IRA

Your 401k is a great tool and you should use it for your retirement planning; but there are better options that would help you even more than your 401k. Once your employer stops matching on top of your contribution you need to move to a better investment vehicle. You need to find yourself an IRA (Individual Retirement Account). There are two kinds of IRAs, a Deductible IRA and a Roth IRA.

A deductible IRA allows you to take a tax deduction on your IRA contribution, which will lower you taxes by your marginal rate. So let us assume you max out your IRA (you can only contribute $5000 to an IRA per year), and you are in the 25% bracket. So take $5000x25%=$1250 reduction in your taxes it works just similarly to the 401k tax deduction. Here is the drawback on the 401k and deductible IRA is that you get growth tax-free until you pull it out then you have to pay taxes.

What would you say if there was a retirement vehicle that you did not have to pay taxes on the growth or on what you pull out of it? There is such a thing; it is called a Roth IRA. With a Roth, you do not get a tax deduction now but you get to grow and withdraw your money tax-free. The only downside is you do not get a tax break now you get it later. The money you contribute is after taxes, but I am almost willing to bet that by the time we get to retirement with the way our government spends money (check out my blog post about our government debt) so the Roth is advantageous to avoid those taxes when we get to retirement.

One thing to remember with all of these retirement vehicles if you pull out the money before 59.5 years old you will pay a 10% penalty and taxes if you have a deductible IRA or a 401k.

Use your 401k

Another thing that you need to plan for is retirement. I hate to break this to you but social security will not be there for you if you are my age, or it will not be enough for you to support yourself. Luckily, there are other options for you to plan for retire, and in most cases, the government will subsidize your saving through tax incentives. The most common form of retirement vehicle that you have probably heard of is a 401k that is what I am going to cover today. Most companies offer a 401k plan for you to use. To make this an even better deal they will match your contribution. How can you complain with that, it is free money? The other advantage is your contribution, is deducted from the income that is on your W-2. For instance, let’s say you make $50,000 a year, and you contribute$5,000 and you are in the 15% tax bracket. Your taxes would decrease by $750, because you 1040 would state your top line income at $45,000. On top of that, let us say your employer matches you 50 cents on every dollar you contribute you would have $7,500 for retirement and it only cost you $4,250. The money you put away grows tax-free until you pull it out at retirement, so no capital gains taxes on dividends etc.

Work Smarter not harder

There are many options out there for saving your money. The most common is probably your standard savings account CDs, or a money market fund; these savings vehicles normally pay low interest rates but are typically insured by the FDIC (Federal Deposit Insurance Corporation). What typically happens with these accounts in reality is that you loan XYZ bank your deposit to turn around and loan out for a higher return. The key to getting a good return on your money is ownership, not loaner-ship. What do most people own to get these higher returns… Stocks. But, aren’t stocks risky? Yes, more risky than your savings account, but often time’s inflation (the devaluation of money) grows faster than the money in your savings account. Remember that term mutual fund I have mentioned a couple of times. Mutual funds are collective pools of different peoples money put together, and invested into a basket of different stocks. These funds are managed by professionals who do nothing more than analyze these stocks for the fund. There are many investment options within the realm of mutual funds, but you need to open one of these for your 10% fund. Typically you need between $1000-$2500 minimum investment to open one of these, yes it sounds daunting but start in your savings account and after a year or two when you have the minimum investment open a mutual fund. It will make your life better 5, 10, or 20 years down the road.

Pay Yourself

10%, it’s a small number when you think about it. For you to be financially successful you will have to pay yourself and 10% is what it takes. How do you pay yourself? That is a good question, because often times we find ourselves counting down the days till our next paycheck. This is where the whole idea of rationing or allocating our resources came from in the first post. There is a simple way to pay yourself it is called direct deposit. Most employers offer this service, and some of you may already use this. Instruct your employer to deposit 10% of your paycheck into what we will call your 10% fund. If you are just starting off you may simply want to put this money into a savings account until you have the money to open yourself a mutual fund (don’t worry we will cover this really soon). This 10% is such a small number you wont even notice that this money is gone. Think about it, you only need a dime out of every dollar you earn. You probably see dimes on the ground and walk on bye without picking it up. Start your 10% fund this week it seems like 10% is so small how will it make a difference, do it this week and you will be thanking me ten, fifteen, and twenty years for now, this small number can be the difference between prosperity and financial comfort, or financial worries down the road.

