Wealth Building 101:
There are so many amazing and downright shocking financial success stories out there. You hear them from time to time about ordinary working class people becoming millionaires. Accumulating a net worth of over a million dollars at some point, usually a few decades in to their working life. You also hear about the people that retire young. The forty something that never has to work again because he or she played their financial cards right early in life. Of course many of these kinds of stories result from luck or good fortune coming people’s way in the form of an inheritance, trust fund, gift of equity etc. Many others come from good old fashioned hard work and financial discipline. The earlier you start, the better off you will be later in life, or the younger you will be when you meet your retirement, child education or any other goals you have set in life. I often get asked how this process should begin and what steps should be taken to make sure someone is on the right path to financial success. Many people I have spoken to don’t understand the similarities between being physically fit and financially fit. They both take drastic lifestyle changes, a focused regimen, an understanding of the proper technique and the development of a solid long term plan. Just like poor health habits, debt can spiral out of control, retirement savings can be made less of a priority than it should be and investment opportunities and returns could be missed. I offer a lot of advice to people on how to become financially fit and disciplined so I figured I would provide my six wealth building tips and techniques over a 3-part series in collaboration with FountainHead RI. I believe that all of these, not just a couple select items, should be used in the development and lifelong follow through of a complete and sound wealth building strategy.
- Save a little from each check
A little something from each pay check should be set aside as savings. I know that this can be sometimes easier said than done as many people live pay check to pay check, using all of their income earned to pay monthly expenses. If you are living pay check to pay check, then you have to do whatever it takes to free up some cash and start accumulating some savings. I will get into how to reduce monthly expenses later, but the concept here is that you need to learn how to live with slightly less so a small percentage of your take home pay can be used to create a pool of savings. If you bring home $600 per week, then maybe start learning how to live with $575, so $25 ($1,300 per year) can be added to your savings pool each week. $1,300 per year is a nice cushion to have in case of emergencies. I recommend having this savings percentage automatically moved from your checking, or whatever account your pay check is direct deposited, into a separate account so you not only don’t forget to set it aside, but you also remove any temptation to not move it over at all. Direct deposit forms with your employer can also be set up where you can designate up front which accounts you want certain dollar percentages to go. After the first year, and once you have gotten used to living with a little less, try increasing the percentage or specified dollar amount. Even a small increase, say $10 extra, would increase your annual savings cushion by $520.
- Maximize your 401k
Have you ever heard the phrase, “Leaving money on the table”? Well that’s exactly what you are doing by not maxing out your 401k. It’s mind-blowing to me the number of people I speak to that can’t answer simple questions about their employer’s 401k plan. If you are eligible to begin contributing to your employer’s retirement plan, then you shouldn’t think twice about it. Years missed or years where you are only contributing a percentage that is under your employer’s maximum matching percentage equates to substantial dollar amounts that could have been there for you in 30-40 years when you retire. The reason for this is that your own contributions, as well as your employer’s matching contributions, are normally invested in a diversified mix of mutual funds and other conservative investments that earn rates of return over the course of your working life. If you have a percentage invested in company stock, or your 401k is heavily weighted in one type of investment (the less diversified you are), the risk grows. Most people choose however, to not actively manage their own 401k, and instead have the investment company that your employer uses (Fidelity for example) manage it for them. You can simply enter your number of years to retirement into your employer’s investment company’s retirement website, as well as your risk tolerance and any other criteria that the company then uses to develop a solid diversified mix of investments for you. This mix can be set to automatically recalibrate when necessary, as market forces change and you get closer to retirement. Most employers offer matching percentages between 4% and 6%, or even higher in some cases, so by only contributing 3% for example, you are literally forgoing free money that your employer is offering (i.e. 2% of your income if your employer matches up to 5%). Free money that can earn considerable rates of return, and allow you to retire more comfortably. In 2014, this equated to 2.4% of annual income on average by not maximizing, or $42,000 over 20 years that could have been invested. On top of that, these contributions are pre-tax dollars, so you are also gaining by not having to pay taxes on this portion of your income until retirement. Even still, the return you earn (capital gains) over the course of your working life is also free from taxation until retirement. If you feel like you would rather pay the taxes up front, because you may believe you will be in a higher tax bracket later in life, then a Roth IRA is also an option to consider, but we won’t dive into that now as it requires another lengthy discussion. For the traditional 401k, you are only taxed at retirement, or if you cash your 401k out early, which you should never do.
Follow Justin on Twitter: @mynextmoneymove
or on facebook: https://www.facebook.com/MyNextMoneyMove/ (Stock picking for millennials and beyond)
FountainHead RI leaders Almonte, Dodier, and Ter Meer talk about the future...
