[toc]How you manage the money you earn as well as your viewpoint of what role money plays in your life is of great importance. Money can work for or against your future. However, before you commit to creating a plan that includes 30 years of faithful investing, think about what having enough money means to you.
For some people it means they can buy anything and live anywhere they want. Others desire relief from the financial stress due to not having enough money to keep up with monthly expenses. And for many, all they ask is to be free from credit and loan debts.
Changing Your Point of View
To gain relief from debt you might think all you need is a little more income. However, the following statistics reveal that more money does not guarantee a debt free and financially stable lifestyle.
A survey by SunTrust revealed that one-third of the people earning $75,000 annually were living paycheck to paycheck. That is $21,343 more income earned than the average American according to the 2015 U.S. Census Bureau report.
Would an extra $2,000, $5,000 or even $10,000 a month extra income be the solution? The answer is no. According to an article published in 2013 on CNN, 76% of Americans are facing the same financial struggles.
These statistics bring to light that earning more does not mean freedom from living paycheck to paycheck. Nor does it provide the freedom from overwhelming debt. To acquire such freedom has nothing to do with how much someone is earning, but rather how well what is earned is managed.
If you are to go beyond simply staying out of debt and living paycheck to paycheck, you will need to change your perspective regarding the role money has in your life.
With solid planning and investing, someone who earns $30,000 per year can live a life debt-free, retire debt free and continue living comfortably during their retirement years. Without proper planning and investing, someone who earns $250,000 per year could live paycheck to paycheck even beyond retirement years.
How is this possible? It is only possible by changing the concept of “more money equals financial freedom”. The following will be discussed in this guide to help you see the value in changing this misconception about money:
- The purpose of money in your life.
- The value you place on your financial future.
- Discovering the truth in who is in control of your finances.
- The destructive nature of procrastination.
- Where the true value of money is found.
- What may be holding you back from investing?
- Who can afford investing and how much will it cost?
- Where to find money to invest in your retirement.
Have you ever had an “ah ha” moment about something you’ve been struggling with? It’s that moment in time where everything seems to come together and you finally “get it”. With a little education into what money can do for you once you understand how to manage it, you may find that an “ah ha” moment follows.
We will dive into the details below, but first here’s a quick infographic summarizing this guide
The Purpose of Money in Your Life – It’s Your Decision
The role money has in your life now can have a great impact on your future financial success or failure. It is not as difficult to make changes as you may think. The main reason why people struggle is due to a lack of forethought and planning.
Consider this example of a monthly budget.
Monthly Income – $3,500
Rent/Mortgage – $1,000
Utilities – $200
Credit Card Payments – $300
Car Payment – $300
Food and Vehicle Allowance – $800
Insurance (health, life, car) – $300
Misc. (Internet, cell phone etc.) – $300
Incidentals (clothing etc.) – $100
Total Payments Deducted – $3,300
The monthly income is $3,500 with $200 left over after all bills are paid. Without any planning or forethought, how hard would it be to set any of that money aside?
With just $200.00 left over each month you have the opportunity to:
- Place some or all in your savings account.
- Spend some or all on entertainment.
- Add it to a minimum payment so you can pay off your debt(s) faster.
- Invest it into a long term retirement plan.
- Purchase an item on credit; increasing your monthly financial obligations.
Look at the above 5 reasons. Think about it. What would “you” do?
Most people give very little thought about it. Saving and investing are the last things on their mind. Yet, they should be the top priority after all credit card debts are paid off.
The key is to “think”. Thinking leads to planning and planning is the way to success. This decision needs to be made right now, today. At this very moment you have a great opportunity sitting right in front of you. And because you are here devoting your time into learning about “investing” into your future, you are taking a step in the right direction.
An Affordable Investment Strategy
There are several reasons why people hold back from investing. Affordability is one of them. The main reason why people cannot afford to invest is because every dollar that could be set aside for investment purposes is typically; paid to a creditor, wasted on expensive hobbies, and given up for unnecessary weekly or daily food and drink expenses.
