David Ning, On Wednesday September 21, 2011, 9:41 am EDT
There are a few pieces of seemingly fail-proof advice that personal finance experts like to give when they are asked about important habits you should develop to retire well, but blindly following them can still get you in trouble. Here's why retirement isn't a sure lock even if you follow these pieces of advice to the letter.
Don't buy a latte every day. Coined by author David Bach, the "latte factor" quite simply points you to the fact that investing $5 a day for 40 years will earn you close to $1 million if you manage to get a return of 10 percent. Yet not drinking coffee doesn't mean you will become a millionaire automatically. If you can't hang on through the ups and downs of the market (even for decades at a time), you will never get the average annual return of the market. If you don't buy a latte but instead buy other things, you won't even save that $5 a day. And if you stop contributing once you feel like you are quite rich even before you become a millionaire, it's much harder to get there.
Live below your means. One of the most important habits to develop in order to retire well is living below your means, but it's not enough to merely live below your means if you want to retire well. To come up with the monthly savings you need to deposit into that retirement stash, you need to go above and beyond. I mean, having $1 left over on every paycheck is living below your means, but you can clearly see that you won't ever get ahead.
Stick to your asset allocation and diversify. Asset allocation and diversification work their magic over time because you are forced to buy low and sell high. However, you need to be careful because you can be very diversified with the recommended asset allocation for your age and still miss the boat. For example, a person who is young can own a ton of individual stocks and still fit the asset allocation recommendation, but if all of the individual stocks are duds, he will never get ahead.
Don't keep up with the Joneses. One of the fastest ways to deplete your future retirement savings is by keeping up with the Joneses, but merely ignoring those around you isn't enough to rack up enough savings to retire comfortably. How about actually keeping up with the Joneses, but just the ones who work hard to make money and diligently save? When you hang out with people who are motivated to save for their own future, you will be encouraged and the good vibes will rub off on you.
It's hard to find the discipline to save for retirement, but when everybody you know is doing it, you will, too.
David Ning runs MoneyNing, a personal finance site aimed at helping others change their habits for a better financial future. He suggests that everyone to sign up for an online savings account to get more out of our hard earned money.
Source:
http://ca.finance.yahoo.com/news/4-Misleading-Pieces-of-usnews-4007154657.html?x=0&mod=pf-sp14c
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