Don't let your future get eaten away by pesky fees, unnecessary taxes or flat-out bad choices.
Here are ten ways to build the biggest nest egg possible.
1. MAKE THE MOST OF YOUR SHELTER
Uncle Sam wants YOU to pay fewer taxes. If you're investing for retirement or college in taxable accounts -- before your IRAs, 401(k)s or 529 college-saving plans are maxed out -- you're wasting money. You should first cram as many dollars into these tax-sheltered investments as you can.
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For instance, say a 25-year-old invests $5,000 each year into a Roth IRA until she retires, and she makes an average annual 8% return on her investment. She'll have $1.4 million saved by the time she turns 65. However, if she stashes that cash in a taxable account earning the same return, she'd only have about $1 million (if her earnings were taxed at 15%). That's 28% less money.
2. TRIM THE FAT
Mutual fund fees can weigh down performance. The average diversified U.S. stock mutual fund charges 1.3% a year in expenses. If your fund isn't beating its benchmark, you're better off buying a low-cost index fund or exchange-traded fund that matches the benchmark.
For example, you'll pay an annual expense ratio of just 0.07% to invest in the Vanguard Total Stock Market ETF (VTI), which tracks Standard & Poor's 500-stock index. On a $50,000 investment, that's a savings of $615 per year.
3. GET ADVICE A LA CARTE
Paying a fee-only financial adviser to create a comprehensive plan and manage your investments for long-term goals can get pricey. Many set investment minimums of $250,000 or more and charge 1% of assets under management per year.
Instead, pick and choose your advice by hiring a planner by the hour through Garrett Planning Network. You'll typically pay $180 to $210 hourly, as needed, with no annual fees or asset minimums. This can be a good way to make sure you're on track to meet specific goals.
4. TRADE STOCKS FOR FREE
Zecco.com offers ten free stock trades per month with a balance of $25,000 or more. Wells Fargo offers 100 free trades per year to customers with $25,000 in brokerage accounts, loan balances or bank deposit accounts.
Don't qualify for the freebie? Go for the deep discount. Just2Trade.com charges $2.50 per online trade, SogoTrade.com charges $3, and TradeKing.com, $4.95. Compare that to $30 or more per trade at a full-service broker. If you don't need the extra perks and attention at the big guys, don't pay for it.
5. ELIMINATE THE GUESSWORK
Trying to time the market is often a losing game. In trying to buy low and sell high, many people actually do the opposite. Instead, employ the simple strategy of dollar-cost averaging.
By investing a fixed dollar amount at regular intervals, you smooth out the ups and downs of the market over time. Take out the emotion and guesswork, and investing can become less stressful and more successful.
6. ESCAPE TAXES ON BONDS
Bond investors have an escape not available to stock owners. They can buy municipal bonds and pay no federal taxes at all on the interest. And if you buy muni bonds from in-state issuers, you can avoid state and local taxes as well.
A 4% yield on a muni is the equivalent of a 5.6% payout on a taxable bond if you're in the 28% tax bracket and 6% if you're in the 33% bracket. And these yields are relatively safe. Muni defaults have been rare over the years. Learn more.
7. WATCH OUT FOR NICKEL-AND-DIMING
Make sure your investment performance isn't tripped up by fees. Watch for inactivity fees, low-balance charges or even fees to receive a paper account statement.
If you're getting nickel-and-dimed, find a new firm that fits your trading style and account balance.
8. DON'T LOAD UP
If you build your own portfolio, selecting no-load mutual funds can save you more than 5% in sales charges. Here are our our favorite no-load picks.
9. CONSIDER TAX SOFTWARE
You'll pay $400 to $500 for a certified public accountant or enrolled agent to prepare your tax return. But if your financial situation is fairly straightforward, you can save big bucks with tax-prep software, such as TurboTax, TaxAct or H&R Block At Home. Prices range from free to about $50 for the most popular tax programs.
You simply answer interview-style questions and the software automatically fills in your tax forms. It can even import investment data directly from your broker and give you tax-planning advice for next year. (For complex matters, however, such as real estate investments or stock options, it's best to stick with a pro.)
10. KNOW WHEN TO WALK AWAY
The right time to unload shares is one of the toughest calls investors have to make. Hold a stock too long and it could become a loser. Sell too early and you could miss out on superior gains.
But if you know the signs to look for, you can boost your chances of making a good decision -- and saving (or making) some serious cash. For example, keep an eye out for a change in the company's fundamentals and how the stock performs relative to its peers. Get more tips.
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