You don't have to be good with numbers or a motivated market watcher to handle your investments. Just follow a few basic rules:
- Simple is best.
Money you intend to keep invested for 10 years or longer belongs in stocks. Yes, there are thousands to choose from, but all you need to do is put 70 percent of your money in a single broad stock index fund that buys into big U.S. companies with a global presence. The remaining 30 percent belongs in an international index fund. Sure, you can add more to the mix—but with two simple moves, you'll have a fully diversified portfolio of stocks. - Keep costs low.
To make the most of your money, I recommend sticking with mutual funds that don't charge a commission when you buy or sell. Another important cost is the annual expense ratio that all funds levy on shareholders. Look for funds that have expense ratios below 1 percent. If you can handle the $3,000 minimum initial investment, I like the low-cost Vanguard Total Stock Market Index Fund and the Vanguard Total International Stock Index Fund (vanguard.com; 877-662-7447). Another good option is the T. Rowe Price family of funds; you can start with as little as $50 a month (troweprice.com; 800-541-6066). - Contribute consistently.
The key to making money is to stay invested. People often panic when the markets go down and sell off their stocks—but then they aren't in the game when the markets are doing well. The best decision you'll ever make is to commit to a steady investment program. No matter what the markets are doing, keep funding your investments. This is called dollar-cost averaging. That's what you do with a 401(k) or 403(b); you regularly add money every few weeks. Sometimes your money will buy fewer shares (when the market is higher), and sometimes it will buy more shares (when the market is lower). If you're saving for the long run, it's actually a good thing when the market is down because the more shares you have, the more you can potentially make when markets rise. And over time—decades, not months—the markets rise more than they fall.
FAQs
The 4% rule for retirement budgeting suggests that a retiree withdraw 4% of the balance in their retirement account(s) in the first year after retiring, and then withdraw the same dollar amount, adjusted for inflation, every year thereafter.
How do you explain financial freedom? ›
Financial freedom means you have enough financial resources to pay for your living expenses and allow you to afford many of your life goals without having to work or otherwise commit any of your time or efforts to generating money.
How much money do I need to be financially free? ›
To be rich, Americans feel they need to make more than half a million a year on average. When it comes to the annual income Americans feel they would need to make to be financially free or rich, almost half (49 percent) feel they need to earn $200,000 or more, up from 44 percent in 2023.
What is the #1 rule of personal finance? ›
#1 Don't Spend More Than You Make
When your bank balance is looking healthy after payday, it's easy to overspend and not be as careful. However, there are several issues at play that result in people relying on borrowing money, racking up debt and living way beyond their means.
What is the 1234 financial rule? ›
One simple rule of thumb I tend to adopt is going by the 4-3-2-1 ratios to budgeting. This ratio allocates 40% of your income towards expenses, 30% towards housing, 20% towards savings and investments and 10% towards insurance.
What is the 50 30 20 rule? ›
The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don't necessarily need.
How to be financially free in 5 years? ›
- Set Life Goals.
- Make a Monthly Budget.
- Pay off Credit Cards in Full.
- Create Automatic Savings.
- Start Investing Now.
- Watch Your Credit Score.
- Negotiate for Goods and Services.
- Get Educated on Financial Issues.
The premise of the 30-day savings rule is straightforward: When faced with the temptation of an impulse purchase, wait 30 days before committing to the buy. During this time, take the opportunity to evaluate the necessity and impact of the purchase on your overall financial goals.
What is the most profitable passive income? ›
25 passive income ideas for building wealth
- Flip retail products. ...
- Sell photography online. ...
- Buy crowdfunded real estate. ...
- Peer-to-peer lending. ...
- Dividend stocks. ...
- Create an app. ...
- Rent out a parking space. ...
- REITs. A REIT is a real estate investment trust, which is a fancy name for a company that owns and manages real estate.
Sometimes, all you have to do is take a step back and remind yourself of what your priorities are. Speaking of priorities, poor prioritization can be another barrier to financial freedom. Failure to prioritize your finances correctly will lead you to focusing your time and energy on something that isn't as important.
Psalm 37:21 says "the wicked borroweth, and payeth not again." The minute a person goes into debt, he loses a portion of his freedom. As Proverbs 22:7 says, "The rich ruleth over the poor, and the borrower is servant to the lender."
What age do most people become financially free? ›
That said, the typical age of financial independence should be between 20-23 years old, according to a Bankrate survey.
What is the fastest way to become financially free? ›
Whatever your definition of financial independence, the following tips can help you achieve it.
- Know Your Finances. ...
- Reduce Debt. ...
- Live Below Your Means. ...
- Increase Your Income. ...
- Invest in Your Future. ...
- Build an Emergency Fund. ...
- Monitor Your Credit Score. ...
- Seek Professional Financial Help.
As mentioned, $500,000 can last for over 30 years if budgeted correctly. However, there are a number of caveats to this, including how long you need your retirement savings to last you. For example, if you retire at 40 and need enough retirement savings for another 40 years, you may struggle.
What is the 4 money rule? ›
Known as the 4% rule, Bengen argued that investors could safely set their annual withdrawal rate to 4% of their initial retirement pot and adjust it for inflation without running out of money over a 30-year time horizon.
What are the four quadrants of financial freedom? ›
The Cashflow Quadrant consists of four sections: Employee (E), Self-Employed (S), Business Owner (B), and Investor (I). A small business falls under the 'B' quadrant. To achieve financial freedom, the business should aim to generate passive income, which is the concept of the 'I' quadrant.
What is the 10 10 10 rule finance? ›
If you participated in our 5th or 8th-grade program called I Am Financial Knowledge, you may remember the 10/10/10/70 principle. This principle says for each dollar you earn or are given, you should save 10%, share 10%, invest 10% and spend 70%.
What is the 5% rule for financial freedom? ›
As an investor you will find many products and many options to invest in. The 5% rule says as an investor, you should not invest more than 5% of your total portfolio in any one option alone. This simple technique will ensure you have a balanced portfolio.