Almost anyone can readjust their budget and find an extra $50.00 a month for investing. It is a small beginning but with compounding interest it can have fantastic growth potential. For this example we will consider a low 5% interest rate with a monthly deposit of $50.00.
- Money invested: $6,000
- Interest earned: $1846.
- Total in your account: $7846
- Money invested: $12,000
- Interest earned: $8,687
- Total in your account: $20,687
- Money invested: $18,000
- Interest earned: $23,404.
- Total in your account: $$41,836
As you can see investing as little as $50.00 a month is well worth your consideration.
Now let’s take it one step further. Consider doubling that figure. Imagine you invest $100 a month for 30 years. How much more interest would you think that would generate? Did you say double? If so you would be right.
Your actual investment over 30 years would be $36,000 and yet your total interest earned would be $47,672, providing you with a grand total of $83,672. The more you add into your retirement the more compounding interest it will earn.
Time Matters – It’s Never Too Early!
If possible, investing should begin as soon as you can arrange it. Even a child can begin investing money into his or her future. Parents and Guardians can start investment funds for their children at any age.
Monthly Payments Not Required
Another reason people hesitate to invest is because there is no room for an additional monthly payment in the budget. The good news is there are investment plans that allow for money to be invested at the discretion of the investor and that amount can be increased or decreased as desired.
A Roth IRA for instance, allows you to contribute funds into your account at any time. The only limit is on how much you can contribute annually.
With some plans you are allowed to place the monthly payments on temporary hold and while you can set up your account to withdraw money on a monthly bases, it is not a requirement.
The key is that you need to get started as soon as possible and there are several reasons why it must be immediately.
Procrastination Results in Great Financial Losses
The main issue for young people today is in how they think about the future. In general, time does not factor into their daily concerns. It has been said that, “Youth is wasted on the young.” Whether that is a quote from Oscar Wilde or George Bernard Shaw is anyone’s guess. The fact is today’s world has its focus on spending money now. Highly irresistible, especially if you are young, yet totally destructive financially regardless of your age.
Unfortunately, the drive of business and commerce does not allow for a healthier viewpoint. Advertisements focus attention on present needs, wants and desires. The spotlight is on spending money now to reap the pleasure it can bring for the moment. With little if any priority on saving or investing money for financial gain in the future.
Time Moves Forward – Take Advantage Now!
In our 20’s our bodies and our brains are still focused on fun and socializing. The goal is to work hard and play harder. When we hit our 30’s we begin to think about settling down “someday” and maybe we start to set aside a little money here and there in a savings account. By our 40’s our struggle with debt is pushing out any thoughts of saving for retirement.
By the time we are in our 50’s we begin to see a lot of age-related body changes. Saving money for our retirement is something we thought about but without planning, never happened. Time simply got away from us.
If you do not take advantage of the time you have now to invest, time will get away from you. It is not a nice thought to think we would still be working at 65 and even 70 years old because we cannot survive financially on Social Security alone.
This does not have to happen to you. With a little bit of forethought and planning, life at age 65 could be much more fulfilling.
Future Planning: Investing $100 monthly into a 401K or IRA:
At age 35 you begin investing $100 monthly into a 5% compounding interest retirement plan. At age 65 your monthly contributions plus the compounding interest become $122,000. This is a nest egg you can now use to support your Social Security retirement income.
Living for Today: Investing $100 monthly into fulfilling daily wants and desires:
At age 35 you begin spending $50.00 a month at your local coffee shop, $50.00 a month is allocated to other types of entertainment. The money is spent, gone forever without any long-term benefits.
At age 65 what has that money done for you? Nothing. How appealing is it to waste money every month on things that last for a few minutes or even a few hours when you see how that very same money could bring you so much more in your retirement years?
Breaking the Wall of Financial Deception
The deception that permeates our world is that the purpose of money is to spend it, pay your bills, have fun, and enjoy life every day. Borrow money now, pay it back later.
