Boosting High Savings

The following is a guide to the kinds of accounts that will help you squeeze more out of your savings, plus some tips on how to use them.

Unless you're expecting a big inheritance sometime in your future, the only way to accumulate a net worth worthy of the label is to make a habit of spending less money than you're taking in.

Budgeting is a good way to practice this particular fiscal religion. On a modest income, the difference between halfhearted money management and smart money management can be hundreds of dollars a year, which can be cash in your pocket or cash down the drain. As the years go by, the difference can amount to thousands and thousands of dollars added to your net worth.

How to reach this blessed state? Start with four simple, common sense principles of smart money management.

1. Don't surround yourself with cash. Do you keep large amounts of cash around the house instead of putting it in the bank, where it will earn interest, or in an investment plan, where it can grow? This will deprive you of chances to let your money make more money.

2. Don't pay your bills early. Paying bills before they are due won't improve your credit standing. Prepaying reduces the time your money can be earning interest for you and gains you absolutely nothing in return. (But be sure not to cut it so close that you trigger late penalties that can wipe out the extra interest you earn!)

3. Don't have more taxes withheld than you owe. Many people deliberately have too much taken out of their salaries to avoid a large tax bill in April or to accumulate a refund. Those excess withholdings could be put to work earning interest, leaving you with even more left over after your taxes are paid.

4. Get the max from your savings. For most people, the difference between depositing a check today and depositing it next week amounts to nickels and dimes in lost interest, and nickels and dimes aren't going to make you rich. The real aim here is to establish good money-management habits. As your income grows, the payoff will grow along with it.

Any plan to maximize your future savings must begin with an up-to-date record of the savings you have now. There are lots of opportunities for squeezing more out of your savings.

Kids and Money Management Plan

Here's how to teach your children the value of money, establish an allowance system and get them to save.

A family money-management plan with any hope of success will have to include the kids -- which is easier said than done. You can teach your 4-year-old to close the front door, but you can't expect him to understand that you don't want to pay for air-conditioning the whole neighborhood. A teenager, on the other hand, should understand that and more.

Lessons in financial responsibility must take into account a child's age and level of maturity, but there are general guidelines you can follow.

• Teach Kids the Value of Money
  Here's how to encourage financial responsibility and what you can expect of your children.

• Allowance: When and How Much?
  Start at an appropriate age so kids can start learning how to handle money.

• Using Money to Reward or Punish
  Cash as an incentive should only be used in small amounts in select circumstances.

• Ways to Give Money to Children
  Custodial accounts and trusts are ways to transfer cash to your kids.

Retirement Plans

Here's a rundown of the four plans for the self-employed and small-business owner.

By Cameron Huddleston

When you work for a company with a retirement plan, setting aside money for retirement is easy. You do a little paperwork and decide how much of your salary you can afford to defer each pay period. But when you're on your own, setting up a plan can be daunting. Besides having to choose among a growing menu of options for self-employed workers, you have to educate yourself about the rules and deal with all the administrative hassles.

To help you pick the right plan, here's a rundown of four retirement plans designed for the self-employed or owners of small firms and a table that compares contribution limits. Contributions for all the plans are tax-deductible and earnings are tax-deferred. You'll pay taxes and, usually, a 10% penalty on early withdrawals.

Individual 401(k)

Best for: A sole proprietor who wants to maximize contributions to a tax-deferred retirement plan. Limited to owner-only businesses, so it's not the best plan for small businesses with expansion plans.

Before changes to the tax law took effect in January 2002, the costs and paperwork associated with a 401(k) made it unwieldy for an owner-only business, and you could contribute only up to 15% of your compensation.

With the "individual(k)," the newest option in the do-it-yourself line of retirement plans, a sole proprietor can contribute up to 25% of compensation plus $15,500 in salary deferrals -- for a maximum contribution of $45,000. There's also a $5,000 catch-up contribution for those age 50 and older. Contributions are tax-deferred and tax-deductible. And you can take loans from your account just as you can with a traditional 401(k).

"It's a 401(k) that has been stripped of its complexities," says David Bergmann, a financial planner in Marina del Rey, Cal.

The 401khelpcenter.com has a list of financial firms now providing 401(k)s for sole proprietors.

You must establish your plan by December 31 and fund it by April 15. For a general idea of how much of a contribution you could make based on your compensation, use this calculator for a more precise amount.

SEP IRA

Best for: High-income business owners who want to maximize contributions through an uncomplicated plan with low fees. SEPs also work well for small-business owners with mostly low-paid, high-turnover employees, because there's no vesting structure and less incentive for employees to stay long-term.

With a simplified employee pension, or SEP, you can contribute 20% of compensation if you're unincorporated and 25% if you're incorporated, up to $45,000 annually. There's no additional salary deferral, so if your business is unincorporated, for example, your income must be at least $225,000 before you reach the $45,000 contribution level.

You can open and fund a SEP up until your tax filing deadline through a bank, brokerage or mutual fund company. It's easy to set up, and fees are relatively low (less than $100). With the exception of the higher contribution limits, SEPs are subject to the same rules as a regular IRA.

If you have employees, too, you make all the contributions. You must pony up the same percentage of compensation for your employees as for yourself, If you have lower paid employees, you can maximize contributions for yourself and minimize the cost of contributions for employees.

Keogh

Best for: Small-business owners who want to provide an incentive for key employees to stay with the firm. Because Keogh profit-sharing plans often have a vesting structure, the longer employees stay with a company, the more money they'll get.

There are two types of this defined-contribution plan: a profit-sharing plan and a money-purchase plan. Before changes in the tax law, the combination of these two plans offered the highest contribution limit. But now the contribution limit is the same as it is for SEPs and individual 401(k)s -- 25% of compensation, up to a $45,000 maximum.

The profit-sharing plan is flexible, allowing you set aside varying percentages of compensation from year to year. The money-sharing plan requires you to contribute the same percentage of income every year.

Contributions are deductible and tax-deferred, but the paperwork can be complicated. Some sponsors hit you with a 10-page (or longer) application. Then you must file a Form 5500 with IRS each year if the plan covers anyone besides you and your spouse. You must open your account by December 31, but you have until April 15 to fund it.

