Football season is upon us, and as I spend each Sunday watching the action on the gridiron, it occurs to me that football has a lot in common with good finances. The same basic principles that win football games can be applied to your savings strategy as well.
Here are six guidelines that lead teams to consistently win on game day.
1. You only need small gains to go far
For those who aren't familiar with football, a team gets four tries to move the ball 10 yards down the field. If they do that, they get another four tries to go 10 yards more.
As long as they keep moving those 10 yards every four plays, they keep the ball. All in all, if a team can average a mere 3 to 4 yards per play, they will be well on their way to winning.
It works the same with your savings. Retiring rich may seem out of reach, but you don't have to be a millionaire now to be a millionaire when you retire. You simply need to make slow and steady progress, just like your favorite football team.
That said, you need to keep strategy No. 2 in mind.
2. Keep your eye on the clock
Timing is a huge part of football and your retirement savings, too.
The game clock rules how a team might play. A trailing team will want to move fast to get the ball down the field for a score. Meanwhile, a team in the lead can take its time.
The same is true for your retirement savings. If you're older than 40, you need to run a hurry-up offense to quickly beef up your retirement fund. If you're younger, you may have time to kill.
For example, this government investment calculator tells us you'd have to start saving somewhere around these monthly amounts to get to a million-dollar retirement fund by age 67.
- $95 per month starting at age 20
- $255 per month starting at age 30
- $690 per month starting at age 40
This assumes you're starting with zero investments and get a 10 percent rate of return on your money. This is totally doable for you 20- and 30-somethings.Cut your cable, shrink your cellphone bill or use one of these other strategies to free up a couple hundred dollars each month.
The number is a bit more daunting for those in the 40-plus crowd, but don't despair. If you've ever had a job with a 401(k) or 403(b) plan, chances are you've already got a head start. Even if you truly have zero saved for retirement, putting away $300 per month for retirement starting now will still give you a nice fund balance at age 67.
3. Mix up your plays for best results
Again, the above amounts are based on a 10 percent rate of return. According to this chart, the S&P 500 averaged a slightly higher annual rate of 11.5 percent from 1928 to 2013. In fact, there are plenty of years in which the S&P 500, that's a stock market index for those who don't know, had returns of 20, 30 and even nearly 50 percent in a single year.
Of course, if you look closely, you'll also see there were years in which the index's value dropped by a double-digit percent, too. Those steep declines are why you need to diversify your portfolio.
On the football field, a team can't run the ball every play, or the opposing team will be ready to block the run. A team can't pass all the time either because, again, the defense will be ready for it. They need to mix up their plays to stay ahead of the opposition.
With investments, you don't have an opposing team to dance around, but you do want to run around those big dips in the stock market and keep your money safe. You do that by diversifying your investments. Facebook might be hot, but you don't want all your money in its stock. You want to mix it up, and put your money in a number of investments that make sense for your age and savings goals.
For more on that, go here for some advice from our resident money expert, Stacy Johnson.
4. Build a solid defense
A team's offense can do everything right, yet the other side will always win if the defense lets them run the ball down the field.
You don't have burly linebackers protecting you, but you should have a few financial products and resources under your belt to provide a solid defense for yourself and your family.
These include, at a minimum:
- Emergency fund to cover three to six months' worth of expenses
- Life insurance
- Disability insurance
- Homeowners, renters and/or auto insurance
- Health insurance
5. Don't let penalties undermine you
In addition to poor defense, football teams can be their own worst enemies when it comes to penalties. Have a couple false starts, and suddenly you need to move the ball 20 yards instead of 10. Or grab hold of the receiver for a little pass interference, and now the opposing team is up on your 5-yard line.
The game of good finances comes with penalties, too. Dip into your retirement fund before age 59½, and get hit with a 10 percent early-withdraw penalty. You'll pay the same penalty on the earnings in a 529 plan if you decide to pull that money out for a boat, vacation or anything else not remotely related to your children's education.
6. Sometimes you have to go long
Finally, in some football games, the slow and steady approach to winning may not be working. Sometimes, the quarterback needs to look long down the field, find his receivers and send the ball flying in order to get his team back on track.
You need to do the same with your money. At least once a year, you should go long. Sit down and re-evaluate your goals, review your portfolio and make sure you're where you need to be. If not, figure out what changes have to happen to get back on track. It could be you need to rebalance your investments, put more into savings or reconsider your insurance.