The way that you manage your money today will have a huge impact on your financial health and quality of life in the future. The good news is that even if you are not managing your money the right way today making changes is easier than you might think. The biggest reason that people struggle when trying to manage their money is they lack a plan. For example take a look at the following monthly budget:
Rent or mortgage: $1,000
Monthly utilities: $200
Credit card bills: $300
Food and vehicle expenses: $800
Misc. expenses: $300
The total amount of these bills and expenses is $3,300. With an income of $3,500 that leaves $200 left over each month after paying all bills and other expenses. Without any planning, it really isn’t that hard to simply take that $200 and use it to start building wealth for the future. Some examples of what you could do are:
1. Put most or all of it into your savings account.
2. Spend some of it or all of it on entertainment.
3. Add the $200 to your minimum monthly credit card payments to pay them off faster.
4. Invest in a long-term retirement plan.
5. Purchase something with your credit card thus making your debt greater.
So look at these 5 different options and think about what the best decisions would be. What would you do with the extra money? Chances are that if you are like most other people saving and investment your money wouldn’t be the first choices, but they should be the top priority once all of your credit card debt is paid off.
The key here is to think and plan so that you can start to turn your life around and get your finances in order. You can’t keep putting this off, if you want to have a secure financial future then the time to make a plan is today. The fact that you are sitting here and reading this shows that you are aware that you need to start getting your finances in order. Today you have a tremendous opportunity to reshape your future and take control of your money.
- Finding An Affordable Investment Strategy
- It’s Never Too Early To Start Saving
- Procrastination Costs You A Lot Of Money
- Who Can Realistically Afford To Invest In Their Future?
- Understanding Retirement Funds
- The Advantage Of Employer Matching Contributions
- What’s The Bottom Line?
- The High Cost Of Debt
- Change The Way You Look At Money And Your Outlook On Life
Finding An Affordable Investment Strategy
There are a lot of reasons that people put off investing, being able to afford to do it is a big one of them. What you have to realize though is that it’s not necessarily a lack of income that holds you back from investing, it’s a lack of using your money in a smart way. Many people waste their money on things they don’t need, and those wasted dollars could all be used to invest for the future. By giving up or cutting back on expensive hobbies, going out to eat, and other unnecessary expenses you can use the extra money to pay down debt. Once you have paid down your debt your monthly commitment to bills will be lower making it easier for you to start investing your money.
Just about anyone can make small changes in their budget to free up some money. Believe it or not, a small amount of money, as little as $50, can make a huge difference over time. Sure it will be a slow process, but if you let the power of compounding interest work for you then over time that small amount can grow into a large sum. The following is an example of a monthly deposit of $50 with a low-interest rate of 5% and what that money will grow to over time.
Money invested: $6,000
Interest earned: $1,846
Total money you now have: $7,846
Money invested: $12,000
Interest earned: $8,687
Total money you now have: $20,687
Money invested: $18,000
Interest earned: $23,404
Total money you now have: $41,386
Now that you see how a small sum of $50 a month can grow over time you should understand why it’s so important to start paying down debt so that you can start investing your money and letting it work for you. Now let’s push things a little further and say that you managed to invest twice as much, $100 a month. If you were able to invest $100 a month you would earn twice as much interest. After 30 years you would have invested $36,000 of your money, earned $47,672 in interest, and would then have $83,672 in your account. Remember that the more money you can invest now the more it will grow over time giving you a better financial health for when your retirement comes.
It’s Never Too Early To Start Saving
The earlier you can start saving money the better off you are going to be. That means that even if you are still a kid and get an allowance or earn money doing other odd jobs then you would be wise to start saving that money for the future. This is an important lesson you can teach your children so that you can help them to start developing the right savings habits today.
Procrastination Costs You A Lot Of Money
The biggest problem with young people today is that they live for the moment and rarely think about the future. They say that youth is wasted on the young, and as people get older many of them realize that this statement is true. The world today is focused on spending money, acquiring things, and getting instant gratification. Saving for the future is generally the last thing on the mind of the world’s youth.
