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In every arena of our lives, it is imperative to seek out experts who know more than we do in the field we wish to improve. When it comes to academia, we want a learned, passionate as well as compassionate teacher who knows how to engage students of varying personalities and learning abilities. When it comes to a particular technical skill, we want someone who has demonstrated success in their craft and continues to be curious about the industry, and when it comes to finances, we want a financial advisor and accountant who knows what will be the best investment and approach to managing our money for the optimal financial security.
As 2018 began I set a goal for myself to examine deeply my finances and make sure they were optimized to their greatest potential. While I already had a financial advisor, I had my doubts that I was doing what was best for my future. So I met with two other advisors during the course of the past eight weeks.
Comparing my numbers, examining my goals, and assessing the rapport with each individual, I made my decision to choose a new expert in the field for my financial future. During this process many emotions were brought to the surface. After all, it was my future we are talking about, and I wanted to make sure I could trust the individuals I was working with and trust the decisions I would be making moving forward.
At the end of my exploration over the past two months I have come to the conclusion that, in large part, my finances have been on track which was quite reassuring; however, there were additional improvements that I could make, and I stepped into those knowing that what may feel like a sacrifice now, will be worth the payoff down the road. So what did I learn?
Have a look below. The seven tips shared will contribute significantly to ensure you have a strong financial future moving forward. Whether you are 21 (even as young as a high schooler with a paying part-time job) or are days away from retirement, and some are even applicable if you are currently enjoying your retirement, these tips will enable you to sleep soundly at night.
1. Take calculated risks now
Each of us will look at this tip and view what a calculated risk is differently. It will depend upon the future you wish to build for yourself, the dreams you wish to pursue, where you currently live, the job you are currently working, etc. But knowing yourself will enable you to invest wisely in yourself now in order to put yourself in the best position to be financially successful as well as overwhelming content. What are some examples of taking calculated risks?
- buying that house you love in that great neighbor which it might stretch your budget for the first few years (although always check the timing regarding the market value, how long you plan on living there, etc.)
- investing in further education to boost your career options and bolster your salary for the long-term
- investing in a new business venture or working for a small start-up
- relocating to another town or country to improve the quality of life
- taking a more fulfilling job that initially pays less, but the work environment is stimulating and offers opportunity for more growth
- investing in aggressive diversified funds until 5-7 years before retirement
- investing in property that will eventually earn nearly passive income if tenants are chosen well
2. Invest in a Roth IRA tout de suite
The Roth IRA retirement option hasn’t been around that long (1997), but if you don’t already have one (United States’ citizens), I highly recommend that you do. While there is a wage income limit (in 2018, $120,000 was the full benefit, reduced up to $135,000) and annual contribution limit, the benefit is not having to be taxed when you withdrawal which can begin when you are 59 1/2. Why I would suggest investing now is because there are many reasons for the government to eliminate this unique IRA: It is far more beneficial to you than the government for you to be taxed up front rather than upon withdrawal. In fact, that is the reason there is a limit of contribution and wage earnings.
So before they change their minds, invest in a Roth IRA. As my financial advisor said, while you probably won’t be able to live off what you earn in interest from the Roth IRA, it is a wonderful account for your vacation/travel/emergency fund, because when you pull out the money in retirement, again, it won’t be taxed, but it also won’t add to your taxable income which could put you into a higher bracket had it been a withdrawal from a traditional IRA. Food for thought indeed.
3. Invest in a 401K (unless you work for a non-profit (school, etc.), then see #4
With annual contributions to a 401K recently increased to $18,500 for 2018, you can invest as much as $1,541 a month from your paycheck pre-tax and begin building the primary basis for your retirement savings. While saving the maximum each month may be difficult, start with $100 and each year gradually increase the automatic deduction as you are able. The more you save now, the more you will have when you reach retirement age.
If your company will match your 401K contributions, or will match up to a certain percentage, in the latter case, contribute to the percentage that is their limit, so you are at least earning as much money from your company as you can, and if the former case, contribute as much as you can in order to earn the, basically, free money contributed by your employer.
4. If you work for a non-profit (i.e. school, police, fire, church organization, etc.) contribute to a 403B
A 403B IRA works nearly identically to a 401K. How a 403B works is that what you deduct is done by your employer and that amount is withdrawn pre-tax (meaning, you do not see that amount as part of your earned income, so your annual tax bracket will reflect the lower earnings, even though you actually saved a portion of it in a 403B). The annual contribution for a 403B in 2018 is $18,500 (or $1541/month). Now you do have to pay taxes when you deduct in retirement, but again, this is one of the primary accounts you will be living on, so you want to begin saving early in your career, save as much as you can each year and save consistently in order to reap the benefits of compound interest.
5. Business owners and entrepreneurs, invest in a SEP or Simple retirement plan
If you are a one-woman/man business (writer, coder, artist, speaker, etc.) you will most likely want to invest in a SEP (Simplified Employee Pension). If you have employees in your small business, you may want to consider the Simple Retirement option (check out this chart to determine which would be best). Both options enable you to contribute far more than a 401K or a 403B annually as you can contribute up to 25% of your annually earnings up to $54,000. Similarly to the 403B and 401K and even the Traditional IRA, your net annual salary decreases which means your tax bill goes down as well.
6. Pay off all bad debt as quickly as possible
Debt is a national conversation in America, and while there is good (mortgage and education) and bad (credit card, car loan) debt, debt is still debt. Paying for a mortgage is a tax deduction, although the benefits have decreased for homes paying mortgages higher than $750,000 (learn more here about all of the mortgage changes), and the interest you have paid on your student loans is also deductible. However, the less debt you have to pay monthly, the clearer picture you have for the living wage you will need when you retire.
Now of course, there will be times when you are investing, whether a business, your education or buying and paying the mortgage of your home, but the goal should be to have debt (good and if you have the bad) that is manageable. Financial advisors will also say to contribute to both your retirement and paying down debt, but never just debt unless you absolutely cannot pay even $50/month to your retirement. (Check out Suze Orman’s books on money here.) View this post on how to get rid of debt and stay out of debt or check out Chapter 3 in TSLL’s first book.
7. Settle into a monthly budget that works well
The sooner we ensure we are living within our means, saving the extra we earn, but always budgeting to save for the three baskets as David Bach likes to call them, the more we can be assured we will have a sound financial future. As always, life is unpredictable, but when we manage well what is in our power, we put the odds in our favor.
Overall, knowing exactly how my retirement is shaping up and what I can do to maximize its growth has made my nights far deeper and restful. While I know the market will shift and change much before I hit the magic number to retire, the least all of us can do is to stay informed, reach out to those who know more than we do in the subjects we seek to learn about and choose wisely individuals we can trust understand what our needs and goals are.
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