Another thing to remember with 72

Remember how yesterday how I told you the rule of 72 was powerful. Well just like the rule can help you build wealth, with your credit cards and other debts it can work against you in the same manner. For instance I have a student credit card that has a 17% interest rate, using the same formula how long will it take for the balance on my credit card to double if I do not pay it off? 72/17=4.24 years. Therefore, if you are trying to save money and you get less of a return from your savings than you have to pay on you credit card it cancels out the possible gains. In addition to that, did you know with a thirty year fixed mortgage due to the rule of 72 you will typically pay 1.5 to 2 times the principle you took out in interest over thirty years.

Make sure you are present for the next few lessons we are about to get into the juicy details of building wealth. I am excited, are you?

Make your money work for you

I am excited today my friends. You may ask why. Well today we are going to start getting how to put money to work for you, instead of you working for your money all the time. The rule of 72 is what is going to make you rich. What is the rule of 72? It is what is used to determine how long it would take your money in a typical investment to double. So lets say you put $100 into a savings account and you get 1% interest, how long would you have to leave your money there for it to double? This is how you figure that out, you take 72 and divide it by the interest rate which is one and you get 72. 72/1=72, so it would take 72 years in that savings account for your $100 to turn into $200. That may sound like a long time; it is a long time. But lets say you take that same money now and put that money into a mutual fund (don't worry ill talk about this later on) and you get 6% on your money how long will it take for your $100 to double? 72/6=12 years. Cool, huh? Now if you leave that same money there for another 12 years your original $100 is now what? $400 dollars. Are you seeing what I am getting at yet. Here is what happened you put that $100 dollars aside for about 24 years and forgot about it, you came back and with no work of your own $100 dollars is now $400. In layman's terms the money money makes, makes money. The rule of 72 isnt taught in school, but is should, it happens to be one of the most powerful forces on the face of the earth.the rule of 72 has the power to change your life, and if you use it you will have everything you ever dreamed of. I would like to keep going because I am so excited, but i want to give you time to look over this and digest it. Start thinking about what the rule of 72 can do in your life

Bank Account

Sorry it has been a couple of days since I have been here I have been extremely busy with school. Lets continue on our path to financial success. Online banking has come out within the past few years and it has turned out to be an extremely useful tool for people to pay bills and to track their cash flows. The problem is that to many people have come to rely on there online banking page as an accurate representation of what is in your account to spend. For certain reasons like holds, or people not taking your check to the bank there may be charges that do not appear on your online banking statement, but will still be withdrawn from your account. All to often though we find ourselves over-drafting and owing the bank an overdraft charge for something as small as a penny; yes I know that it is extremely frustrating. To many people lose their hard earned money to overdrafts, and I have an easy way to prevent these stupid fees. I want all of you to begin using a check register, yes it takes more time out of your day, but I do not think there are many other ways to pay yourself, or save yourself $35 with at most 15 minutes a week. I have a BB&T account, and they provide me one the size of a credit card that I keep in my wallet, and since I have been using it I haven't had an over-draft fee. Yes it's old fashioned but it works use it. That $35 may not seem like a lot, but it adds up quickly. Also if you were to still have that money you could put it to work to make you more, but I wont get into that yet it is still further into our journey of financial success.

Limited Resources

Like most people you may have found yourself sleeping through your Economics 101 class. Don't worry, you are not alone there are many people I talk to on a day to day basis that have a problems staying awake or just sifting through the material. That's o.k. I am not here to cover supply and demand or elasticity. I just want you to recall what your teacher said the first day. Remember it, the whole spiel about resources are scarce and have to be allocated. This rings true for your paycheck. Do you live paycheck to paycheck, that's fine so do I, that money is the scarce resources we are going to cover. It is likely that for the rest of your life, that is still o.k. We are only going to make small changes to your finances that will equal big changes in the end. I hope you are excited, because I am excited to help you.

Hello

I am a junior at GCSU and pursuing an Accounting Undergraduate Degree. In this Blog I want to help you to achieve your dreams. Today there are to many common misconceptions about how to be wealthy and financially successful, I want to put those to bed. What I will do is show you the path to reach your goals.