Wealth Building 101:
There are so many amazing and downright shocking financial success stories out there. You hear them from time to time about ordinary working class people becoming millionaires. Accumulating a net worth of over a million dollars at some point, usually a few decades in to their working life. You also hear about the people that retire young. The forty something that never has to work again because he or she played their financial cards right early in life. Of course many of these kinds of stories result from luck or good fortune coming people’s way in the form of an inheritance, trust fund, gift of equity etc. Many others come from good old fashioned hard work and financial discipline. The earlier you start, the better off you will be later in life, or the younger you will be when you meet your retirement, child education or any other goals you have set in life. I often get asked how this process should begin and what steps should be taken to make sure someone is on the right path to financial success. Many people I have spoken to don’t understand the similarities between being physically fit and financially fit. They both take drastic lifestyle changes, a focused regimen, an understanding of the proper technique and the development of a solid long term plan. Just like poor health habits, debt can spiral out of control, retirement savings can be made less of a priority than it should be and investment opportunities and returns could be missed. I offer a lot of advice to people on how to become financially fit and disciplined so I figured I would provide my six wealth building tips and techniques over a 3-part series in collaboration with FountainHead RI. I believe that all of these, not just a couple select items, should be used in the development and lifelong follow through of a complete and sound wealth building strategy.
A little something from each pay check should be set aside as savings. I know that this can be sometimes easier said than done as many people live pay check to pay check, using all of their income earned to pay monthly expenses. If you are living pay check to pay check, then you have to do whatever it takes to free up some cash and start accumulating some savings. I will get into how to reduce monthly expenses later, but the concept here is that you need to learn how to live with slightly less so a small percentage of your take home pay can be used to create a pool of savings. If you bring home $600 per week, then maybe start learning how to live with $575, so $25 ($1,300 per year) can be added to your savings pool each week. $1,300 per year is a nice cushion to have in case of emergencies. I recommend having this savings percentage automatically moved from your checking, or whatever account your pay check is direct deposited, into a separate account so you not only don’t forget to set it aside, but you also remove any temptation to not move it over at all. Direct deposit forms with your employer can also be set up where you can designate up front which accounts you want certain dollar percentages to go. After the first year, and once you have gotten used to living with a little less, try increasing the percentage or specified dollar amount. Even a small increase, say $10 extra, would increase your annual savings cushion by $520.
Have you ever heard the phrase, “Leaving money on the table”? Well that’s exactly what you are doing by not maxing out your 401k. It’s mind-blowing to me the number of people I speak to that can’t answer simple questions about their employer’s 401k plan. If you are eligible to begin contributing to your employer’s retirement plan, then you shouldn’t think twice about it. Years missed or years where you are only contributing a percentage that is under your employer’s maximum matching percentage equates to substantial dollar amounts that could have been there for you in 30-40 years when you retire. The reason for this is that your own contributions, as well as your employer’s matching contributions, are normally invested in a diversified mix of mutual funds and other conservative investments that earn rates of return over the course of your working life. If you have a percentage invested in company stock, or your 401k is heavily weighted in one type of investment (the less diversified you are), the risk grows. Most people choose however, to not actively manage their own 401k, and instead have the investment company that your employer uses (Fidelity for example) manage it for them. You can simply enter your number of years to retirement into your employer’s investment company’s retirement website, as well as your risk tolerance and any other criteria that the company then uses to develop a solid diversified mix of investments for you. This mix can be set to automatically recalibrate when necessary, as market forces change and you get closer to retirement. Most employers offer matching percentages between 4% and 6%, or even higher in some cases, so by only contributing 3% for example, you are literally forgoing free money that your employer is offering (i.e. 2% of your income if your employer matches up to 5%). Free money that can earn considerable rates of return, and allow you to retire more comfortably. In 2014, this equated to 2.4% of annual income on average by not maximizing, or $42,000 over 20 years that could have been invested. On top of that, these contributions are pre-tax dollars, so you are also gaining by not having to pay taxes on this portion of your income until retirement. Even still, the return you earn (capital gains) over the course of your working life is also free from taxation until retirement. If you feel like you would rather pay the taxes up front, because you may believe you will be in a higher tax bracket later in life, then a Roth IRA is also an option to consider, but we won’t dive into that now as it requires another lengthy discussion. For the traditional 401k, you are only taxed at retirement, or if you cash your 401k out early, which you should never do.
Follow Justin on Twitter: @mynextmoneymove
or on facebook: https://www.facebook.com/MyNextMoneyMove/ (Stock picking for millennials and beyond)