SIMPLE IRA

Best for: Someone with self-employment income -- particularly from consulting or freelance work -- of $30,000 or less. There's no percentage-of-income limit, but actual dollar limits are much lower than for other plans.

A savings incentive match plan, or SIMPLE, allows you to defer up to $10,500 (or 100% of income, whichever is less) a year from your paycheck, plus 2% or 3% of income. For those age 50 and older, there is a $2,500 catch-up contribution.

If you earn $30,000, for example, you can contribute up to $11,400 a year if you take advantage of the 3% matching contribution. At that salary, the most you could set aside with a SEP or Keogh would be $7,500.

Firms with fewer than 100 employees can also use a SIMPLE. If you have employees, you must include them in your plan and match their contributions dollar for dollar up to 3% of compensation or contribute 2% of every employees' salary -- even for those who don't kick in money themselves.

You can have a SIMPLE even if you have a job that offers a pension plan, but you may not have both a SIMPLE and a Keogh. There are no special tax forms to file. You must open a SIMPLE by October 1 the year you make the contribution to get the deduction. Plans are offered by banks, brokerage firms and mutual funds.

Many Ways to Save Big Money

Think you don't have enough money to start saving? Even little deposits add up to big bucks -- especially when you start young.

ByJessica Anderson, Staff Writer, Kiplinger's Personal Finance

You've heard of the savings crisis. You've probably even thought, 'yeah, I should probably save more.' But eking out an existence is tough on a starting salary and sometimes comfort takes precedence over cutting corners. Besides, if you can only save $50 or $100 a month, is it really worth it? The answer: absolutely.

By starting to save now, you're giving your money -- however little it is -- time to grow on its own. The magic of compound interest means that you can contribute less money for fewer years if you start when you're young and still end up with more cash than someone who waits.

For example, if Natasha starts saving or investing when she's 25 and saves $100 a month for ten years then lets the money sit, her stash will grow to $174,928 by the time she turns 65 (assuming an 8% annual return). If Anna waits to until age 35 to start saving, and socks away the same $100 a month for the next 30 years, she'll have only $135,940 by 65. Anna will have contributed three times as much as Natasha, but will end up with nearly $39,000 less.

This week is America Saves Week, and it makes as good a time as any to get started. Think you don't have enough money to save? We've compiled a list of our best tips to find extra money in your budget to sock away. These strategies won't require you to take a vow of poverty -- we know money's tight already. Rather, they're small and simple cost-cutters that'll help you get started saving as soon as possible.

1. Give yourself a raise and bank it. Boost your take-home pay by adjusting your tax-withholding and have the difference in pay automatically transferred to an online savings account. Kiplinger's tax-withholding calculator can help you revise your W-4.

2. Enroll in a 401(k). If your employer offers a 50-cent match for every dollar you contribute, even adding $60 a month will net you over a grand a year. Plus, you defer paying taxes on your contributions, giving you a bigger paycheck now. See how even small amounts can add up.

3. Raise your car insurance deductible. Upping your out-of-pocket outlay from $250 to $1,000 can save you 15% or more off your premium. Learn more about how to save money on your car insurance.

4. Pay off your credit card. Carrying a $1,000 balance at 18% blows $180 every year on interest that you could put to better use elsewhere. See climb out of debt faster for help.

5. Go green. Control energy costs with a programmable thermostat. Prices start around $50, but you'll cut your heating-and-cooling bill by 10-20%.

6. Bundle up. Getting a package of phone, Internet and cable from one provider can save you about $50 a month.

7. Use your employer's FSA. Flexible spending accounts let you pay healthcare costs with pre-tax dollars. If your company offers them, take advantage and save 33% or more.

8. Get a credit card with rewards. Spending $80 a week on gas and groceries? Putting it on a card with 5% cash rebates will earn you nearly $200 a year.

9. Kick the habit. Smoking is hard on your health and the wallet. Three packs a week averages $50 a month. Learn more about how getting in shape can fatten your wallet.

10. Brown bag it. Instead of spending $8 on takeout every day at work, bring a bagged lunch for $5. You'll save $60 a month and $720 a year. Do your own calculation at FeedThePig.com

11. Negotiate your rate. Instead of paying an APR of 18% on your credit card, call your issuer and ask for a lower rate. If you have good credit, your lender might consider it and if you can provide examples of offers you've gotten from other companies, it'll strengthen your case.

12. Travel on the cheap. Bypass the old trifecta of travel search engines (Travelocity, Expedia and Orbitz) and head straight for Sidestep.com, which will search them all -- saving you money and time. For last minute deals, try Site59.com. And see our list of the 25 best Travel Sites for more cost-cutting resources.

13. Insure yourself. Even if your company has a health plan, you may be able to do better for yourself. Pairing a high-deductible medical policy with a health saving account -- which lets you put away pre-tax dollars for out-of-pocket medical expenses -- can save money on premiums. Shop around at www.ehealthinsurance.com.

14. Make media free. Dust off your library card and enjoy DVDs and books for free. If you'd normally rent a movie a week and buy a book a month, you can cut costs by $30.

15. Change your calling plan. The average wireless-phone user spends about $60 a month, including taxes and fees. If you talk for 200 or fewer minutes per month, switching to a prepaid plan where minutes cost 25 cents a minute could save you $10 a month. Compare plans at www.myrateplan.com.

16. Park your car. Why pay $25 a week in gas when you could pay half that to use public transit? Or check out carpooling at www.erideshare.com and www.carpoolconnect.com.

17. Ditch your gym. Forget the $40/month gym membership that'll cost you almost $500 a year and check out community centers in your area. Some may be free or charge a minimal fee such as $100 a year. Or buy a good pair of running shoes and work out the old-fashioned way.

18. Reshop your auto insurance. Using a comparison site like Ins Web can help you determine if you've got the best deal.

19. Learn to cook. Cooking at home saves on your food budget and it could even improve your dating prospects -- who isn't impressed by someone who can prepare a great meal?

20. Keep track of your money. The best way to save is to know what you spend. It might not be pretty, but detail every expense for a month to get an idea of where you can cut back. Nearly everyone has some fat they can trim from their spending to put toward a savings goal.

How to Retire a Millionaire

Find out how much you need to save each month to reach $500,000, $1 million of $2 million by age 65.