Big business not only realizes that this mindset is present, they embrace it and do all they can to reinforce it. Advertising is focused on the glamor of spending influencing young people to spend money on material things instead of saving for a better and more secure financial future.
Who Can Realistically Afford To Invest In Their Future?
The question shouldn’t be who can afford to invest in their future, it should be who cannot afford to. Most people make the mistake of thinking that only the wealthy can afford to invest, but this simply isn’t true. While there are certain types of investments that only wealthy people should risk taking on that doesn’t mean that the rest of us should just sit on our cash. For example, it may seem like the stock market crashes far more often that it should, so maybe that isn’t the best place for the average person to commit most of their money to. So if not the stock market where else can you invest? What about a 401K, IRA, or a Roth IRA? These are retirement funds that were created specifically to protect the money of those who invest in them. Remember how we were speaking about $50 a month? Well, these types of retirement funds can be started and maintained with a monthly contribution of only $50.
While $50 or even $100 a month isn’t a lot, it can be a lot if you are stuck living paycheck to paycheck like a lot of people are. That means that you need to put in some work to free up some of your income. The following are tings you should consider doing in order to free up more of your income.
1. Write out a new budget. Make sure that you emphasize planning and saving and that you carefully track all income and expenses.
2. Your yearly tax refund. Most people blow the money on purchases, vacations, and some use it a little more responsibly to pay down debt. If you can afford to do it using your annual tax refund to provide an influx into your savings account is a great way to keep things moving in the right direction.
3. Visa and Master Card cash back programs. These are benefits that basically pay you a small percentage for each purchase you make. If you can be responsible, and pay off the balance before the end of the billing cycle then this can be an easy way to make extra cash.
4. Overtime, bonuses and other unexpected sources of income should be used to contribute toward your retirement fund.
5. If you are hoping to instill in your children a greater sense of financial responsibility then helping them to start a savings account at a young age is a great place to start. You can teach them to avoid making impulse buys, and then reward them by letting them use a percentage of money they get to buy things they want.
Understanding Retirement Funds
Now we are going to get into more of the specifics regarding 401K, IRA, and Roth retirement funds. These are important investment options that should command your respect and attention. It’s important that you don’t just contribute some random amount to some fund. You need to have a plan and to figure out which type of fund is the right one for you to put your money into. Now, this may feel like an overwhelming process, but we are going to take this slow and take a step by step approach.
The most important thing you can do regarding investing in these types of funds is to quit putting it off and start investing now. How can you do that? Well, most employers offer a 401K plan for their employees, and some offer IRAs (individual retirement accounts) as well. There are tax advantages to using these types of plans as well so they can help you build long-term wealth while also helping you to have more cash on hand today.
The Advantage Of Employer Matching Contributions
First off if you have access to a 401K at your work and you aren’t already putting money into then you are making a mistake. Talk to your employer today and find out what you can do to get started. This is a great way to make your money work for you. Another huge advantage of a 401K is that most employers will match a certain percentage of what you contribute to it. Typically an employer will require you to commit 6% of your pay for a 100% matching contribution on their end.
So if you work for a company that offers this type of plan then finding a way to get the maximum amount of matching contributions is in your best interest. This is free money so take it! Now there are limitations you have to keep in mind. If you are under 50 then the maximum contribution you can make to your retirement plan is $18,000. If you are over 50 that limit goes up to $24,000. There is a combined limit of $53,000 in annual contributions regardless of your age.
Just imagine having $18,000 or $24,000 contributed to your 401K by your employer. Now chances are that you don’t have enough money to dedicate this amount of your pay to your 401K. But don’t let this discourage you, the key here is that you have to take that first step and then keep building on it from there.
There are two different types of 401Ks to consider using. The first is a traditional one, the second is a Roth 401K. Each one has different advantages and tax benefits so you need to choose wisely.
The Traditional 401K
In this type of 401K the money is put into your retirement account and once you reach 59 1/2 years old you can start to withdraw it, but remember at this point it is taxed as income. The good news here though is that your money has been growing, hopefully for decades, without being taxed. If you decide you need the money before reaching 59 1/2 years of age ten there is going to be a 10% penalty in addition to the regular income tax.
