Some of us are so desperate for money that we are dangerous. There are simple and powerful ways to get rich.
They won't all stay in your brain. As Uncle Sam reforms our taxes and benefits, and as new and better financial products come on board, many will change. Having guiding principles can help you manage your money.
I teach and live by 21 money rules.
1. Don't borrow for college. It is too risky and expensive. I don't say this lightly. I teach at a college. You can get a good education without ruining your career plans.
It involves applying to less prestigious institutions and pursuing scholarships.
2. Discuss who will repay your parents' tuition debt. Consider if they are blowing your inheritance or sacrificing their welfare to help you attend an expensive college.
3. Try to buy your home in cash. It is possible to shelter your money from federal and state asset-income taxation by packing it in your home. If you're a moderate to high earner, this is the case.
4. Mortgages are loser. Pay them off right away. If you have $100,000 that you can invest right now in a bond earning 1.5%, you will have over a year of interest income. If you paid off a $100,000 debt at a 3.2% interest, you would save $3,200 over the course of the year.
If you invested in debt repayment, you would make $1,700 with no risk.
5. It is possible to reduce longevity risk by owning a home. If you are 70 years old, you have found your dream location, and it is better to own than rent. Renting for the rest of your life can lead to rent hikes without the possibility of increasing your fixed income.
Home prices can go up or go down, but you will be protected. Who cares what the housing market does since you are not buying or selling your home? Your housing consumption is guaranteed through the end of the day.
6. It may be cheaper to live in a home that is several time zones away. It could be somewhere with no state income tax, no state estate tax, and no state inheritance tax.
Things are more complicated. New Hampshire has a tax advantage that may affect land values. The school system may be better in Massachusetts. Who knows? You might be childless and happy to live in a tall five-decker with no yard.
7. You can choose jobs that you don't like. Skills, education, and experience are all equal, and people with unpleasant, nerve-racking, frightening, or financially risky jobs get paid more than people with the same skills working jobs with none of these drawbacks.
The extra pay is called a compensation differential. The key to taking advantage of it is to find something you love and others don't.
8. Don't worry about job hopping. How can you not shop when there are so many options? Getting a credible outside offer is the fastest way to get a raise.
9. Work for yourself. I tell this to my students a lot. If you start your business the right way, you will raise your earnings and provide job security.
If that sounds too risky, think about how you can turn your hobby into a side hustle.
10. Think about tomorrow. Do you think you are in the best place to work for the rest of your life? Should you switch? Is your job in danger? A spouse, partner or friend can set a date to do a career review.
11. The living standard is your bottom line. You can see where alternative investment and spending strategies can land you by imagining its potential paths.
12. Long-term partnerships are not as good as marriage. It may mean higher net taxes, but it comes with an array of valuable implicit insurance arrangements, which the formality and legality of marriage help enforce.
13. If you do get married, you should also get divorced. It is as likely as not. A prenup protects you and your loved ones.
14. Changing careers, moving homes, getting married, having kids, and getting divorced are lifestyle decisions that come with a price. Measure these prices against your sustainable living standard.
15. Retirement-account contributions, conversions and withdrawals can be used to cut taxes. Make sure you contribute enough to get your employer's match.
16. Wait until you are 70 years old to take Social Security benefits. Retirees who wait to claim can get hundreds of dollars more each month than those who take benefits early.
This is not feasible for everyone. Before you make any moves, make sure you figure out the strategy that maximizes your household's lifetime benefits.
17. If you don't formally request your benefits, you won't get them. Many people in their 70s ask when they will get their checks. I told them they need to file for their benefits immediately.
We have paid FICA taxes our entire working lives for those benefits, so Social Security isn't in the business of letting us know what it owes us.
18. The staff of the Social Security Administration can get wrong thousands of rules in the Program Operations Manual System. Do your own research after talking to multiple offices.
19. Financial suicide is when you retire early. There are situations where it makes sense to retire early. Most of us don't think of early retirement as a decision to take the longest and most expensive vacation, it's just a choice.
It's clear that the wonderful benefits of extra time with the grandkids, freedom to pursue hobbies, reduction in stress, all come at a high price: the loss of years, if not decades, of earnings.
20. Conventional investment advice is to be nice. Saving the wrong amount when younger, putting your preretirement savings on autopilot, spending the wrong amount when you're older, and never adjusting to market conditions are four major economic mistakes.
21. You can play the stock market like a casino if you worry about downside risk. You should only spend out of stocks that have been converted to safe assets if you want to live comfortably.
The author of Money Magic is an economics professor. He received his PhD in economics from Harvard University. His columns have appeared in a number of newspapers. He was named one of the world's 25 most influential economists by The Economist. You can follow him on the social networking site.
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