Save more, spend less, invest wisely—you know the broad strokes of building a nest egg. But the how-to can be elusive. Financial adviser Manisha Thakor offers fresh strategies you can take to the bank.
Increase your retirement-plan contributions each year.
"If your employer matches contributions to your 401(k), you should do whatever you can to take advantage. That means contributing at least as much as the company matches. But in addition, promise yourself you'll increase your contribution 1 percent each year until you hit the cap. As in other aspects of life, small changes to financial habits stick best. Of course, if you can afford to contribute the maximum to your retirement account this year, by all means do so."
Read two books.
"Virtually no one gets a formal education in handling personal finances. But just as parents-to-be read up on raising kids, everyone should hit the books on money. I recommend two painless titles: Think, Act, and Invest Like Warren Buffett, by Larry E. Swedroe, a thin 160 pages that provides a sensible approach for both novice and expert investors. And The Behavior Gap, by Carl Richards. The title refers to the distance between what we should do when it comes to finances and what we actually do. It emphasizes using your head over your emotions in money matters."
"When most people think about risk, they consider only their willingness to take it. But the emotional part—your personal risk tolerance—is only one of three components of investment risk. Another is your ability to take risks, which depends on your age and income stability. For example, a tenured teacher has a high ability to take risks because her salary is secure; an entrepreneur may not. The third is your need to take a risk. Your need depends on the gap between your current nest egg and your ideal nest egg. If there's a big discrepancy, you might be taking a risk by not taking a risk with investments."
Use only "fiduciary standard" financial advisers.
"Unlike doctors, lawyers, or accountants, who all have to measure up to a particular professional standard, financial advisers get to choose which of two standards to adhere to: a fiduciary standard or a suitability standard. The one you're looking for is the fiduciary standard. Advisers who operate under this standard are legally obligated to put their clients' best interests first—as in, they must be honest and objective. But most financial advisers don't operate according to a fiduciary standard. Most function under a suitability standard, which means they have loyalty to their employer first, so they might not always be operating according to a client's best interest. What? Yes. Shocking. To find out whom you're dealing with, just ask."
Make a will, already!
"Many Americans don't have a will, but it's absolutely essential—as is something called durable powers of attorney for financial and health matters. With no will, the state will decide how to divide your money. And if you become unable to make decisions related to your finances or health, you want to make sure your wishes are followed—that's what durable powers of attorney are for. There are online companies that help you create wills and powers of attorney, but it's difficult to tell which are reputable. Instead, set up an appointment with a local estate lawyer to draft these documents."