The road to $1 million starts early, but if you're a late bloomer, help is at hand. The information below shows how much you need to save each month to accumulate $500,000, $1 million or $2 million by age 65, along with strategies for achieving that goal. At age 25, you're starting from scratch. At ages 35, 45 and 55, we assume you already have money in savings, on which you're earning 8% annually.

Age 25

You've saved: $0
To reach $500,000, what you need to save per month: $143
To reach $1 million, what you need to save per month: $286
To reach $2 million, what you need to save per month: $573

Get help from Uncle Sam: You may qualify for a retirement-savings tax credit of 10% to 50% of the amount you contribute to an IRA, 401(k) or other retirement account. The credit can reduce your tax bill by up to $1,000. To qualify, your income must be $25,000 or less if you're single, $37,500 or less if you're a head of household or $50,000 or less if you're married.

Age 35

You've saved: $0
To reach $500,000, what you need to save per month: $335
To reach $1 million, what you need to save per month: $671
To reach $2 million, what you need to save per month: $1,342

You've saved: $25,000
To reach $500,000, what you need to save per month: $152
To reach $1 million, what you need to save per month: $488
To reach $2 million, what you need to save per month: $1,159

Get help from your boss: If your employer offers a matching contribution, contribute at least enough to your 401(k) to capture the full match. Otherwise, you're walking away from free money. Try to save 15% of your gross income for retirement, including your employer match.

Age 45

You've saved: $0
To reach $500,000, what you need to save per month: $849
To reach $1 million, what you need to save per month: $1,698
To reach $2 million, what you need to save per month: $3,395

You've saved: $25,000
To reach $500,000, what you need to save per month: $640
To reach $1 million, what you need to save per month: $1,489
To reach $2 million, what you need to save per month: $3,186

You've saved: $50,000
To reach $500,000, what you need to save per month: $431
To reach $1 million, what you need to save per month: $1,280
To reach $2 million, what you need to save per month: $2,977

You've saved: $100,000
To reach $500,000, what you need to save per month: $12
To reach $1 million, what you need to save per month: $861
To reach $2 million, what you need to save per month: $2,559

Play catch-up: Aim to contribute the maximum $15,500 to your 401(k) this year or $4,000 to your traditional or Roth IRA. Once you turn 50, you can contribute an additional $5,000 in catch-up contributions to your 401(k) and an extra $1,000 to your IRA.

Age 55

You've saved: $0
To reach $500,000, what you need to save per month: $2,733
To reach $1 million, what you need to save per month: $5,466
To reach $1 million, what you need to save per month: $10,932

You've saved: $25,000
To reach $500,000, what you need to save per month: $2,430
To reach $1 million, what you need to save per month: $5,163
To reach $2 million, what you need to save per month: $10,629

You've saved: $50,000
To reach $500,000, what you need to save per month: $2,126
To reach $1 million, what you need to save per month: $4,859
To reach $2 million, what you need to save per month: $10,326

You've saved: $100,000
To reach $500,000, what you need to save per month: $1,520
To reach $1 million, what you need to save per month: $4,253
To reach $2 million, what you need to save per month: $9,719

You've saved: $200,000
To reach $500,000, what you need to save per month: $306
To reach $1 million, what you need to save per month: $3,040
To reach $2 million, what you need to save per month: $8,506

Stay on the job: Working a few years longer can boost your savings.

Money Rules


1. Be humble
When you do not know a thing, to allow that you do not know it--this is knowledge.

--Confucius
Investing is a big bet on an unknowable future. The mark of wisdom is accepting just how unknowable it is. Granted, that's not easy. Our brains are built to think the future will be like the near past. And we're too ready to act on the predictions of pundits, who are no more clued in than we are about what lies ahead.

Being humble in the face of uncertainty keeps you from costly mistakes. You won't jump on yesterday's bandwagon. And before you invest, you'll be more likely to ask a key question: "What if I'm wrong?"

2. Take calculated risks

He that is overcautious will accomplish little.
--Friedrich von Schiller
The returns you get are proportionate to the risk you take. This is a fundamental law of the markets. It's why five-year CDs typically pay more than six-month ones and why you're disappointed if your emerging markets fund does no better than its stodgy blue-chip stablemate. History unequivocally supports this "no free lunch" principle. Going back to 1926, stocks (high risk) have paid more than government bonds (medium risk), which in turn have beaten low-risk Treasury bills.
Among many, many other things, this law suggests:

• To earn returns high enough to build true wealth, you have to put some of your money in risky assets like stocks--the only investment to handily beat inflation over time.
• If a financial salesperson tries to tell you his product offers a high return with no risk, get that claim in writing. Then send it and his business card to the SEC.

3. Have an emergency fund

For age and want, save while you may; no morning sun lasts a whole day.
--Benjamin Franklin
The first step in constructing any serious financial plan is to create an emergency cash fund--ideally, three to six months' living expenses--stashed in a low-cost ultrasafe bank account or money-market fund. Without this financial cushion, any unexpected expense can derail your long-term plans.

These days, happily, that emergency stash won't just sit idle. Top bank accounts like the one at UFB Direct (888-580-0049) and perennially competitive money funds like Vanguard Prime (800-851-4999) now pay more than 5%.

4. Mix it up

It is the part of a wise man to keep himself today for tomorrow and not to venture all his eggs in one basket.
--Miguel de Cervantes
Nothing can break the law of risk and reward, but a diversified portfolio can bend it. When you spread your money properly among different asset types, a rise in some will offset a fall in others, muting your overall risk without a commensurate drop in return. It's the closest thing to a free lunch there is in investing. To make the alchemy work, you must load up on assets whose up and down cycles don't run in sync: stocks (both U.S. and foreign, as well as large-company and small), bonds (of varying maturities), cash, real estate and commodities.

5. It's the portfolio, stupid

Asset allocation...is the overwhelmingly dominant contributor to total return.
--Gary Brinson, Brian Singer and Gilbert Beebower
Most investors concentrate on trying to choose the best stock and pick the perfect moment to buy or sell. It's a waste. What really matters to your long-term returns is asset allocation--that is, how you split up your portfolio.

Since researchers dropped this bombshell 20 years ago, experts have debated the size of the asset-allocation factor. Some say it accounts for 40% of the variation in investors' returns; others (like the original researchers) say 90%. But no one refutes that it's major.

