In a constantly changing economy, it is often hard to know which direction is the best to take. After a crazy year filled with government shutdowns, rising interest rates and the S&P 500 hitting all-time highs, who really knows what tomorrow will bring? By leveraging investment outlooks and concerns of everyday investors, we have come up with four key personal finance tips for 2014. All four tips center around one key theme, “pay yourself first.” There are hundreds of ways you can put your assets to work, but you always want to make sure your actions are keenly focused on meeting your personal financial goals. The suggestions range from tactical ideas that are best used during the current year to strategic moves that are essential to any financial planning process.
1. Max out your 401(k) before investing anywhere else
Whether it’s a 401(k), 403(b) or 457, employer-sponsored retirement plans are typically the best savings vehicles for investors. These are highly tax-efficient vehicles that allow employees to save at least $17,500 in a tax-deferred vehicle. Since your contributions are pulled out of your paycheck before you receive it, they are not taxed on the front end, saving you money you would have lost to taxes.
2. Diversification is key
Diversification is the technique to manage risk by investing in noncorrelated asset classes so if one investment does poorly, another could possibly deliver positive returns. In 2013, the S&P 500 hit all time highs, while many fixed income investments got hit pretty hard. In 2008, the S&P 500 fell over 40 percent and U.S. bonds were one of the only asset classes with positive returns. You never know for sure how the markets will fare but, with a highly diversified portfolio you are typically positioned well for whatever the future may bring.
3. Always have emergency savings
You should always have enough money put away to cover three to six months’ worth of bills. These assets should be readily available in case a major life event occurs. In 2009, the US unemployment rate hit double digits; leaving millions of Americans jobless. In times like these, having access to an account that can cover three to six months worth of bills can be a lifesaver.
4. Don’t try to time the market
Market timing has historically been proven to not work. It is the technique of buying and selling at the right time. This doesn’t work because it is counterintuitive to how people think. The reality is you should sell while a stock is up and buy when it is low; one thing which is incredibly hard to do. Who really wants to invest in losers, while selling winners? This is why the best method has always been to buy and hold. Investment selection is always critical but if you’ve done the research and know what you would like to invest in, pull the trigger.
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Octavius T. (Ted) Reid, III has worked for Morgan Stanley for more than 20 years. The Cherry Hill, N.J., resident and Rutgers University alum, known as “the broker to the stars” for his sizable sports and entertainment clientele, frequently speaks to adults and kids on financial stability and wealth building.
*The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks; and there is always the potential of losing money when you invest. The views expressed herein are those of the author, and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates.