A couple of weeks ago I asked you to send in the best financial advice you've ever received. Several readers said it was to base their lifestyle on one income right from the start of their marriage. Initially, following that advice enabled Jennifer and her husband to pay off an automobile loan. Ever since, the habit of living well beneath their means has enabled them to pay cash for cars, and now that they have a child, to have her stay home. As Jennifer wrote, "I know a number of people who have gotten married, excitedly bought a big house because they could easily afford it on two incomes, and then after they had a child the mother wanted to stay at home but felt like she couldn't because they wouldn't be able to maintain the status quo."
Another reader, Jon, told a similarly powerful story of how living on one income enabled his wife and him to pay off their education and vehicle loans, save for a down payment on a house, and to transition to one income when they had children.
Matt's View
Even for couples who do not plan to have children or who plan to continue as dual-earner households with kids, it's wise to live primarily on one income. Doing so provides an all-too-rare safety net in case one earner loses their job. Plus, it provides a lot of flexibility should one decide to go back to school or pursue a less lucrative but perhaps more satisfying career.
Do you have an emergency fund? If so, you're in the smart minority. Just 40 percent of Americans have such a fund, according to a new Consumer Federation of America survey. While higher income households are most likely to have an emergency fund, even among the highest earners more than 40 percent said they do not maintain a separate emergency fund.
Matt's View
An emergency fund is a foundational element of wise money management. Having money in reserve keeps stress low and is a powerful preventative for credit card debt. Today, money market mutual funds from brokerage firms such as Fidelity
and Vanguard
are paying five percent interest. That's a great rate for safe, easily accessible money. However, you'll need an initial deposit of $2,500 to $3,000. If that's more than you can afford, start with your bank's savings or money market account and then transfer to a higher yielding money market mutual fund once you have enough for the minimum deposit. A good rule of thumb is to keep at least three months' worth of living expenses in such a fund, preferably more.
Employer-sponsored 401(k) plans are becoming more generous. As reported in USA TODAY recently, 36 percent of such plans now offer a 100 percent match on employee contributions. In other words, for every dollar an employee saves in a 401(k) plan, their employer kicks in a dollar as well--usually up to a certain percentage of the employee's pay. In 2002, just 26 percent of plans offered a 100 percent match.
Matt's View
An employer match is the easiest money you'll ever make. And yet, according to Hewitt Associates, one-third of eligible employees do not participate in their company's 401(k) plan. Of those who do, one-fifth fail to save enough to receive their employer's full match.
If you're not participating in your employer's plan, contact your human resources department to find out what you need to do to get in the game. Start with one percent of your income if that's all you can muster for now. And then grow the percentage over time. With the money automatically deposited, you'll soon find that you don't even miss the money.
What's the biggest mistake you can make when leaving your job for greener pastures? Posting a video of the last office party on YouTube? Using the boss' reserved parking place on your last day? Cashing in your 401(k)? Okay, they're all bad ideas. But the worst financial mistake you can make is closing out your 401(k). As reported by The Motley Fool recently, a whopping 45 percent of workers who leave their jobs do just that. Such workers have to pay a 10 percent penalty if they are younger than 59 and a half, plus income taxes. A much better option is to transfer the assets to an IRA.
Matt's View
Some plans allow you to keep your money in your former employer's 401(k) plan. However, you'll have more investment options by transferring to an IRA. Brokerage houses such as Fidelity
, Vanguard
, Charles Schwab
, and others will walk you through the process.
