With Mother's Day right around the corner, you probably find yourself bombarded at every turn by can't-miss deals on a variety of mom-friendly gifts. Like clockwork, early May is the time for ad mavens everywhere to crank up the guilt machine and ensure another banner year for purveyors of flowers, chocolates, fruit baskets and cute knickknacks.
On the other hand, Mother's Day is your special day, and you deserve a truly memorable gift. With a little foresight and planning, you can give yourself the best Mother's Day gift around: the peace of mind that comes with long-term financial security.
If you're worried about how you'll support yourself when you're older, you're not alone. According to a 2010 study from the Economic Benefit Research Institute, nearly half of all American workers had $10,000 or less in long-term savings. Meanwhile, mutual fund giant Vanguard found that 25 percent of its 401(k) clients had raided their retirement funds to cover current expenses. This figure has risen by about 12 percent since 2008. Most disturbingly, a recent LIMRA study found that half of all American workers contributed nothing to a long-term investment or savings fund in 2012.
Whether you work out of the house or put in long hours raising your kids, long-term planning is essential. This year, use these tips to give yourself a truly useful Mother's Day gift.
Financial advisors are virtually unanimous in recommending that workers make regular contributions to some form of retirement plan. If you're a salaried employee of a decent-sized company, your employer probably offers a fairly generous 401(k) plan into which you can contribute a portion of your monthly earnings.
Many employers "match" their employees' 401(k) contributions, and most larger companies provide a range of allocation options for employees who wish to adjust their exposure to risk. Whereas some allocation options might steer your money into more stable investments like blue-chip stocks and Treasury bonds, others might invest in emerging-market companies or volatile commodities that offer substantial risks and profit opportunities in equal measure. Since 401(k) contributions generally aren't taxable, your financial security may depend on your ability to maximize the amount of income that you set aside.
If you're a stay-at-home mom who earns income outside of a traditional employer-employee relationship -- as a freelancer, piece-worker or part-time employee -- you should think about setting up an IRA. These investment vehicles let your long-term savings grow on a tax-free basis. Depending on your age, you'll face annual contribution limits of $5,000 or $6,000.
As a rule of thumb, you should put at least 5 percent of your earnings into a long-term savings plan like a 401(k) or IRA. In light of all the ongoing obligations on your ledger, this can seem like a hefty contribution. Then again, 5 percent of a $50,000 annual paycheck equates to just $2,500. If you can maintain a sensible household budget that eschews non-essential line items like multiple weekly restaurant meals, online shopping sprees and marked-up designer clothing buys, you'll be able to afford it.
At the same time, discipline is key. If you find yourself withdrawing money from your investment accounts or taking loans against your retirement funds, it is time to take a hard look at your household budget and eliminate wasteful expenditures. By committing to live within your means right now, you'll have more money to spend throughout your golden years.
While you might not work as an investment pro, nothing is stopping you from managing your money like one. No matter what anyone tells you, maintain a diversified investment portfolio that features a variety of asset classes. For instance, don't put all of your money in volatile growth stocks or low-yield government bonds. Instead, hold some "predictable" investments like government and corporate bonds as well as riskier but potentially more rewarding investments like commodities and technology stocks. Your 401(k) manager may diversify on your behalf, but you'll still need to keep close tabs on exactly where your money is going.
Also, be sure to keep sufficient "emergency reserves" of cash in a savings or money market account. This hoard should be equivalent to at least three months' worth of income, and it's OK to raid it to cover unexpected expenses.
You've heard plenty of stories about regular folks losing their nest eggs to shady Ponzi schemes or risky stocks. Avoid a similar fate by adopting a conservative program of long-term planning that doesn't expose you to undue risk. Put your hard-earned money in relatively safe investment vehicles like individual blue-chip stocks, investment-grade government or corporate bonds, and well-managed mutual funds that own diversified asset baskets.
At the same time, it is important not to do away with risk entirely. Interest rates on savings accounts and CDs have been depressed for years, and this trend shows no signs of reversing. If you elect to stick all of your savings into these low-risk vehicles, your returns are unlikely to outpace the rate of inflation. Over time, your savings could lose their "real" value. Talk to a seasoned financial adviser to learn more about managing risk and crafting a plan that takes your time horizon, risk appetite and other factors into account.
Financial security isn't the sexiest Mother's Day gift around, but it's a crucial aspect of every mom's long-term plan. Although the "job" of being a mom never really ends, it's key to plan for the years after your kids move out of the house. With a little discipline and a lot of long-term planning, you can overcome your late arrival to the savings party and set yourself up for an easy life after your working and child-raising years come to an end. You might even save up enough to pass on to your grateful children.
Find the Right Financial Advisor for You
Free Initial Consultation. No Match Fees. No Obligation
Need a Financial Advisor in your area?