Why 1% Should Matter to You

 

It is 2015, and pensions are out, 401k’s are in.

The shifting retirement landscape has come to the point where companies rarely offer pensions for employees anymore.  Instead, 401k plans are the preferred choice.  Contributing to your employer-sponsored 401k plan to get the full company match is a given.  If they contribute 50 cents on the dollar for the first 6% then you put in 6% of your paycheck and the employer contributes 3%.  A total of 9%.  Not too shabby.

Contrary to many news outlets, companies are handing out raises to employees.  It could be in the form of an annual 3% raise.  A promotion can often times carry a raise of 6% to 20%.  No matter how big or small the raise is, you SHOULD consider raising your 401k contribution beyond the full company match.

It is the end of your company’s fiscal year and they award you a 3% raise (this is how employers make sure their employee salaries keep up with inflation).  Let’s say you contribute 6% of your paycheck and the employer matches you 3%.  You have a total of 9% of your paycheck being contributed to your 401k.  If you make $5000 a month this equates to a monthly contribution of $450.  If you were to take your 3% raise, increase your 401k contribution by 2%, a total of 8% that YOU are contributing, and add in your employer’s match of 3%, you now have a total of 11% of your paycheck going to your 401k.  Now, instead of having $450 a month deposited into your retirement account, the amount leaps up to $550 a month.

Adding 2% of the 3% raise to your 401k contribution still leaves you a little, 1%, increase to your paycheck.  You won’t miss the 2%.  Why?  Because you have already been conditioned to get by on the money you were currently earning.

Small raises to your 401k contribution can pay dividends later in your retirement life.  The following link shows you just how much a small increase now can pay you much more in your retirement years.

http://finance.yahoo.com/news/how-a-1–savings-boost-could-sweeten-your-retirement-155040943.html

Budget Smart, Invest Wise

The Pieces of the Financial Puzzle

 

financial puzzle

Achieving true financial wealth is no easy task.  Firstly, you have to generate an income.  Secondly, you have to have expenses that are less than the income you generated.  Finally, you have to take the difference remaining and invest it wisely.  These three things are what I consider to be the pieces to the financial puzzle.  I will illustrate how all three pieces are essential to creating a financial future you will be proud of.

Piece 1: Income

For the majority of us, this is generated from our job.  We trade our hours for money.  The best part about this piece is that there is no limit to how high your income can be.  Additionally, there are many ways to generate income.  Getting an extra job part-time on the weekends is an option.  Unfortunately, there are only so many hours one can trade for money.  This is where you must get creative.  Making more money each hour is one way to generate more income.  There is also residual income and ways to generate passive income one can do to expand upon this number.  Get creative and don’t limit yourself.

Piece 2: Expenses

Keeping expenses low is similar to a good defense.  Limiting expenses in various categories not only holds you accountable for your money, but it also can allow you to achieve certain financial goals faster.  Budgeting is the easiest way to monitor your expenses.  See what categories are holding you back, look at ways to reduce or eliminate them.  Gym membership you’re not using but still paying for?  Have you renegotiated your cable bill recently?  Much like the income piece of the puzzle, a little creativity in your expense category can go a long way.

Piece 3: Investing Wisely

You make money, you spend money.  Hopefully, the difference between these numbers isn’t negative.  If it is, you’re digging yourself into debt.  If the amount is positive then saving the remainder is often advised, but how you save that money is more important than the actual act of saving.  Placing savings into low-interest savings or checking account is a good way to devalue your money quite fast.  The U.S. economy has an inflation rate that is around 3% per year.  This means you need to invest the difference wisely, and that means in an investment vehicle that yields return greater than 3% per year.  Vanguard can make this investment strategy easy.  Simply open a fund, pick an asset mix suitable to your risk tolerance and let the money compound over many years.  Of course, it is always advisable to have an emergency fund on hand where you won’t need to dip into retirement or other investments.

When reviewing your financial past, your financial present, and your financial future, all three of these pieces are essential.  Generate income, have expenses that are less than that income, and invest the difference wisely.

Budget Smart, Invest Wise

The Potential Retirement Cap

retirement cap

In his plan for the 2016 budget, the president and his administration are seeking to disrupt the current retirement process.  A number of retirement topics were mentioned such as Social Security, the elimination of a “back door” Roth, and a cap on the amount eligible in a person’s retirement accounts.

