I recently spoke with one of my favorite personal finance gurus, Liz Pulliam Weston. She has written a new book, Easy Money: How to Simplify Your Finances and Get What You Want Out of Life. You may have seen her columns on MSN Money. I asked Liz to about her book and to share some of her top advice on saving money. Here's what she had to say:
What are the most common mistakes people make with their money?
Number one is confusing "need" with "want." Before you understand the difference, you may think of yourself as a victim or as having limited choice about where your money goes. When you understand the distinction, you realize that virtually all of your spending is a choice of some kind. That's pretty powerful, and puts you back in charge. Yes, you need food, but you don't need steak, and eating something less expensive may mean you can take a killer vacation or do something else you really want to do.
The other mistakes are not knowing where your money goes and not taking advantage of retirement savings plans at work or on your own. Everybody should be saving for retirement, starting as early as possible and without stopping. If your 401(k) has a waiting period, set up an automatic transfer into an IRA or a taxable brokerage account until you can join the company plan. And don't cash out when you leave the job.
Why did you write Easy Money? What inspired you?
All kinds of reader questions! Even though people are increasingly comfortable with technology and the Internet, there's still a big population who's spooked about "putting their finances online." I wanted people to understand that online access helps improve your financial security, rather than detracting from it. Besides, it's easier and faster than trying to do things the old-fashioned way with checks and monthly statements.
I also know that a lot of people are overwhelmed by all the choices they have to make regarding money: how much to put in their 401(k), whether they should fund a Roth, how should they invest that money, which healthcare plan should they choose, how much insurance should they buy, and on and on. So I wanted to give them a guidebook that cuts through all the noise and says, "Here's what you should do."
What are three changes that you recommend in your book that consumers could make right now to save them money or make their lives easier?
• Use online bill pay. It's faster, safer and easier to track than putting checks in the mail.
• Automate bill payments. Putting most if not all of your bills on automatic ensures you won't incur late fees or—worse yet—skip a payment, which can devastate your credit scores. At the very least, you should make sure the minimum payments due on your credit cards are set up to be automatically deducted from your checking account. You can (and should) always go in later and pay the rest of the bill, but the auto payments make sure you won't get dinged.
• Choose the easy retirement options. Most 401(k) plans and virtually all brokerages offer some kind of target date or life cycle funds. Target date funds are often called something like "Retirement 2025" or "Retirement 2040," and you pick the year that's closest to when you plan to retire. These do all the heavy lifting for you. They not only pick the investments and set the asset allocations, but they rebalance regularly so you're not taking too much or too little risk. As you approach retirement, they ratchet back your exposure to stocks so that more of your money is in safer investments. It's like having your own personal money manager.