6. Average is the new best

The best way to own common stocks is through an index fund.
--Warren Buffett
Here's the logic behind index funds, which aim simply to match the return of a market index: The average fund in any market will always earn that market's return (because in aggregate investors are the market) minus expenses. Since index funds match the market but have much smaller expenses than other funds, they will always beat the average fund in the long run. It's hard to argue with the math, and history bears it out (see the performance stat at right). Besides, if the Greatest Investor of Our Time believes that index funds are superior for most investors, shouldn't you?

7. Practice patience

It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!
--Edwin Lefevre
This blunt warning was issued in Lefevre's 1923 fictional memoir, reportedly based on legendary trader Jesse Livermore and treated by many financial advisers like the Bible. Some 77 years later, behavioral finance professors Terrance Odean and Brad Barber's research into transactions by some 66,000 households between 1991 and 1996 found that those who traded least earned seven percentage points a year more than the most frequent traders. Moral: Once you arrange your assets into your ideal allocation, don't tinker. Rebalance once a year to keep your mix on track, but otherwise, listen to Livermore and sit tight.

8. Don't time the market

The real key to making money in stocks is not to get scared out of them.
--Peter Lynch
It would be so nice, wouldn't it, to sell before every market downdraft and then get back in just as the good times roll again. But it's too hard to pull off. Nobody knows when markets will turn (see Rule No. 1). And when they do, they tend to move in quick bursts. By the time you realize an advance has begun, most of it's over. Miss that initial stretch and you'll miss out on most of the gains. The lesson: The surest way to investing success is to buy, then stick to your guns.

9. Be a cheapskate

Performance comes and goes, but costs roll on forever.
--Jack Bogle
If you choose a fund that eats up 1.5% a year in expenses over one that costs 1% (let alone the 0.2% that index funds may charge), your fund's return will have to beat the other's by half a point a year just for you to come out even. Past returns are no guarantee of the future, but today's low-cost funds are likely to stay low cost. Buying them is the only sure way of giving yourself a leg up.

10. Don't follow the crowd

Fashion is made to become unfashionable.
--Coco Chanel
Or, as the legendary financier Sir James Goldsmith has said, "If you see a bandwagon, it's too late."

In the late 1990s, there was no more fashionable bandwagon for investors than Firsthand Technology Value fund. It returned 23.7% in 1998, but investors really piled into it after it rocketed an incredible 190.4% in 1999. But by then, the bust of 2000 was about to unfold, and Firsthand was soon to become as passé as plaid trousers. The result was a chilling example of the perils of following the herd: While the fund posted a respectable 16% annualized gain over the four years through 2001, the average shareholder in the fund actually lost more than 31.6% a year.

11. Buy low

If a business is worth a dollar and I can buy it for 40 cents, something good may happen to me.
--Warren Buffett
The best Dow stocks of the past 10 years don't include Microsoft or Intel. But Caterpillar (Cat) makes the cut with a 212% return. In 1997, in the midst of tech madness, the market was so bored by the company's industrial-machinery business that investors paid just $11.50 for each dollar of earnings. If the stock's current value of 16.1 times earnings is right, that's nearly a 30% discount. Smart investors didn't need to foresee the coming construction boom. They only needed to call a bargain a bargain and trust the market to eventually wise up.

12. Invest abroad

The World is a book, and those who do not travel read only a page.
--St. Augustine
Over the 10 years through 2006, a portfolio split 80%-20% between U.S. and international large-cap stocks would have returned an average 8.4% a year, roughly the same as a portfolio invested 100% in domestic stocks. But because U.S. and foreign markets partially offset one another's ups and downs, the global portfolio was 4% less risky than the all-American (see Rule No. 4). Most Americans have less money in foreign funds than the 15% to 25% experts recommend. But you don't have to be like most Americans.

13. Keep perspective

There is nothing new in the world except the history you do not know.
--Harry Truman
When the Dow sheds 300 points in a day, it's natural to feel doomed. And when the market surges, it's easy to be convinced that stocks have entered "a new paradigm," to echo a bubble-era phrase. Don't delude yourself. As Sir John Templeton notes, "The four most expensive words in the English language are, `This time it's different.' "

To keep your perspective, remember:

• In every bull market since 1970, stocks have dropped by 10% or more at least once. Average time to get back to even: 107 days.
• Over time, markets tend to stick close to their long-term trends, called "regression to the mean." Manias and panics never last.

14. Just do it

It takes as much energy to wish as it does to plan.
--Eleanor Roosevelt
Financial planning is an unnatural act. The brain is wired to make us undervalue long-term goals and exaggerate the cost of short-term sacrifice. Yet studies show that people who do even a little retirement planning had twice the savings of those who did almost none. Heed the words attributed to Mrs. Roosevelt by doing the following:

• Set concrete, attainable goals. "I'll pay an extra $100 a month on my credit card" is more likely to succeed than "I'm going to get my act together."
• Then commit. Tell someone your plan and agree to a penalty--you'll do your spouse's chores for a month if you haven't saved $10,000 extra by June.

15. Borrow responsibly

As life closes in on someone who has borrowed far too much money on the strength of far too little income, there are no fire escapes.
--John Kenneth Galbraith
Face this truth: If you let them, lenders are only too willing to advance you more than is good for your family. Mortgage banks and credit-card issuers don't care if your monthly payment makes it impossible for you to sock away money in your 401(k) or fund your kid's 529 plan. You need to set your own rules, including:

• No credit-card debt. Period. It's never okay to pay 15% to borrow for consumption.
• Borrow only to buy assets that appreciate. A home, yes. Education, sure. A vacation, a fancy dinner or even a 50-inch flat-screen TV? No way.

16. Talk to your spouse

"In every house of marriage there's room for an interpreter."
--Stanley Kunitz
Your most important financial partner isn't your broker. It's your spouse--you know, the one who probably owns half of all you do and whose fate is inextricably linked with yours. But research shows that spouses often don't agree on even such basic info as their income and savings. Wake-up call: To make smart decisions, you need to talk, and if you're like most couples, to do a better job at it.

• Men: Don't assume she doesn't care about this stuff. She does. But you need to lay off the jargon and speak English.
• Women: Don't just leave it all to him. At a minimum, know where the key papers are and how your money is invested. ˙
• Both: Focus on goals, not on being right. It's not a contest.

