7 Biggest financial decisons part 1

Your 7 biggest financial decisions
How you manage a handful of major life choices can make or break your financial future.
A lot of people spend a whole lot of time worrying about the small stuff: a little extra yield on their savings, a few dollars less in mortgage payments, slightly higher returns, slightly lower commissions.
They pore over Internal Revenue Service publications and fat tax guides searching for ways to save a few hundred bucks on taxes. They read personal-finance magazines, buy books and scour the Web looking for tips.
Fine. It pays off. But does managing your money have to be this complicated?
Actually, no. In fact, if you spend all your time focusing on fractions of a point, you may lose sight of the big picture.
The blunt truth is that if you make the right choices early in life on a handful of major decisions, you'll never have to worry about financial security.
1. How you handle risk Risk affects all aspects of your life. Would you rather work for a rock-solid company with a strong benefits package, join a smaller startup with great stock options or start your own business? The potential payoffs escalate as you take on more risk, and so do the possibilities for disaster. The same is true for investments.
Make sure your risks are age-appropriate. If you're young, you can dust yourself off and start again. For people over 40, the ability to absorb losses diminishes rapidly as retirement nears.
Do your homework. Risk without research is just another form of gambling. Before jumping into any kind of investment, it's vital to do the due diligence required to accurately evaluate risk, the potential for gains and the potential for losses. (Start with MSN Money's Stock Research or Mutual Fund Research centers.) Don't make yourself a target for unethical advisers or garden-variety con artists.
Example: The long-term rate of return for big-company stocks has averaged 10% yearly over the past 70 years. Say Joe invests $2,000 a year in those stocks (via a low-cost S&P 500 Index fund in a tax-deferred individual retirement account) while Dexter buys supersafe Treasury bonds paying an average of 5%. They start at age 25 and continue until age 65. Though the rate of return is double, the accumulation is quadruple: At age 65, Joe has $1,006,513, while Dexter has just $248,561. Use our Savings Calculator to play with your own figures.
2. Your choice of career There are worse things than a fat paycheck. Your options depend largely on your education and skills, but some fields will always pay better than others. Getting the training needed for a better job could be the best investment you make. Ask yourself what the long-term salary expectations are for your career field and consider how you could make yourself more valuable. (See "10 surprising six-figure jobs" and "The 10 best-paying blue-collar jobs.")
Does your pay depend on distortions in the market? A lot of semiskilled but highly paid union workers now know the sting of competition here and overseas. Blue-collar incomes have stagnated over the past 20 years as manufacturers found cheaper workers abroad. So, consider what your skills would be worth in a truly open, worldwide market.
Will your skills retain their value? Knowledge is the key to survival in the years ahead, whether you're a carpenter or a computer programmer. The pace of innovation is staggering, and those who fail to keep up will find their personal stock in a nose dive. Nothing has a more disastrous impact on financial security than a lengthy period of unemployment.
Example: Joe's salary averages $60,000 over a career of 40 years; Dexter's averages $30,000 per year. In addition to their IRA accounts, they each put 10% of their income aside each year in taxable investment accounts that yield 8% annually. At retirement, Joe has $1,092,093 to Dexter's $546,047.
3. Your lifestyle You don't have to live like a monk to save money. Americans are conditioned to overbuy. Shopping has gone from being a chore to a hobby, a lifestyle even. Shoppers are encouraged to define their individuality in terms of style, which for most people comes down to a matter of which mass-produced goods one chooses to buy. See MSN Money's Saving Money Decision Center for ideas.
Ask yourself how much house you really require. The square footage of the average U.S. home has been growing steadily since World War II. In the 1980s and '90s, buying ever-larger homes seemed a good investment. Home values generally have outpaced inflation -- by a large margin in some places and despite periods of slow economic growth. Still, as the baby-boom generation downshifts into retirement and the subprime-mortgage mess plays out, those 4,000-square-foot, five-bedroom homes aren't seeing a lot of buyers. Besides, smaller houses are in: Read "For many homeowners, less is so much more" on MSN Real Estate.
Every dollar you don't spend on a house saves roughly $2.40 in mortgage payments. A lot of people calculate what they can afford to pay for a house and use that as the floor price for their house search. They don't even consider less expensive homes, and no self-respecting, commission-hungry Realtor would suggest it. Find a smarter approach in "Don't bite off too much house" and "8 big mortgage mistakes to avoid."
Example: Joe and Dexter each have $40,000 for a down payment on a house. Joe buys a house that requires him to carry a $180,000 mortgage. Dexter buys a larger house and needs a $200,000 loan. Buying the lower-priced house saves Joe $43,286 in mortgage payments over the life of the 30-year mortgage at 6% interest.
The B-wordBudgeting doesn't have to be a straitjacket on fun. Find out how to budget your way to smarter spending.
4. How you manage debt Pay yourself instead of your creditors. At its most basic, credit is the privilege of spending money you don't have. Before World War II, most people avoided it. To help Americans get over that silly notion, interest on credit card debt was a deductible expense until 1987. Then, Congress created a new pool of deductible interest in the form of home-equity lines of credit.
We've learned our lessons so well that bankruptcies are now at an all-time high. (If you're in trouble, see MSN Money's Bankruptcy Guide.) Everyone is shocked and appalled to discover how deeply in debt the typical American is today. Banks make a lot of money lending to people who can't wait to buy things. For help getting out of debt, see MSN Money's Debt Management Decision Center.
Example: Dexter buys his new $20,000 car with 10% down and a 48-month loan, while Joe postpones the purchase, saving up the money and paying cash. Dexter's monthly payment on the loan is $448, but Joe needs to set aside only $344 each month in a 5% taxable money market account to pay cash for the car at the end of four years. Joe started buying all his cars this way at age 30 and put the $104 savings in an IRA earning 9%. By the time he retires at 65, he'll have an extra $352,000. Think owning a pricey car is a necessity? Read "The real reason you're broke," then check out the concept of car sharing

By Richard Jenkins