6 Ways To Safeguard Your Income

Kimberly, who writes the U.S. News & World Report’s Alpha Consumer blog and has a new book out, wants you to control your finances rather than let them dominate you.

She emailed us some tips on how to maintain your financial standing, positioning yourself for financial freedom and success:

1. Save one-third of your income. — Putting one out of every three dollars you earn into the bank might sound like a lot, and it is. At some times in your life, such as shortly after graduation, or the birth of a child, when your budget is strained to capacity, it’s impossible. But at some point, it will become not only possible but essential to creating stability in your financial life. That’s because significant savings are the only way to weather the inevitable tough periods, such as lay-offs, as well as move towards longer term dreams, such as starting our own businesses. Yes, saving such a big chunk of money each month means sacrificing some comforts and indulgences for the short-term, but it’s the only way to get closer to that ultimate goal of financial security.

2. Don’t scrimp on career-related investments. — There’s one area where it’s okay to be a spendaholic, and that’s when it comes to investing in your future earning power. The category includes not only education expenses, but also voice lessons for an aspiring podcaster, how-to books for those with potentially lucrative hobbies, and even a new wardrobe for office workers who need to impress the higher-ups. Even hiring a maid service is an investment in your future if you use the time it creates to work on your writing, or website.

3. Cultivate your most ambitious dreams. — The primary reason many people don’t reach their long-term financial goals is that they fail to ever articulate — even to themselves — what they are. Do you want to quit your day job and knit full-time? Or open the next big cupcake shop? Or star on your own reality television show? If you’re having trouble putting your finger on it, ask the people who know you best. Brainstorming with your significant other, family members, and friends can help shake loose any latest thoughts from your own head.

4. Pay off all but your cheapest student loans early. — Student loans that carry a 5 or 6 percent interest rate (or higher) are costing you much more than your savings can earn in our current low-interest rate environment. That means paying off a chunk of your loans will immediately start saving you more money than you could if you continue to make those slow and steady monthly payments. Of course, not everyone has the cash to pay off a big chunk of their loans, and it will probably take five-plus years after graduation to get to the point when you can even consider it. But once you have a healthy bank account, don’t wait too long to start paying off big chunks of those more expensive student loans.

5. Don’t wait to invest until you have “extra money.” — Waiting to start a retirement account until you feel like you can afford it might mean you can never retire. Don’t wait to open up a 401(k) account if your workplace offers it, even if you start by contributing just 2 percent of your salary. Soon, you can raise that percentage to 4 percent, and eventually to 10 percent or higher. For extra motivation, plug your numbers into a retirement calculator on bankrate.com, and see how much you need to fund your golden years – it’s probably much more than $1 million.

6. Give back – on your own terms. — Companies know that we want to make a difference in the world, and they want to profit off that desire. That’s why so many of them are cashing in on the $600 billion plus “green” industry by claiming to be environmentally-friendly when they’re not. The problem is so common it has a name, “greenwashing.” Don’t be fooled by all-natural labeling; investigate why the company is claiming to be good for the Earth before spending your money. A similar lesson applies to giving to charitable donations: Use Charity Navigator to check up on the background of your chosen organization before donating any money to make sure they’re going to use the money the way you want them to.

What would you add to Kimberly’s advice?

Comments

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  1. tricky1 says:

    Dave Ramsey?
    Baby Step 1: $1000 (Baby) Emergency Fund in Savings
    Baby Step 2: Debt Snowball
    Baby Step 3: 3 to 6 months of EXPENSES in Savings(Money Market)(Fully Funded Emergency Fund
    Step 4: 15% of household income into Roth IRA or Pre-tax savings
    Step 5: College Savings for children
    Step 6: Pay off Mortgage Early
    Step 7: Build Wealth & GIVE

    We are currently on Step 1 and have about half saved up in a month and a half. Should have it finished by mid-november.

    • sirwired says:

      Pay off your mortgage early? While doing this can be a great boost to the psyche, it’s a bad way to save money. Mortgage rates are so freaking low right now, it’s like free money from the bank; money you can be putting in your investments. I could pay off my mortgage today without touching my 401k, but instead I have 11 years left on a 15-year note.

      I’m strongly opposed to the idea of taking out a Home Equity Loan to invest, but if you already have the mortgage, keeping it while putting that extra cash into investments is a much better idea. Before you counter that the latest market crash shows that can be a bad idea, I thought I would mention I have recovered every penny I lost during the market crash through the time-tested strategy of doing absolutely nothing. Nada. Zilch. I’ve had my money in the Vanguard 2025 Retirement fund since it came out years ago, and it’s never budged out of that fund. It has now recovered everything I lost. Has it made much money? No. Would I have gotten a better return, if I had to retire today, by paying of the mortgage? Yes. But I’d have all my cash tied up in my house, and none available for spending. And from here on out, it’s all gravy.