17. Exit gracefully

Only put off until tomorrow what you are willing to die having left undone.
--Pablo Picasso
Despite the words he reportedly uttered, Picasso was willing to die without planning his estate. It took years for his heirs to reach a settlement with French authorities. Although you may not have masterpieces to bequeath, you have no excuse not to take elementary steps to make life easier on those you'd leave behind. Covering the basics shouldn't cost more than $1,500.

To find a lawyer, ask friends and colleagues for recommendations or get referrals online at the website of the American Academy of Estate Planning Attorneys (aaepa.com). For tips on dividing emotion-laden personal belongings--more often the flash point for family tension than money or big-ticket items--check out the website Who Gets Grandma's Yellow Pie Plate? (yellowpieplate.umn.edu).

18. Pay only your share

The avoidance of taxes is the only intellectual pursuit that carries any reward.
--John Maynard Keynes
It's all well and good to put time into choosing the right investments. But being conscious of taxes puts money in your pocket too (at least it keeps it from being taken from your pocket, which amounts to the same thing), and the payoff is swift, certain and there for the taking. So take full advantage of tax-deferred benefits at work, like 401(k)s and flexible spending accounts. Stick with tax-efficient investments like index funds. And claim every deduction you're entitled to. According to the Government Accountability Office, taxpayers who could itemize but chose not to ended up overpaying by $450. Don't be one of them.

19. Give wisely

The time is always right to do the right thing.
--Martin Luther King Jr.
Granted, Dr. King did not have money on his mind when he spoke these words. But they also ring true in your financial life, since giving back is always the right thing. Still, there are more right and less right ways to do it.

• Look beyond the headlines. It's fine to give money to disasters like the tsunami, but don't forget about smaller charities that go wanting.
• Don't give over the phone. Telemarketers often take a cut of 50% or more.
• Focus. Identify a cause that really speaks to you. Then devote most of your energy and charitable dollars to the organizations that best support it.

20. Keep money in its place

A wise man should have money in his head, but not in his heart.
--Jonathan Swift
People who say they value money highly report that they are less happy in life than those who care more about love and friends. Enough said.

Money Rules


1. Be humble
When you do not know a thing, to allow that you do not know it--this is knowledge.

--Confucius

Investing is a big bet on an unknowable future. The mark of wisdom is accepting just how unknowable it is. Granted, that's not easy. Our brains are built to think the future will be like the near past. And we're too ready to act on the predictions of pundits, who are no more clued in than we are about what lies ahead.

Being humble in the face of uncertainty keeps you from costly mistakes. You won't jump on yesterday's bandwagon. And before you invest, you'll be more likely to ask a key question: "What if I'm wrong?"

2. Take calculated risks

He that is overcautious will accomplish little.
--Friedrich von Schiller

The returns you get are proportionate to the risk you take. This is a fundamental law of the markets. It's why five-year CDs typically pay more than six-month ones and why you're disappointed if your emerging markets fund does no better than its stodgy blue-chip stablemate. History unequivocally supports this "no free lunch" principle. Going back to 1926, stocks (high risk) have paid more than government bonds (medium risk), which in turn have beaten low-risk Treasury bills.
Among many, many other things, this law suggests:

• To earn returns high enough to build true wealth, you have to put some of your money in risky assets like stocks--the only investment to handily beat inflation over time.
• If a financial salesperson tries to tell you his product offers a high return with no risk, get that claim in writing. Then send it and his business card to the SEC.

3. Have an emergency fund

For age and want, save while you may; no morning sun lasts a whole day.
--Benjamin Franklin

The first step in constructing any serious financial plan is to create an emergency cash fund--ideally, three to six months' living expenses--stashed in a low-cost ultrasafe bank account or money-market fund. Without this financial cushion, any unexpected expense can derail your long-term plans.

These days, happily, that emergency stash won't just sit idle. Top bank accounts like the one at UFB Direct (888-580-0049) and perennially competitive money funds like Vanguard Prime (800-851-4999) now pay more than 5%.

4. Mix it up

It is the part of a wise man to keep himself today for tomorrow and not to venture all his eggs in one basket.
--Miguel de Cervantes

Nothing can break the law of risk and reward, but a diversified portfolio can bend it. When you spread your money properly among different asset types, a rise in some will offset a fall in others, muting your overall risk without a commensurate drop in return. It's the closest thing to a free lunch there is in investing. To make the alchemy work, you must load up on assets whose up and down cycles don't run in sync: stocks (both U.S. and foreign, as well as large-company and small), bonds (of varying maturities), cash, real estate and commodities.

5. It's the portfolio, stupid

Asset allocation...is the overwhelmingly dominant contributor to total return.
--Gary Brinson, Brian Singer and Gilbert Beebower

Most investors concentrate on trying to choose the best stock and pick the perfect moment to buy or sell. It's a waste. What really matters to your long-term returns is asset allocation--that is, how you split up your portfolio.

Since researchers dropped this bombshell 20 years ago, experts have debated the size of the asset-allocation factor. Some say it accounts for 40% of the variation in investors' returns; others (like the original researchers) say 90%. But no one refutes that it's major.

6. Average is the new best

The best way to own common stocks is through an index fund.
--Warren Buffett

Here's the logic behind index funds, which aim simply to match the return of a market index: The average fund in any market will always earn that market's return (because in aggregate investors are the market) minus expenses. Since index funds match the market but have much smaller expenses than other funds, they will always beat the average fund in the long run. It's hard to argue with the math, and history bears it out (see the performance stat at right). Besides, if the Greatest Investor of Our Time believes that index funds are superior for most investors, shouldn't you?

7. Practice patience

It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!
--Edwin Lefevre

This blunt warning was issued in Lefevre's 1923 fictional memoir, reportedly based on legendary trader Jesse Livermore and treated by many financial advisers like the Bible. Some 77 years later, behavioral finance professors Terrance Odean and Brad Barber's research into transactions by some 66,000 households between 1991 and 1996 found that those who traded least earned seven percentage points a year more than the most frequent traders. Moral: Once you arrange your assets into your ideal allocation, don't tinker. Rebalance once a year to keep your mix on track, but otherwise, listen to Livermore and sit tight.