No one will argue over how easily money can be borrowed. The deception is in believing it is easily repaid. That is the type of thinking that needs to be smashed to oblivion. Debt comes at a very high price.
To smash that idea, let’s consider the various ways money can be utilized.
- $100.00 invested monthly over 30 years – With compounding interest your money is working for you.
- $100.00 invested into paying off debt – decreases the interest paid back on the debt. Your money is working for you.
- $100.00 invested into entertainment and dining out offers you nothing more than its paper value at the time you spend it.
- Money borrowed; $5,000 borrowed has a devastating effect of compounding interest on your money. Paying it off within 3 years would cost you an additional $1,967.33. Money is working against you.
Get Out Your Wrecking Ball!
Are you looking at money differently now? How about borrowed money? What is more appealing? Borrowing it or investing it?
Hopefully you have a new respect for money and the role it plays in your financial future.
Destructive Investment Fears
Even when people know the value of investing, there are other reasons why they hold back from it. Fear can play a large part in why people do not want to invest money into their retirement.
Fear of change
In general, no one likes to make changes to their routine. Even giving up a daily hot cup of cappuccino and a breakfast burrito may seem like an overwhelming sacrifice. In addition, fear of having your money tied up until you reach the age of withdrawal without penalties can also put a damper on planning out your investment strategy.
Even the thought of getting started can be a bit overwhelming. It is completely normal to be apprehensive about things we are not familiar with. These issues can be overcome by taking it one step at a time.
The first step is in looking at your budget and finding out whether or not you can start investing immediately.
Investing – Who Really Can Afford To Invest Into Their Future?
The first thing that comes to mind for most people is this; only the rich can afford to invest. Is this true? Certainly appears so. There are many factors that affect this line of thought.
The stock market is a scary place. It seems like it’s always crashing. Picking stocks should be left up to the professionals. The good news is you do not have to pick stocks nor do you have to hire a broker to pick individual stocks for you.
There are many ways you can invest your money. In this section you will learn about investing into a 401K, IRA, and a Roth 401K or Roth IRA. These retirement funds are set up to provide the safest way for individuals to invest their money with as little personal involvement as possible.
And remember; you can invest as little as $50.00 a month into a retirement fund.
Regardless of how much money per month you earn, if you are living paycheck to paycheck it means that finding an extra $50.00 to $100.00 a month or more for investing purposes may be difficult.
Where to Find Money to Invest
- Creating a new budget. To help you get started, visit the section that explains how to get out of debt by planning and sticking to a budget. If you are already out of debt (with the exception of a mortgage), then check out our section that goes into more detail on how to put together a conscious spending plan budget.
- Yearly tax refunds. Many people use their tax refunds for vacation or to pay down debt. If you can manage it, consider reserving your refund as money you can add into your retirement fund. The ROTH IRA is one option.
- The Visa and Master Card cash back rewards program. Consider all of the cash back rewards dedicated to your retirement fund. This should only be utilized when you are able to pay off your credit card debt in full within each billing statement period.
- Overtime, bonuses, and any money that is unexpected can be reserved for your retirement fund.
For children, money that comes from relatives on special occasions such as rewards for good grades or graduation can be diverted into a retirement fund. Perhaps an agreement allowing them a small percentage of any cash gift to be used for something special. Teaching your children the true value of money early on will help them appreciate the benefits of using it wisely.
Saving For Events, Vacations, and Other Occasions
Of course there are times when you will want to set aside money for special occasions. Think about how much easier it will be to save for things you need once your debts are paid off and you are in full control of your budget.
Remember, when you borrow money, you must pay it back with interest. And many times that means double and even triple what you originally borrowed. Pay off your debts first and you will more than likely be able to set aside money for investing as well as other things.
Investing – Understanding Retirement Funds
In this next section we will cover the 401K, IRA and Roth retirement funds. Any important project should not be managed haphazardly. It’s important to have a good strategy especially when addressing your future financial needs.