      • lordargent says:

        Sometimes, you just need to invest in your psyche.

        /A large promotion/raise & bonus left me with enough to pay off my condo with plenty of cash left over, so I did it. I’ve been so content since then.

      • sonneillon says:

        Depends. I know some people who are taking the money they would be using to pay down their mortgage and keeping them in bonds and index funds.

        On the flip side that requires financial discipline which many people do not have. If you are a hey I have money time to buy a boat even though I live in Kansas person. It’s probably best to pay off the mortgage first.

      • MaxH42 thinks RecordStoreToughGuy got a raw deal says:

        Good ideas, but I would like to raise two minor issues:

        First, it’s easier and safer to put an extra $X towards your mortgage every month, whatever the rate, than to try to manage an investment to consistently gain and protect against a drop in value. If you play it safe and stick to bonds, it would be hard to get as high a return, not to mention the complications if you get into taxable vs. tax-free bonds. I’m sure it can be done, but it’s really not a good idea for a lot of people, especially if they might be tempted to crack that fund for home improvements or other expenses.

        Second, you’re right that if you diversified properly, you should have already recovered from the drop of the last 2-3 years, but I wouldn’t say don’t touch a penny….I rebalanced a little more often than usual (1/yr) during that time, which made me feel like I was taking better advantage of the dollar-cost averaging.

      • Fineous K. Douchenstein says:

        As long as savings interest is less than mortgage interest, you want to pay off your mortgage as quickly as possible. If interest rates were really high right now, and you were saving at a higher rate than your mortgage, your logic would be correct.

        Unfortunately, it is wrong. Pay off the mortgage.

  2. goodfellow_puck says:

    Alright, I’ll play along. Who here currently has student loans at the same interest rate as what they could get in savings or similar investment? Anyone? The only “cheap” student loans are the ones not earning interest while you’re IN school!

    • apd09 says:

      I consolidated my loans and locked in a 2.9% interest rate on them back in 2003. I was quite happy to get that rate when I was 3 years out of college and 24.

      • snobum says:

        Yea, I consolidated my government loans in 2005 for 2.8%. Somehow I was able to find a company in 2006 to consolidate my private loans, which is currently at 2.3%. The private one is variable, so I’m trying to pay that off first. I don’t think it was because I was responsible or anything, just that I got lucky with timing.

  3. Tom Foolery says:

    Any time you get a pay raise, put the increase into 401k or some other type of savings.
    If you earn bonuses or comission, budget according to your base– or as close as possible to your base– and put the extra into savings. This has the added benefit that if business slows and those bonuses dry up, it doesn’t kill your budget.

    • tbax929 says:

      My 401K is rapidly losing money. I prefer to put my money into an interest-bearing account. But I agree with the sentiment.

      • Tom Foolery says:

        On the other hand, when the market is down is — potentially– the best time to put money in.

      • Culture says:

        if your 401k has been rapid losing money as a result of equity investments any time since early 2009, you are doing something wrong.

    • snobum says:

      Agreed. I have my direct deposit set up so any OT/bonuses go into my savings account.

  4. sirwired says:

    The career spending ideas are beyond stupid. Before you go spending significant money on “career investments”, run the numbers. Voice lessons for an “aspiring podcaster” are rather unlikely to be a good investment, given the chance you will actually make the money back from those lessons. Likewise how-to books for “potentially lucrative hobbies.” Hire a maid so you have more time to write and work on your website? Good advice for an established writer or somebody with a successful website already where the money they are earning is greater than the money to pay the maid; poor advice for somebody struggling to get by.

    I’m all for going after your dreams, but go after dreams like this with your leisure budget, not as a serious investment.

    • hansolo247 says:

      Exactly.

      As is blowing $20K on a for-profit college.

    • tbax929 says:

      I agree. I was seriously considering starting my MBA, but I’m already at the “Director” level in my company, so I’m not sure how much it would benefit me.

  5. hansolo247 says:

    I just ran my savings. I came out to 36.1% of net, or 26.2% of gross.

    My only liabilities are $11K in student loans at 3.9%, and about $500 from what I spent last month on my credit card (will be paid, thus no interest). I have an 8 year old car (though not a beater, a Honda S2000), and live in a decent, but apartment (I live in FL, and will buy when housing truly crashes here). I’m 35, and have had significant medical problems (requiring replacement parts), but I still put a priority on savings.