8. Don't time the market

The real key to making money in stocks is not to get scared out of them.
--Peter Lynch

It would be so nice, wouldn't it, to sell before every market downdraft and then get back in just as the good times roll again. But it's too hard to pull off. Nobody knows when markets will turn (see Rule No. 1). And when they do, they tend to move in quick bursts. By the time you realize an advance has begun, most of it's over. Miss that initial stretch and you'll miss out on most of the gains. The lesson: The surest way to investing success is to buy, then stick to your guns.

9. Be a cheapskate

Performance comes and goes, but costs roll on forever.
--Jack Bogle

If you choose a fund that eats up 1.5% a year in expenses over one that costs 1% (let alone the 0.2% that index funds may charge), your fund's return will have to beat the other's by half a point a year just for you to come out even. Past returns are no guarantee of the future, but today's low-cost funds are likely to stay low cost. Buying them is the only sure way of giving yourself a leg up.

10. Don't follow the crowd

Fashion is made to become unfashionable.
--Coco Chanel

Or, as the legendary financier Sir James Goldsmith has said, "If you see a bandwagon, it's too late."

In the late 1990s, there was no more fashionable bandwagon for investors than Firsthand Technology Value fund. It returned 23.7% in 1998, but investors really piled into it after it rocketed an incredible 190.4% in 1999. But by then, the bust of 2000 was about to unfold, and Firsthand was soon to become as passé as plaid trousers. The result was a chilling example of the perils of following the herd: While the fund posted a respectable 16% annualized gain over the four years through 2001, the average shareholder in the fund actually lost more than 31.6% a year.

11. Buy low

If a business is worth a dollar and I can buy it for 40 cents, something good may happen to me.
--Warren Buffett

The best Dow stocks of the past 10 years don't include Microsoft or Intel. But Caterpillar (Cat) makes the cut with a 212% return. In 1997, in the midst of tech madness, the market was so bored by the company's industrial-machinery business that investors paid just $11.50 for each dollar of earnings. If the stock's current value of 16.1 times earnings is right, that's nearly a 30% discount. Smart investors didn't need to foresee the coming construction boom. They only needed to call a bargain a bargain and trust the market to eventually wise up.

12. Invest abroad

The World is a book, and those who do not travel read only a page.
--St. Augustine

Over the 10 years through 2006, a portfolio split 80%-20% between U.S. and international large-cap stocks would have returned an average 8.4% a year, roughly the same as a portfolio invested 100% in domestic stocks. But because U.S. and foreign markets partially offset one another's ups and downs, the global portfolio was 4% less risky than the all-American (see Rule No. 4). Most Americans have less money in foreign funds than the 15% to 25% experts recommend. But you don't have to be like most Americans.

13. Keep perspective

There is nothing new in the world except the history you do not know.
--Harry Truman

When the Dow sheds 300 points in a day, it's natural to feel doomed. And when the market surges, it's easy to be convinced that stocks have entered "a new paradigm," to echo a bubble-era phrase. Don't delude yourself. As Sir John Templeton notes, "The four most expensive words in the English language are, `This time it's different.' "

To keep your perspective, remember:

• In every bull market since 1970, stocks have dropped by 10% or more at least once. Average time to get back to even: 107 days.
• Over time, markets tend to stick close to their long-term trends, called "regression to the mean." Manias and panics never last.

14. Just do it

It takes as much energy to wish as it does to plan.
--Eleanor Roosevelt

Financial planning is an unnatural act. The brain is wired to make us undervalue long-term goals and exaggerate the cost of short-term sacrifice. Yet studies show that people who do even a little retirement planning had twice the savings of those who did almost none. Heed the words attributed to Mrs. Roosevelt by doing the following:

• Set concrete, attainable goals. "I'll pay an extra $100 a month on my credit card" is more likely to succeed than "I'm going to get my act together."
• Then commit. Tell someone your plan and agree to a penalty--you'll do your spouse's chores for a month if you haven't saved $10,000 extra by June.

15. Borrow responsibly

As life closes in on someone who has borrowed far too much money on the strength of far too little income, there are no fire escapes.
--John Kenneth Galbraith

Face this truth: If you let them, lenders are only too willing to advance you more than is good for your family. Mortgage banks and credit-card issuers don't care if your monthly payment makes it impossible for you to sock away money in your 401(k) or fund your kid's 529 plan. You need to set your own rules, including:

• No credit-card debt. Period. It's never okay to pay 15% to borrow for consumption.
• Borrow only to buy assets that appreciate. A home, yes. Education, sure. A vacation, a fancy dinner or even a 50-inch flat-screen TV? No way.

16. Talk to your spouse

"In every house of marriage there's room for an interpreter."
--Stanley Kunitz

Your most important financial partner isn't your broker. It's your spouse--you know, the one who probably owns half of all you do and whose fate is inextricably linked with yours. But research shows that spouses often don't agree on even such basic info as their income and savings. Wake-up call: To make smart decisions, you need to talk, and if you're like most couples, to do a better job at it.

• Men: Don't assume she doesn't care about this stuff. She does. But you need to lay off the jargon and speak English.
• Women: Don't just leave it all to him. At a minimum, know where the key papers are and how your money is invested. ˙
• Both: Focus on goals, not on being right. It's not a contest.

17. Exit gracefully

Only put off until tomorrow what you are willing to die having left undone.
--Pablo Picasso

Despite the words he reportedly uttered, Picasso was willing to die without planning his estate. It took years for his heirs to reach a settlement with French authorities. Although you may not have masterpieces to bequeath, you have no excuse not to take elementary steps to make life easier on those you'd leave behind. Covering the basics shouldn't cost more than $1,500.

To find a lawyer, ask friends and colleagues for recommendations or get referrals online at the website of the American Academy of Estate Planning Attorneys (aaepa.com). For tips on dividing emotion-laden personal belongings--more often the flash point for family tension than money or big-ticket items--check out the website Who Gets Grandma's Yellow Pie Plate? (yellowpieplate.umn.edu).