Planning your investment strategy may feel overwhelming so it’s best to take it one step at a time. First learn what your options are and proceed by taking advantage of investment opportunities you may already have access to.
The key is to get started. Often the best place to start is right where you work. For instance, there are 401(k)’s, which are offered by employers to their employees. If this opportunity is not something you can take advantage of there are also IRA’s (Individual Retirement Accounts) set up by individuals who may or may not have access to a 401(k) or a company funded retirement plan.
Employee Employer Matching Contribution Advantage
First, if you are fortunate enough to work for a company that offers a 401(k) retirement plan and are not contributing a portion of your pay into it, then you should talk to your employer so you can get started right away. This is one of the best ways to make your paycheck work for you.
With a 401(k) your employer will typically match, up to a certain percentage, what you put in. Typically an employer will require you to contribute at least 6% of your annual salary for a 100% contribution match.
So the wise thing to do, for those with employers who will match 401(k) contributions, is utilize that provision to get the maximum amount of matching dollars. This is free money. The more money added by your employer into your retirement plan, the better.
There are limits to how much you can contribute annually. For employees under 50, there is an $18,000.00 limit on yearly contributions. If you’re over 50 that limit is $24,000.00. There is a limit of $53,000.00 placed on employee and employer annual contributions regardless of the age of the employee.
Imagine that! $18,000 to $24,000 contributed by your employer into your 401K retirement fund. If these figures seem unrealistic in comparison to your salary, don’t be discouraged. Your goal should be to take steps to fix and secure your finances now, with a view to your future; think long-term.
There are two types of 401(k)’s to consider. First is the traditional 401(K), and second is the Roth 401(k). Each has different tax benefits that you can take advantage of.
The money that is invested from your paycheck is not taxed when put into a traditional 401(k) account. When you reach the age of 59.5 years, your money is taxed as you draw it out. But remember; your money has been growing the whole time without being taxed.
If you access your account before you are 59.5 years old, you must pay a 10% penalty, plus income tax.
You pay taxes on what is invested initially. But after you turn 59.5 years old, the money you draw out is tax-free. This includes the interest accrued on your account.
If you contributed $50,000 into your Roth fund and by the time you turned 59.5 years old your account accrued another $60,000 in interest, the $60,000 would be 100% tax free. It’s not often you find a way to earn money without having to pay taxes on it
The same contribution limits ($53,000.00) and restrictions (10% early withdrawal penalty) apply to both types of 401(k)’s.
Unfortunately, fewer and fewer employers offer these types of retirement accounts for their employees. And those that do may not offer to match your contributions. This is especially true of small businesses. If you are either at a job where your employer offers a 401(k) but won’t match your contributions, or are self-employed, there are other options to consider.
First; if your employer doesn’t match your contributions to a company 401(k), it’s still a good idea to set money aside for your retirement. And for the tax benefits over time it’s a good investment in your future. So if possible, utilize your company’s 401(k) plan even if your employer doesn’t match your contributions.
Second; if you are self-employed, or even currently contribute to your companies 401(k) plan, you might consider an IRA (Individual Retirement Account).
There are similarities between IRA’s and 401(k)’s. For instance, with a traditional IRA your contributions are not taxed when you pay into the account, but only when you reach 59.5 years and you begin to draw money out.
In a Roth IRA account, like a Roth 401(k), your contributions are taxed pre-investment. Therefore you do not deduct them. But once invested, all the interest is tax-free and you pay no taxes upon retirement.
If available, first fund your company 401(k) and maximize the matching dollar amount that your employer offers. If you can invest more after this is done invest in a traditional or Roth IRA, depending on when you want to see your tax break.
If your finances allow you to max out your IRA, then re-invest your extra income back into your 401(k). This will allow additional tax savings on current-year investments. If your employer offers a 401(k), but no contribution match, then go for an IRA and max it out first. Then go back and contribute to your 401(k) because you can get pre-tax benefits.
