The secret to financial security and wealth accumulation is risk and debt management, which entails being adequately insured, paying off credit card debts and living within your means by establishing a budget and adhering to it. Everyone's situation is different but financial planners typically recommend the establishment of an emergency fund of 3 to 12 months of monthly living expenses depending on the likelihood of finding employment within that period of time should you suddenly become unemployed. Maintaining an emergency fund is an essential first step of investing because it ensures you'll NOT have to sell equities or other assets during down periods of the markets.

The degree of liquidity of said money has been the subject of on-going debate. However, such money should never be invested in the equity markets given the volatility and unpredictable nature of such investments. Some of the acceptable alternatives, which can be used in combinations for such money, are:

Money market account with checking

Bank savings accounts

Bank CDs (short duration CDs with laddered maturities is recommended)

EE Bonds (several purchases over the course of a year is recommended)

I-Bonds (several purchases over the course of a year is recommended)

Short or Ultra short term bond funds

Home equity line of credit

Roth IRA (created via contributions over several years)

The Roth IRA was reluctantly included as an alternative because contributions can be withdrawn tax-free at any time unless of course the tax law changes. However, using the Roth IRA in this fashion should ONLY be considered by those that are fully funding other qualified retirement plans, such as 457, 401K and 403B plans, which represent their main retirement savings while desiring to maintain large amounts of liquid assets. The advantage of using a Roth IRA for a portion of said money is that of tax efficiency and more reasonable investment choices such as TIPS and other types of Bond funds. EE Bonds and I-Bonds can serve a dual role in an investment plan, which is that of an emergency fund in the early accumulation phase and later receive preferential tax treatment if used to fund educational expenses.

Another important criteria of a successful long-term financial plan is that of establishing and maintaining a good credit rating, knowing your credit score and the factors that affect your FICO Credit Score. Information pertinent to your credit report can be obtained from the following credit bureaus:

Equifax Credit Information Service
P.O. Box 740241
Atlanta, GA 30374-0241
800-685-1111

Experian (formerly TRW Credit Data)
P.O. Box 2002
Allen TX 75013-0036
888-397-3742

Trans Union Corp
P.O. Box 1000
Chester PA 19022
800-888-4213

and on-line at myFICO.COM

After establishing an emergency fund of appropriate size, new investors should then determine their risk tolerance prior to investing. The development of an asset allocation and long-term plan, which can be adhered to in both good and bad markets, is much more important than the specific funds chosen! Investors with a long-term plan and the discipline to adhere to said plan have a much higher likelihood of success than investors without plans. Having a plan and adhering to it helps isolate an investor emotionally from the "greed and fear" cycles most markets experience. An old but appropriate clich is:

"It's not the investor's plan that fails but that the investor fails to plan"

It's NOT timing the market but time in the market that builds wealth through the miracle of compound interest. For example, assuming a 10% annual rate of return, a twenty year old investing $2K in a retirement account for ten years and then never investing another penny will amass more money for retirement than a thirty year old investing $2k every year for the rest of their life. Individuals saving for retirement should maximize contributions to tax advantaged accounts with the usual order of contributions being:

Qualified Retirement Plan (QRP) to the employer's matching amount

Roth IRA which provides tax-free retirement withdrawals
or  Deductible IRA if applicable for additional mutual fund choices

Remaining amounts to QRP maximums (especially high tax bracket individuals)

Lastly, be tax wise as it's NOT what you make but what you keep that matters!

Originally posted in thread: 8454