You get a job with a company that offers a 401k with a match. What do you do? You do what you’ve been told to do. You contribute what you need to get the max contribution from the employer. For me, I contribute 6% and get a 3.5% match, totaling 9.5%. I am nearly saving 10% of my salary in my early 20’s. I’m doing a good job of preparing for retirement right?… Well yes and no. ALWAYS, I repeat ALWAYS, contribute what you need to your 401k to get your company match. It’s FREE MONEY.
This is where I will tell you about the easiest way one can double his or her retirement income. It is through a Roth IRA. You see a 401k is pre-tax money, so you will pay taxes on your withdrawals in retirement along with whatever social security you are receiving at the time. Combine social security and your 401k and you will have only 75% (assuming a 25% income tax bracket) of the income you receive during retirement. A Roth IRA allows you to pay taxes on the money now, so regardless of what tax bracket you are placed in the future you can keep all of the income you withdraw!
Check out the spreadsheet I have attached to truly see how a Roth IRA can double your retirement income. Keep in mind also with a Roth you never owe taxes and with your 401k you will.
Actionable step for the day, set up a Roth IRA!
To project your retirement income with a 401k and a Roth IRA, simply enter your salary into the cell along with your contribution and your employer match and watch the pie chart on the left shift! Consider increasing your 401k contribution at work for more income in retirement.
You might say it’s your financial advisor, your parent, a relative or maybe even a mentor who has had great financial success.
Your best friend when it comes to investing is: Compound Interest
People who are new to investing often wonder what is compound interest, or why is compound interest important. I’ve touched briefly on the subject of compound interest in a past post but I feel it is so vital to creating long term wealth that I am circling back to it again.
Money can be made and lost. However, time cannot. Each of us has only a finite amount of time here on Earth to build up a financial wealth. Mr. Time is your next best friend.
Check out the following article which shows a visual representation of how Compound Interest and Mr. Time can work together to create a substantial amount of financial wealth for oneself.
This post is occurring on the 15th of the month. For those who are employed and get paid on a bi-monthly basis, today is most likely a payday for you. Congrats! Your first half of the month has been rewarded with a monetary settlement.
For me, today isn’t payday… It’s “Cash flow” day!
Many people look at payday as an opportunity to “go out for drinks with friends” or “buy that new sweater you have been wanting”. They made money, so now they spend it. Since I monitor my spending using a budgeting worksheet, I already know how much I can spend on things such as a new sweater, or drinks with friends in a given month.
Instead, view today as a day of positive cash flow. You got paid, probably in a bank account, so it is in essence liquid cash. This positive cash should first be used to pay expenses. It’s the middle of the month, so maybe you have a cable bill or a car payment. Focus on paying your necessary debts first before splurging on other activities.
Additionally, with my job, pre-taxed money is automatically put into my 401k, so I never even put this into the budget equation. My philosophy is, “If you don’t see it, you can’t spend it.”
Budgeting after college is essential to get on the right financial track for life. I have attached a free budget spreadsheet at the bottom of this post. Use it, make changes to it to fit your needs.
Today might be a literal payday for you, but it is both literally and figuratively a “Cash flow” day as well.
I can’t locate exactly where I’ve heard this before, but I’ve been told/ read/ listened to the following advice multiple times:
“The biggest killers of investment returns are taxes and fees”
The taxes, well that should be obvious. It’s the amount you pay to the government. Income taxes, capital gains taxes, if you don’t plan well you could have to deal with both. This is why I always talk about retirement plans, and the benefits they offer in reducing one’s tax burden.
Fees, I’m talking about investment fees paid to advisors. When I first graduated and had money to invest, I thought I was doing a good job of putting money with an advisor. However, I quickly realized that every “recommendation” they gave resulted in a fee earned by them on the selling of one position and the buying of another. I eventually took out less money with my advisor than I initially invested and missed about an 18% gain in the stock market during this period. Lesson learned! This is why I also recommend Vanguard and their low-cost index funds.
So this leads me to the title of this post… How the Rich get Rich. Well they look into reducing their biggest killers for investment returns. Don’t believe me, check out the following article and see for yourself.
With the end of the 2014 calendar year upon us, it is time for many of us to make our New Year’s Resolutions. A New Year’s Resolution for one’s financial life is a critical one to consider.
As the new year draws close, I have already begun preparing my 2015 Financial Spreadsheet, aka budget. You can get an example budget, one similar to what I use on one of my previous posts (Budget Spreadsheet for Starters). Two critical things I considered when making my financial goals for the 2015 year were as follows:
1) Pay off the remainder of my student loans.
2) Continue to contribute to a Roth IRA on a monthly basis reaching the max $5,500 contribution level for the year.
I view these two goals as a MUST for the 2015 year. Setting a clear picture of how I can tackle both of these from financial achievements while also enjoying travel, entertainment among other things is the foundation of my budget.
So as 2015 draws near, create a budget and PAY YOURSELF FIRST (To me this means paying down debt and saving for the future). Nobody can be entirely certain of what the stock market does in the upcoming year, but you and only you can control the budgeting aspects of your finances.
1) The low cost allows me to gain broad access to the entire stock market (I’m young so my investments are strictly in domestic stock and I have the mental capacity to accept volatility).
2) I can seamlessly add money to my accounts (yes accounts plural… Brokerage, Roth IRA, and 401k) on a monthly or bi-weekly basis without even seeing it in some cases.
3) MOST IMPORTANTLY I let the dividends I make on my investments reinvest in the funds which ultimately takes advantage of the Magic of Compound Interest.
The point of this post is to help you realize the benefits and exponential growth one’s portfolio can have if you take advantage of compound interest. Mutual funds make it super easy to reinvest the returns you make and by contributing on a regular cycle you take advantage of market highs and lows.
The following link is to an article which emphasizes how compound interest can impact your retirement. The more you save and the earlier you save, the more time you have for the interest to continually compound. Please leave a comment if you have any further questions.
Have student loans? Credit card debt? Feeling bogged down?
Paying down debt begins with budgeting and tracking expenses. Set a monthly dollar amount limit for how much you eat out, spend on entertainment, and at the grocery store. Tracking one’s spending is the best way to see how much you can afford to put towards debt. Check out the following story which shows a real-life example of how paying down debt can be managed in a short time.
As many of us get geared up for Black Friday and the “incredible” deals the day offers we must ask ourselves: “Is this purchase something I truly need?”.
Take an investing look at a discretionary purchase you make this weekend.
For every $1.00 you spend today, you are potentially costing yourself an additional $10 in 30 years. For example, say you were to purchase a new TV on sale for $500. If you were to instead take that $500 and invest it in a retirement account or a brokerage account (and let the magic of compound interest take hold) it could be worth a whopping $5000 in 30 years! This assumes that you put the money into a portfolio returning 8% annually and allows the dividends to reinvest.
So before you jump the gun on an impulse purchase this holiday season ask yourself: “Is this dollar I’m spending now really worth the ten dollars it could be in 30 years?”
The choice is yours. Budget smart and invest wisely!