There are compelling reasons for contributing into and staying with a company offered 401(k). This is especially so if your employer matches your contribution. But there is also a higher contribution and deductibility limit when compared with an IRA.
On the other hand, an IRA offers more choices in investments. There is also the ability to move your investment to another brokerage firm. In a 401(k) your money must stay in the account until the duration of your employment.
Here’s the point
If you have a company retirement plan, take advantage of it. If one is not available, or you are self-employed, set up your own. But before jumping into anything, consult with a qualified financial advisor.
Diversify, Diversify, Diversify
There are many ways to invest. The 401K and IRA, and the Roth 401K and IRA. There are benefits both now and later to both. Plus, the more your investment portfolio is diversified, the better it can manage through the ups and downs of the economy.
Benefits of the IRA Now
Your immediate benefit is in the immediate tax deduction. Every dollar you put into your IRA account now is deducted from what you are taxed. If you are a higher income earner it can help lower the percentage of taxes you pay by placing you into a lower income bracket.
If you contribute $10,000 into your IRA annually and your tax bracket puts you into the 25 percentile, you would save $2,500 per year. You would have to pay the taxes on this money later, however, you will only pay taxes on what you withdraw annually. And remember, that same $2,500 in tax money saved is earning interest over time.
Benefits of the ROTH IRA Later
If you contribute to a ROTH IRA you are diversifying your investments as well as earning money that will never be taxed later when you take it out. The next best thing about a ROTH IRA is no penalty upon withdrawing up to the amount you contributed.
Calming Early Withdrawal Worries
Only interest accrued in your ROTH account would be penalized upon withdrawal. However, there are allowances for early withdrawals without penalties; medical expenses, to prevent the foreclosure of your home, or educational fees to name a few.
The main thing to remember here is that money invested is money that would have been spent and lost forever today. You’re not in any sense of the word “locking” up money. If you placed this same money into a savings account, one of two things will happen.
Money easily accessed will be spent. It’s like walking into your favorite bakery, sitting down and watching someone else enjoy eating the best smelling desert right in front of your face.
If by some miracle you’ve got an amazing resistance to spending that money it’s going to do absolutely nothing for you. If you’re read the section on Banking you are well aware of the small 0.01% to the whopping 1% interest rates offered for savings account holders. At the current inflation rate you’re actually losing money.
Put that money to work for you! Set up an appointment with a local professional who can help you sort through your options. And be sure to ask what (if any) fees are attached. You don’t want the fees to eat away at your investment.
Attention to Debts
If there are debts (e.g. credit cards) that are holding you back from contributing to a retirement account, by all means work to pay them off. This is an excellent way to see a quick return on your efforts to reign in your finances. And seeing the balance on a credit account steadily go down is a good reason to be happy.
The more determined you are to streamline your budget, and make a meaningful contribution to your future financial security, the happier you will be. Remember that your goal is to take control of your finances and begin funding your retirement.
What Will You Do Next?
Good question. You have an opportunity to make changes in your financial life that can improve it tremendously.
The Cost of Debt
Married couples end up in divorce due to great stress resulting from overwhelming financial debt. Trying to work a way out of debt requires many couples to work longer hours and/or taking on 2 or more jobs; spending little time with one another. These things add up and equal certain doom for a loving relationship many couples once enjoyed.
Financial stress is attributed to life-threatening health issues such as heart attacks, sleep issues, strokes, and it is even attributed to causing cancer and other life-threatening diseases.
Change Your Perspective – Improve Your Lifestyle
The value of that $100.00 increases when you factor in peace of mind and improvement in your health and relationships. Paying off debts so you can begin investing into a brighter future can provide a happier disposition along with positive health benefits.
Whatever you decide to do, start doing it today. Even if the first step is making a phone call and speaking to a professional who can offer financial advice based on your personal circumstances.
The key here is to “do” something today. Schedule what you will do next to lay a solid financial foundation that includes getting out of debt, staying out of debt, and investing in your future.
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