18. Pay only your share

The avoidance of taxes is the only intellectual pursuit that carries any reward.
--John Maynard Keynes

It's all well and good to put time into choosing the right investments. But being conscious of taxes puts money in your pocket too (at least it keeps it from being taken from your pocket, which amounts to the same thing), and the payoff is swift, certain and there for the taking. So take full advantage of tax-deferred benefits at work, like 401(k)s and flexible spending accounts. Stick with tax-efficient investments like index funds. And claim every deduction you're entitled to. According to the Government Accountability Office, taxpayers who could itemize but chose not to ended up overpaying by $450. Don't be one of them.

19. Give wisely

The time is always right to do the right thing.
--Martin Luther King Jr.

Granted, Dr. King did not have money on his mind when he spoke these words. But they also ring true in your financial life, since giving back is always the right thing. Still, there are more right and less right ways to do it.

• Look beyond the headlines. It's fine to give money to disasters like the tsunami, but don't forget about smaller charities that go wanting.
• Don't give over the phone. Telemarketers often take a cut of 50% or more.
• Focus. Identify a cause that really speaks to you. Then devote most of your energy and charitable dollars to the organizations that best support it.

20. Keep money in its place

A wise man should have money in his head, but not in his heart.
--Jonathan Swift

People who say they value money highly report that they are less happy in life than those who care more about love and friends. Enough said.

Money Rules


1. Be humble
When you do not know a thing, to allow that you do not know it--this is knowledge.

--Confucius

Investing is a big bet on an unknowable future. The mark of wisdom is accepting just how unknowable it is. Granted, that's not easy. Our brains are built to think the future will be like the near past. And we're too ready to act on the predictions of pundits, who are no more clued in than we are about what lies ahead.

Being humble in the face of uncertainty keeps you from costly mistakes. You won't jump on yesterday's bandwagon. And before you invest, you'll be more likely to ask a key question: "What if I'm wrong?"

2. Take calculated risks

He that is overcautious will accomplish little.
--Friedrich von Schiller

The returns you get are proportionate to the risk you take. This is a fundamental law of the markets. It's why five-year CDs typically pay more than six-month ones and why you're disappointed if your emerging markets fund does no better than its stodgy blue-chip stablemate. History unequivocally supports this "no free lunch" principle. Going back to 1926, stocks (high risk) have paid more than government bonds (medium risk), which in turn have beaten low-risk Treasury bills.
Among many, many other things, this law suggests:

• To earn returns high enough to build true wealth, you have to put some of your money in risky assets like stocks--the only investment to handily beat inflation over time.
• If a financial salesperson tries to tell you his product offers a high return with no risk, get that claim in writing. Then send it and his business card to the SEC.

3. Have an emergency fund

For age and want, save while you may; no morning sun lasts a whole day.
--Benjamin Franklin

The first step in constructing any serious financial plan is to create an emergency cash fund--ideally, three to six months' living expenses--stashed in a low-cost ultrasafe bank account or money-market fund. Without this financial cushion, any unexpected expense can derail your long-term plans.

These days, happily, that emergency stash won't just sit idle. Top bank accounts like the one at UFB Direct (888-580-0049) and perennially competitive money funds like Vanguard Prime (800-851-4999) now pay more than 5%.

4. Mix it up

It is the part of a wise man to keep himself today for tomorrow and not to venture all his eggs in one basket.
--Miguel de Cervantes

Nothing can break the law of risk and reward, but a diversified portfolio can bend it. When you spread your money properly among different asset types, a rise in some will offset a fall in others, muting your overall risk without a commensurate drop in return. It's the closest thing to a free lunch there is in investing. To make the alchemy work, you must load up on assets whose up and down cycles don't run in sync: stocks (both U.S. and foreign, as well as large-company and small), bonds (of varying maturities), cash, real estate and commodities.

5. It's the portfolio, stupid

Asset allocation...is the overwhelmingly dominant contributor to total return.
--Gary Brinson, Brian Singer and Gilbert Beebower

Most investors concentrate on trying to choose the best stock and pick the perfect moment to buy or sell. It's a waste. What really matters to your long-term returns is asset allocation--that is, how you split up your portfolio.

Since researchers dropped this bombshell 20 years ago, experts have debated the size of the asset-allocation factor. Some say it accounts for 40% of the variation in investors' returns; others (like the original researchers) say 90%. But no one refutes that it's major.

6. Average is the new best

The best way to own common stocks is through an index fund.
--Warren Buffett

Here's the logic behind index funds, which aim simply to match the return of a market index: The average fund in any market will always earn that market's return (because in aggregate investors are the market) minus expenses. Since index funds match the market but have much smaller expenses than other funds, they will always beat the average fund in the long run. It's hard to argue with the math, and history bears it out (see the performance stat at right). Besides, if the Greatest Investor of Our Time believes that index funds are superior for most investors, shouldn't you?

7. Practice patience

It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!
--Edwin Lefevre

This blunt warning was issued in Lefevre's 1923 fictional memoir, reportedly based on legendary trader Jesse Livermore and treated by many financial advisers like the Bible. Some 77 years later, behavioral finance professors Terrance Odean and Brad Barber's research into transactions by some 66,000 households between 1991 and 1996 found that those who traded least earned seven percentage points a year more than the most frequent traders. Moral: Once you arrange your assets into your ideal allocation, don't tinker. Rebalance once a year to keep your mix on track, but otherwise, listen to Livermore and sit tight.

8. Don't time the market

The real key to making money in stocks is not to get scared out of them.
--Peter Lynch

It would be so nice, wouldn't it, to sell before every market downdraft and then get back in just as the good times roll again. But it's too hard to pull off. Nobody knows when markets will turn (see Rule No. 1). And when they do, they tend to move in quick bursts. By the time you realize an advance has begun, most of it's over. Miss that initial stretch and you'll miss out on most of the gains. The lesson: The surest way to investing success is to buy, then stick to your guns.

9. Be a cheapskate

Performance comes and goes, but costs roll on forever.
--Jack Bogle

If you choose a fund that eats up 1.5% a year in expenses over one that costs 1% (let alone the 0.2% that index funds may charge), your fund's return will have to beat the other's by half a point a year just for you to come out even. Past returns are no guarantee of the future, but today's low-cost funds are likely to stay low cost. Buying them is the only sure way of giving yourself a leg up.

10. Don't follow the crowd

Fashion is made to become unfashionable.
--Coco Chanel

Or, as the legendary financier Sir James Goldsmith has said, "If you see a bandwagon, it's too late."

