congress can change the laws governing retirement savings plans at any time.
Moreover, the recent economic downturn has underscored the point that stocks can be extremely volatile in the short term, even if they remain among the most consistent performers over long periods. Thus, the stock portion of any retirement portfolio needs to take into account the possibility of sharp downturns.
To make your retirement finances secure, you need to contribute to as many different plans as possible. If you have a 401(k), 403(b), or 457 program at work, put in as much money as you can.
Most employers will match your contributions, giving you money for retirement that you won't get any other way. If you have no retirement plan at work, contribute to an IRA. Note that contributions to all of these plans are tax-deferred, so that you, Uncle Sam, and your boss together could be adding to your retirement stash.
Then to insure against possible new retirement-plan rules mandated by Congress, you need to have your own taxable savings plan as well - ideally invested in stocks, bonds, or mutual funds, which can return more than bank accounts. Best of all, as your investing account grows, it can help you finance other goals.