Saving for your future isn't easy. College didn't teach us anything, employers don't provide any training, and most people older than us rarely understand the in's and outs of investing. To make matters worse millennials are to scared to invest with a huge amount of student loan debt. But by taking advantage of the two most common retirement accounts you can set yourself up for a prosperous future. A future where you aren't stuck working part time to pay the bills.
If you've decided to start saving for your future great job, it's not easy to save for an event that could be 25-45 years away. But the earlier you start the more you will be rewarded. Unfortunately starting to save isn't enough, you have to choose the right ways to invest. Savings accounts .001% interest won't get you the lavish future you want. Instead you need to take advantage of Roth IRA's and your employee sponsored 401K or 403B. Here's why you should invest in both to have the most money possible for your upcoming retirement.
Top 3 Reasons to Invest in Your 401K
Your employer will typically contribute or match a portion of your contribution.
This is essentially its free money from your employer. For example my employer matches up to $1,000/year, wouldn't mind an increase! So I make sure to invest at least $1,000 each year so they contribute $1,000 as well. My $1,000 is now $2,000, doubled my money no problem. Other employers match a percentage of your salary instead of fixed amount. Usually they will match up to six percent of your contributions.
Your 401K contributions happen before you get taxed (pre-tax).
You will be investing more for the same percentage than a post tax contribution.
For example, if you invest 15% of your $2,000 paycheck then you will contribute $300 pre tax dollars. If you invested 15% after taxes it would be closer to the $190-$230 range (depending on your tax situation). BUT you will be taxed in the future when you begin to withdraw after 59 1/2 years old.
Automatic contributions ensure you won't spend all your paycheck before investing. You will pay yourself first! Listen to Warren Buffet = Net Worth of 66.7 Billion.
Three Reasons To Use an IRA
The disadvantages of the 401K are the advantages of the ROTH IRA.
Roth IRA's use your post tax money
This means you have already been taxed, aka Uncle Sam has already taken his cut. To contribute to your IRA, the advantage is that when you cash out (after 59 ½) there are no tax implications! You can watch the money grow over time tax free. Even if you shuffle investments you won't be taxed on you gains within in your IRA!
It can act as a 2nd emergency fund.
If something does happen in the future you can access this money much easier than a 401K. Of course there are penalties if you withdraw for reasons other than the ones listed here. You also have to have the account for the 5 Year Rule. It's not as easy to dig into the funds as a savings account but still an option. Ideally you'd like to not touch your contributions as you can take advantage of compound interest.
You can invest in the funds you want
Roth IRA's allow you to choose where you wan to invest. With a 401K you're stuck with the funds offered through your employer. Usually the majority of options are high fee, limited selection compared to the thousands of funds available. Check out this ROTH calculator and plug in the details to get projections on your IRA!
Investing in both is great as you have essentially diversified your retirement accounts. You have free money from your employer, pre-taxed & post-taxed, and can access an IRA penalty free for qualifying expenses.
Contributing to both a Roth IRA and a 401K/403B can make it possible to save as much in tax-advantaged retirement accounts as the law allows. These accounts have tax advantages that help your savings grow faster and larger than they would in a non-tax-advantaged account. The more you contribute to your retirement savings accounts each year the more your future self is rewarded.
Also, it's impossible to know what tax bracket you'll be in at various stages in your retirement. Investing in both accounts gives you money that has been taxed and some that will in the future. This will allow you to strategize your distributions to minimize your tax liability for your retirement dreams.
"Are you on a laptop all day? Would keeping an excel file or Google doc file help you track your expenses easier? Would it be more convenient to keep an old fashioned pen and paper type of budget? How about keeping a running tab on the fridge so that you are tracking all expenses?
"For the few that actually look at their goals again, it’s common to revisit them only at the end of the year. This is a crucial error. As our circumstances may change day to day and month to month, so will our goals. A lot can change in twelve months, which is why I propose reviewing once a month, or at the very least every three months.
Revisiting also keeps our desires relevant. It’s helps us remember that we even have them. Ideas aren’t enough, we must execute.
As the great Thomas Edison said, 'Vision without execution is hallucination.' " -Jiu-Jitsu Finance
Increasing your income
"After you have lowered your expenses, it is time to bring in more income. There are many ways to bring in more income especially during the holiday season. Maybe your full-time gig will let you work extra hours for overtime. In addition, retail stores typically hire for the holiday season. That part time holiday gig could turn into a longer gig...