In the late 1990s, there was no more fashionable bandwagon for investors than Firsthand Technology Value fund. It returned 23.7% in 1998, but investors really piled into it after it rocketed an incredible 190.4% in 1999. But by then, the bust of 2000 was about to unfold, and Firsthand was soon to become as passé as plaid trousers. The result was a chilling example of the perils of following the herd: While the fund posted a respectable 16% annualized gain over the four years through 2001, the average shareholder in the fund actually lost more than 31.6% a year.

11. Buy low

If a business is worth a dollar and I can buy it for 40 cents, something good may happen to me.
--Warren Buffett

The best Dow stocks of the past 10 years don't include Microsoft or Intel. But Caterpillar (Cat) makes the cut with a 212% return. In 1997, in the midst of tech madness, the market was so bored by the company's industrial-machinery business that investors paid just $11.50 for each dollar of earnings. If the stock's current value of 16.1 times earnings is right, that's nearly a 30% discount. Smart investors didn't need to foresee the coming construction boom. They only needed to call a bargain a bargain and trust the market to eventually wise up.

12. Invest abroad

The World is a book, and those who do not travel read only a page.
--St. Augustine

Over the 10 years through 2006, a portfolio split 80%-20% between U.S. and international large-cap stocks would have returned an average 8.4% a year, roughly the same as a portfolio invested 100% in domestic stocks. But because U.S. and foreign markets partially offset one another's ups and downs, the global portfolio was 4% less risky than the all-American (see Rule No. 4). Most Americans have less money in foreign funds than the 15% to 25% experts recommend. But you don't have to be like most Americans.

13. Keep perspective

There is nothing new in the world except the history you do not know.
--Harry Truman

When the Dow sheds 300 points in a day, it's natural to feel doomed. And when the market surges, it's easy to be convinced that stocks have entered "a new paradigm," to echo a bubble-era phrase. Don't delude yourself. As Sir John Templeton notes, "The four most expensive words in the English language are, `This time it's different.' "

To keep your perspective, remember:

• In every bull market since 1970, stocks have dropped by 10% or more at least once. Average time to get back to even: 107 days.
• Over time, markets tend to stick close to their long-term trends, called "regression to the mean." Manias and panics never last.

14. Just do it

It takes as much energy to wish as it does to plan.
--Eleanor Roosevelt

Financial planning is an unnatural act. The brain is wired to make us undervalue long-term goals and exaggerate the cost of short-term sacrifice. Yet studies show that people who do even a little retirement planning had twice the savings of those who did almost none. Heed the words attributed to Mrs. Roosevelt by doing the following:

• Set concrete, attainable goals. "I'll pay an extra $100 a month on my credit card" is more likely to succeed than "I'm going to get my act together."
• Then commit. Tell someone your plan and agree to a penalty--you'll do your spouse's chores for a month if you haven't saved $10,000 extra by June.

15. Borrow responsibly

As life closes in on someone who has borrowed far too much money on the strength of far too little income, there are no fire escapes.
--John Kenneth Galbraith

Face this truth: If you let them, lenders are only too willing to advance you more than is good for your family. Mortgage banks and credit-card issuers don't care if your monthly payment makes it impossible for you to sock away money in your 401(k) or fund your kid's 529 plan. You need to set your own rules, including:

• No credit-card debt. Period. It's never okay to pay 15% to borrow for consumption.
• Borrow only to buy assets that appreciate. A home, yes. Education, sure. A vacation, a fancy dinner or even a 50-inch flat-screen TV? No way.

16. Talk to your spouse

"In every house of marriage there's room for an interpreter."
--Stanley Kunitz

Your most important financial partner isn't your broker. It's your spouse--you know, the one who probably owns half of all you do and whose fate is inextricably linked with yours. But research shows that spouses often don't agree on even such basic info as their income and savings. Wake-up call: To make smart decisions, you need to talk, and if you're like most couples, to do a better job at it.

• Men: Don't assume she doesn't care about this stuff. She does. But you need to lay off the jargon and speak English.
• Women: Don't just leave it all to him. At a minimum, know where the key papers are and how your money is invested. ˙
• Both: Focus on goals, not on being right. It's not a contest.

17. Exit gracefully

Only put off until tomorrow what you are willing to die having left undone.
--Pablo Picasso

Despite the words he reportedly uttered, Picasso was willing to die without planning his estate. It took years for his heirs to reach a settlement with French authorities. Although you may not have masterpieces to bequeath, you have no excuse not to take elementary steps to make life easier on those you'd leave behind. Covering the basics shouldn't cost more than $1,500.

To find a lawyer, ask friends and colleagues for recommendations or get referrals online at the website of the American Academy of Estate Planning Attorneys (aaepa.com). For tips on dividing emotion-laden personal belongings--more often the flash point for family tension than money or big-ticket items--check out the website Who Gets Grandma's Yellow Pie Plate? (yellowpieplate.umn.edu).

18. Pay only your share

The avoidance of taxes is the only intellectual pursuit that carries any reward.
--John Maynard Keynes

It's all well and good to put time into choosing the right investments. But being conscious of taxes puts money in your pocket too (at least it keeps it from being taken from your pocket, which amounts to the same thing), and the payoff is swift, certain and there for the taking. So take full advantage of tax-deferred benefits at work, like 401(k)s and flexible spending accounts. Stick with tax-efficient investments like index funds. And claim every deduction you're entitled to. According to the Government Accountability Office, taxpayers who could itemize but chose not to ended up overpaying by $450. Don't be one of them.

19. Give wisely

The time is always right to do the right thing.
--Martin Luther King Jr.

Granted, Dr. King did not have money on his mind when he spoke these words. But they also ring true in your financial life, since giving back is always the right thing. Still, there are more right and less right ways to do it.

• Look beyond the headlines. It's fine to give money to disasters like the tsunami, but don't forget about smaller charities that go wanting.
• Don't give over the phone. Telemarketers often take a cut of 50% or more.
• Focus. Identify a cause that really speaks to you. Then devote most of your energy and charitable dollars to the organizations that best support it.

20. Keep money in its place

A wise man should have money in his head, but not in his heart.
--Jonathan Swift

People who say they value money highly report that they are less happy in life than those who care more about love and friends. Enough said.