If you're lucky enough to have a 401(k) or other type of workplace retirement plan, take advantage of it, particularly if your employer matches your contributions. The money you put into one of these plans comes out of your paycheck before the IRS taxes it. By maxing out 401(k) contributions you not only take full advantage of a tax-deferred retirement account but also reduce your taxable income and your annual tax bill in the process.
Financial planning covers various aspects of your life. From investing to buying a home to dealing with debt, you've got to have a plan. It's easy to overlook the basics, but, in most cases, if you have desire and discipline, it's just as easy to put plans into place to cover the basics and come out with your house in sound economic order.
Max Out Your 401(k)
Fund an IRA
If you've maxed out contributions to your workplace plan or you're not covered by one, fund an IRA, if you qualify. Most people qualify to put money into one of the two main types of IRAs -- a Roth or traditional IRA -- if not both. With a traditional IRA, the IRS allows you to deduct your contributions, up to an annual limit, from your taxable income. The IRS taxes the full amount of all traditional IRA withdrawals. With a Roth, you cannot deduct contributions, but, if you follow IRS guidelines, most withdrawals in retirement come out tax-free.
Be Smart About the Mortgage
National radio host Dave Ramsey does not advocate buying a home until you undertake some serious financial planning. Unless you have an emergency fund equal to three to six months' worth of expenses and you're debt-free, Ramsey does not think you should even consider taking on a mortgage. Even if you have a cash cushion and no debt, Ramsey advocates paying cash for your home. If you can't, get a 15-year mortgage. If you can't do all of the above, go for a 30-year, but, in all cases, limit your payment to no more than 25 percent of your monthly tax-home pay, according to Ramsey.
Get Tough With Debt
If you decide to live with debt, do yourself a favor -- budget more than the monthly payment toward your credit cards. When you don't, it takes much longer pay down debt. Consider a $15,000 balance on a card with a 12.99 percent interest rate and a minimum monthly payment of $300. If you pay just the minimum, you'll pay off the balance in 73 months. Add just an additional $50 a month and you reduce the payoff time to 58 months; an extra $100 a month decreases that number to 49 months. Carrying high-interest debt essentially eats away at or completely offsets any gains you realize on investments.