For the subject of this post, I will discuss the president’s plan to limit the amount held in retirement accounts for an individual.  Presently, an individual can have an unlimited amount in retirement accounts.  This includes employer-sponsored 401k’s, traditional IRA’s, and Roth IRA’s.  The only limitations currently imposed on retirement accounts are the amount you can contribute.  This includes$5500 ($6500 for people over 50) for IRA’s and $18,000 ($24,000 for people over 50) for 401k plans.  These limitations are currently set so that individuals don’t stash all of their retirement savings in tax-free or tax-deferred retirement accounts.  The government has to make its money somewhere.

The 2016 budget proposal would now not only put a limit on the number of contributions you can put into a retirement account, but also on the amount held in your various retirement accounts.  The proposed limit: $3,400,000.  For a younger person saving for future retirement, this amount might seem astronomical.  However, I am here to tell you that it is not.  Granted a lot has to happen for this limit to take effect.  It has to be voted on and passed, and then I would assume the government would adjust this number to reflect inflation, roughly 3% a year.  If, and again this is a big if, this law were to be put into place it would impact roughly 10% of 401k plan participants according to Forbes.

Example:

Take the proposed limit on retirement accounts: $3,400,000 and adjust it for inflation of 3%.  In 40 years this inflation adjustment amount would be approximately $11,000,000.

Mike is a 25-year-old with $20,000 in retirement assets.  This includes an employer-sponsored 401k plan along with a Roth IRA.  Mike will contribute $18,000 a year to his 401k and get an employer match of $3,000.  He puts in $21,000 a year into his 401k.  Additionally, he contributes the maximum $5,500 into his Roth IRA every year.  Mike spreads this amount out evenly over the 12-month year.  When Mike turns 50, he contributes the new limit, $24,000 in an employer-sponsored 401k with a $3,000 match and $6500 in a Roth IRA.  Assuming Mike’s portfolio returns 10% a year, Mike will have over $15,000,000 in his retirement accounts, more than what would be allowed.  He would then have to divert some of those funds to a taxable brokerage account or be forced to spend it.

Sure, the example of Mike listed above is an outlier.  Many of us can only dream of having so much set aside for retirement.  The fact is that some people DO!  We can agree this would be a good problem to have, but nonetheless a problem.  Are you aggressive enough with your retirement planning that you have to worry about this law possibly being passed?  I am!  And for that reason, my vote is against it.

Budget Smart, Invest Wise

The Perfect “Financial” Christmas Gift

christmas gift

The older we get the less “stuff” we get for Christmas.  As kids, our Christmases were often filled with various toys and gadgets.  However, once you reach your 20’s you tend to want bigger items such as iPads, new cell phones, and money.

I gifted unto my sister this year what I consider to be the perfect financial gift.  It was a check worth $200.  Now, most of the time when we get a check for Christmas or our birthday we think of what we could possibly buy with that money.  This check was different.  I wrote out the check, but I did not date or sign the check.  The check is currently worthless.  Under the “For” spot on the bottom left part of the check I wrote: “Roth IRA”.  The check was given unto my sister with the stipulation that it be used as funds to go towards her opening a Roth IRA.  When she decides to gather up another $800, she will have $1,000 to put towards a low-cost index fund through Vanguard, and I will sign and date the check.  This Roth IRA money will aid in her retirement goals many years down the road.

I would like to think that this gift can one day make her a MILLIONAIRE, and it can.  If she were to open an account with the $1,000 needed and put in the maximum contribution allowed to a Roth IRA, given an 8% annual return on her investment.  She would have an account balance of well over $1 million dollars by the time she is just 60!!!

Maybe you received some money for Christmas or recent birthday.  My challenge to you is instead on spending it frivolously on the latest iPad or TV, open yourself a Roth IRA.  Vanguard offers low-cost mutual funds that can be started with as little as $1,000.  Be diligent and stay the course, you could turn some Christmas cash into a million dollars!

Budget Smart, Invest Wise

How the Rich get Rich

rich people

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.

http://finance.yahoo.com/news/6-things-rich-advantage-151628504.html