    I put 12% in a Roth 401K (yes, they exist), and that is matched 6% pre-tax. Then I save even more each month on top of that. Savings is probably 2/3 in retirement accounts, and 1/3 in non-retirement savings, including a mix of cash and stocks (I look for low P/E ratios and a good dividend yield).

  6. sonneillon says:

    Everyone should do this right now.

    Ask for a raise.

    If they tell you no. Well you haven’t lost anything.

    • sponica says:

      I see my program’s monthly financials…it’s hard to ask for the extra 5-7K a year I should be making when we’re in the red that much every month.

      My boss says the minute he can give me a raise, he will….

    • catastrophegirl chooses not to fly says:

      asking for a raise at the right time can be a job saver. my company/department does raises on an annual evaluation and that period is in february. ask for it earlier and when they are looking to let people go, the idiots who don’t know the standard procedures of the business will be at the head of the line
      i’d love to ask for a raise right now but it just isn’t right for my situation

      • You hate your job but you're still working there? says:

        If they’re going to otherwise ignore your job performance and let you go just because you happened to pick the wrong time to make them worry about the bottom line for two seconds, do you really want to be working for them in the first place? It’s not enough to just “ask for a raise.” You’re a lot more likely to be successful at getting that raise if your performance justifies it AND you’ve got metrics to prove it.

        Waltzing up to your boss and asking for more money seems ridiculous because it is. Waltzing up to your boss with numbers that explain how you benefit their bottom line and how paying a little more to keep you will continue to pad that line going forward is what actually gets you the money. That’s what those annual performance reviews are supposed to be for (I have them where I work, too), and a lot of times the raise you’re offered isn’t supposed to be negotiable (mine is supposed to be a max of 3.5%/year), but if you’ve been outperforming your coworkers and can prove it, all of a sudden that number can turn into an open variable or a promotion.

        • sonneillon says:

          Assertiveness is more useful than numbers in most cases. If you have both that is best but being assertive will get you more money. I don’t agree that is how things should be but that is how things are. Every time I have gotten a raise I phrased the conversation like this.

          “I want you to pay me more money to do the exact same thing I am doing now. It’ll take 6 months to replace me with someone who won’t do as good of a job. I’m better than most of the people here and I want to be paid for it.”

          Worked well. Now I’m a contractor and the process is significantly different. I can’t just pay myself more money.

      • sonneillon says:

        Then they pay you not to work. Go on vacation. Get drunk. Work for somebody who isn’t such a bastard.

        • catastrophegirl chooses not to fly says:

          actually i work for a pretty fantastic company with excellent benefits, no backstabbing in the office and great perks. i’ve worked for plenty of real bastards and would rather wait until the appropriate time of year to negotiate my raise than to go back to work for people i hate at a job i hate

    • tbax929 says:

      Agreed. I stayed at my last employer, even though they’d frozen raises for two consecutive years. Now I’m at one that gives profit sharing, bonuses, and raises. I should have left the old company two years ago!

    • KrispyKrink says:

      Friend of mine tried this recently. After the owner was done laughing he was given a choice. Either accept a reduction of hours from full time into a part time position with all benefits cut or leave. He took the demotion to part time like everyone else because his only other option would be joining the several hundred other people that lined up for a part time job at a new In-N-Out Burger that’s still being constructed.

  7. Vandil says:

    A simple way to save: Make savings another “bill” you pay each month and choose a dollar amount you can commit to monthly, such as $50 or $100. Have that “bill” payment go into a savings account and don’t spend it unless extenuating circumstances arise.

    Even at $50/mo, that’s $600/yr. When you save up a few grand, throw it into a CD so you can’t spend it and earn a little more interest over the savings account or throw it into your 401k if possible.

    • HogwartsProfessor says:

      I plan to do this. I’m supposed to get a raise (they’re desperate to keep me because this place is a suckhole and they’re afraid I’ll bail) and I’m not even going to use it. I’m going to put it away.

      I’ve never been able to save before because I’ve always been just on the edge, and times I wasn’t I ended up needing it for some dumb thing breaking or something, but I have to do something. My company is instigating mandatory 401K’s also so that might help a bit. If I can spare a buck or two for it I will.

      I have a lot of medical bills to pay and haven’t even begun on my student loans yet so this may be futile. *rubs lotto ticket for luck*

  8. dush says:

    Save 1/3rd of your income??
    I guess step 7 is don’t eat.

  9. BeFrugalNotCheap says:

    Can my fellow consumerists invest in me? I accept paypal and money orders.