A Roth 401K is the opposite in that you pay taxes as you invest, but once you reach 59.5 years of age there are no taxes on the money you withdraw. Remember that you are going to have to pay income tax on the interest that your account makes for you as well. The advantage here is that it will give you more income at a point in your life when you are starting to get closer to retirement. For example, if you contributed $50,000 to your Roth 401K, and it made another $60,000 in interest, at 59.5 years of age you could pull out $110,000 without paying taxes on it.
With a Roth 401K the same types of contribution limits apply as they do with a traditional 401K. The unfortunate thing here is that fewer and fewer employers are offering a 401K retirement account for their employees. This is especially true for small businesses that have less access to cash and can’t afford to match employee contributions. If you work for a company that doesn’t offer a 401K or doesn’t match contributions then there are other options you should look at that can make you more money over time.
First of all, even if your employer doesn’t offer matching 401K contributions you should still use their 401K plan. This will enable you to save money and it will also have tax benefits for you. So even though it isn’t ideal it’s still a better option than not doing anything at all. Secondly, if you are self-employed, or you want to save as much as possible, then you should look into starting an IRA.
There are many similarities between an IRA and a 401K. For example, a traditional IRA doesn’t tax your contributions when you pay into the account, but they are taxed at 59.5 years of age when you start to draw money out of the account. In a Roth IRA, like a Roth 401K, your contributions are taxed as you make them, but when you start to draw the money out they are not taxed.
So what should you do first? Well if your company offers a 401K then take advantage of it and do whatever you can to get the maximum employer contribution. Next, if you want to invest more then look into either an IRA or a Roth IRA, depending on when you want to get your tax benefit. If your employer offers a 401K but doesn’t match your contributions then using an IRA is a better option for you, and you should prioritize putting your money here.
There are a lot of benefits with sticking with a company based 401K, especially if your contributions are matched by your employer. But there are also more limitations than there are with an IRA, so if you are looking at maximizing your long term investments then an IRA may be a better choice for you. With an IRA you also have the option of moving your account to a new brokerage firm whereas with a 401K you are stuck leaving it in the same account so long as you remain employed by the same employer.
What’s The Bottom Line?
If your company offers a retirement plan then take advantage of it. Work for yourself? Then start your own retirement plan, just make sure you consult with a financial advisor first to make sure you won’t end up making a costly mistake.
Always Diversify Your Investments
There are many different ways to invest and they each have their own advantages. What you should do is to try to diversify your money as much as possible so that you are more financially stable.
IRA Benefits Now
The biggest immediate benefit of an IRA is the tax deduction you get. Every dollar you put into your IRA is deducted from your income and not taxed, which will save you money come tax season. This is especially helpful if you are making a lot of money. For example, if you contribute $10,000 annually into your IRA, and you are in the upper 25 percentile for your tax bracket, this will save you roughly $2,500 a year in income tax.
Roth IRA Benefits Later
The biggest benefit of a Roth IRA is that you are building a source of tax-free income for your future. Another huge advantage is that there is no penalty for withdrawing the portion of the money you contributed before you reach 59 1/2 years of age.
So What’s Next?
Good question with a complicated answer. The next step for you is to take a look at your finances and start figuring out how you can free up money you can invest.
The High Cost Of Debt
An overwhelming cause of divorce is debt since it places an enormous amount of stress on a marriage. Trying to pay off debt will often result in couples working multiple jobs, which means less time together. Over time the stress of this situation adds up and will often result in a fractured and broken marriage. Not only is financial stress bad for your relationship, it’s also bad for your health. When you are under stress you can suffer from high blood pressure, sleep disorders, a stroke, or even a heart attack or cancer.
Change The Way You Look At Money And Your Outlook On Life
$100 may not seem like much but when you think that this small amount of money can help to keep you healthy and keep your marriage strong it takes on a lot more value. While it may be tough in the short term using your money to pay down debt so you can start to invest in the future is a great move long term. You will be happier, have less stress, and will likely enjoy a longer and healthier life as a result. What you have to do now is to quit procrastinating and start making moves today. Even if that first move is just a phone call to a financial adviser so you can get an idea of how to get started then that is a first move in the right direction.