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1. Start investing early in your career. The magic of compound interest magnifies the importance of early investments. At a 6% real return, saving $1 at age 21 for retirement is about the save as saving $6 at age 52 for retirement. Consequently, you can greatly diminish the burden of providing for your retirement if you start saving at an early age. 2. Maintain a diversified portfolio. Index funds are a cheap diversification tool. Don’t ignore bonds and foreign stocks. Normally, investors must take on more risk to get higher average returns. Diversification, however, provides investors with a free lunch and allows you to reduce your risk without sacrificing average returns. 3. Invest in stocks and bonds through tax-preferred vehicles like 401k plans and IRAs. The government gives huge tax breaks to people who make certain preferred investments. Not investing through tax-preferred vehicles is the equivalent of voluntarily paying higher taxes. Beware, however, that 401K plans and IRAs impose early withdraw penalties. 4. Buy and hold stocks until retirement. Excessive trading increases risk, taxes, and commissions. Investors are terrible at out-timing the market. Ideally, after you buy a stock you should forget about it until you retire. The Motley Fool5. Buy life insurance if you have a dependent. Make your spouse buy life insurance if you rely on his or her income. The world probably won’t end with your death, so you have a moral obligation to provide for those you might unexpectedly leave behind. Remember, your family might be dependent on your services as well as your income. Consequently, a full-time parent who doesn’t work still needs life insurance so his or her family could purchase child rearing services if (s)he dies. 6. Insure both you and your spouse have disability insurance. If you become disabled you might impose a greater financial burden on your family than if you die. Disabilities can rob your family of your income and create significant medical costs. If no one depends on your income or services you probably don’t need life insurance but you still need disability insurance to replace the income an accident could permanently deprive you of. 7. Avoid high interest credit card debt. Do whatever it takes to reduce high interest credit card debt. If possible, defer payments of student loans and use the freed funds to reduce your credit card balance. If you can’t payoff your credit card debt you should negotiate with your company to get a lower rate or move your debt to a card that will give you a lower rate. The credit card industry is extremely competitive and their most valuable customers are those who keep large balances and only slowly pay off their debts. If you’re one of these high-debt customers, then you have negotiating leverage. 8. Remember that the deductibility of mortgage interest imparts massive tax benefits to home ownership. The government provides large tax benefits to homeowners. While these benefits are difficult to justify on public policy grounds, only the financially foolish ignore the tax code. The Motley Fool9. Women usually live longer than men and so need to save more for retirement. Women, on average, live about five years longer than men; consequently they need to save more for retirement. This problem is compounded by women’s tendency to marry older men. For example, assume a married couple stops earning income when the husband is 65 and the wife 61. If the husband lives to 74 and the wife to 79 than the husband will be retired for 9 years while the wife will live in retirement for 18 years. Consequently, women should be far more concerned about saving for retirement than men. 10. Determine how much people in your job are usually paid. Should you be asking for a raise? Many are uncomfortable discussing salary with co-workers. In any negotiation, however, information brings advantages. Since your employer knows how much people in your position usually make, shouldn’t you?
James D. Miller is an associate professor of economics at Smith College. He developed these ten rules for Smith College’s Women & Financial Independence Program. He is the author of Singularity Rising, and the creator of a series of game theory YouTube videos.
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