Retail jobs aren't the only part-time jobs available. There are plenty of other side hustles you can pick up right at home to make extra money like: Freelance Writing, Virtual Assistant, Social Media Management." -Financially Fit & Fab
Turn on your automatic savings
"Another no-hassle way to save is by setting up an automatic transfer to your savings account. By automating your transfer, you're making sure that you don't forget or pay your savings last–and as a bonus–automating your savings means you never "see" that money and subsequently makes it sting a little less.
Two new apps that I am loving lately are Digit (which has a cult following). It automatically transfers money from your checking account you won't miss. I also love Qapital, which has rules you can set to "save the change" from your purchases. I saved over $75 my first month of Qapital, which was really astonishing to me. Click here to give it a try." -Financial Best Life
Develop the habit to spend with cash than card
"To spend with cash is also an actionable way to get out of debt. According to the research on peoples spending with credit cards; it was revealed that those who shop with credit card are impelled to spend more on luxury items because they feel they are paying with “play or fun money”. In other words, people who shop with credit card spends more than required.
Evidently, finance advisors hold a strong stand on this. They strongly advise that people who are working on eliminating their debt should cultivate the habit of spending cash, to avoid being tempted to spend on irrelevant items." -MoneyMiniBlog
Leave your wallet in the car when shopping
"This trick is simple but impactful. When doing any kind of shopping, use cash, and only take the amount of money you want to spend in the store with you. Leave all other cash, credit cards, and debit cards in the car.
This is very powerful, especially when grocery shopping. In addition to the amount you plan to spend, you can consider bringing in a small cushion of a few dollars (in case there are hiccups at the register). You will shop (and spend) completely differently when you only have a hundred dollar bill with you versus a hundred dollar bill and your debit and credit cards.
Don’t give yourself a way to spend more money than you want to — and you won’t." -Hope + Cents
Start and maintain an emergency fund
"There is no fixed formula for how much you should have in an emergency fund. Some school of thoughts say 6 months’ worth is sufficient, some say a year’s worth. Everyone’s situation is different and as such, each strategy should differ. To start however, I would suggest understanding your spending habits, and then implementing a 3-6-9 guideline.
3 Months: If you are single without kids, renting, no car, partially dependent on parents for income or any combination of these factors, start off with a target of 3 months’ worth of expenses for a rainy-day fund.
6 Months: Married, kids under 18, own a house or condo, own at least one car, or any of these combined, the base target should be 6 months’ worth of expenses (if married, base it off the income of the highest earner).
9 months: Self-employed, freelancers, anyone with a volatile job or unpredictable paycheck, 9 months’ worth should be the benchmark." -Investment Conversations
How students should avoid the debt trap
"The easiest way to prevent yourself from falling into the debt-trap is by living within or below your means (that is, not overspending). In addition, it is necessary to do research before getting credit cards (or signing any contract to take on loan/ debt) so that you really understand how it works. As a student, you must learn to treat your credit card with respect." -Investment Conversations
Build a budget and stick to it
"There are many free apps available to help you track expenses, but I always prefer using my own spreadsheets. That enables me to have the most control over what I’m doing. I understand that being able to access your spreadsheet on your phone makes tracking significantly easier, which is why I prefer Google Sheets over Excel. You can download the Google Sheets app and pull up your expense tracker wherever you are to input a transaction or monitor your spending. By combining the expense tracker as separate tabs within the same spreadsheet as the bill tracker, you can have all your finances in one easy-to-access location." -The Budget Boy
Create an automatic savings account for travel.
"Here's how this automated system specifically works for you and your travel fund. Once it's set up, it goes like this:
-Your checking account receives income.
-The next day, your checking account automatically transfers money to a separate (different bank) savings account—aka your travel fund.
Know Your Interest Rates
If you have anything that you are making payments on every month, you need to know how much interest you're paying. Make sure you know these numbers, too. Ideally, you'll want to pay debts down that have a higher interest rate first. However, there is another school of thought out there that suggests paying the bill with the lowest balance first. I'd say either way is fine as long as you're making progress and as long as the higher interest rate stuff isn't astronomical.
Action: Look at your statements or call the companies to get your current interest rates on all monthly obligations.
Negotiate Lower Interest Rates
If, by chance, you ARE paying astronomical interest rates on any of your liabilities, call and try to negotiate a lower rate. Oftentimes, if you've demonstrated a history of paying on time, the company will work with you to reduce your rate. The only trick is, you have to ask.
Action: Know your numbers and call the companies to negotiate if you're paying high interest rates.