Search Results for: simple saving priorities

Simple Saving Priorities: Where to Put Your Money

After you’ve passed the piggy-bank stage, some financial difficulties are good to have. For example, it’s a happy problem to need direction as to where to put your savings. Congratulate yourself that you have an income today, you’re saving some of it and you’re reading this blog!

Some frequently asked questions at Wealth Gathering involve how to allocate savings. Which goals do you save toward first, second and so on? What types of accounts are best for
achieving your goals?

Freedom

My blog Seeking Financial Freedom, not Just Retirement covers long-term savings. Today’s blog talks about this Freedom money, which is different from Purpose money (short-term savings for enjoyment).

Today’s blog also addresses only moderate-income households. The priorities shown here apply to those with an Adjusted Gross Income (AGI) of less than $122,000 for individuals or $179,000 for married couples because these limits are the phase-outs for Roth IRA eligibility. With higher incomes, saving priorities are a bit different and will be the subject of a later blog.

Priorities: What to do and Why

Here’s the best way to prioritize your savings:

1. Prep Your 911 Fund: Calling 911 won’t help if there’s no answer, so set up an emergency fund for the unexpected. Without money in the bank, you’re one surprise away from bankruptcy, whether it’s a layoff, lost pay due to illness, car trouble or worse. Your cash cushion provides the ability to sleep at night!

To set up an emergency fund, calculate 3 to 6 months of expenses (not income). This is 3-6 times your monthly Survive spending. If you spend $5000 to Survive every month, then $15,000 to $30,000 goes in your emergency fund. If you dip below the 3-month mark, divert all savings to your 911 Fund until you reach the minimum requirement. Your 911 Fund must be totally liquid and safe, so it goes in the bank. True, interest rates are low—but if you’re calling 911, you can’t wait several days for help to arrive. Some online banks provide good returns (search www.bankrate.com).

2. Get the Match: Do this step only if your employer offers a retirement plan with a match. Often a company matches every dollar you put in a 401(k) or 403(b) plan up to a percentage
of your salary (typically 3% to 5%). Declining this option is like turning down a bonus. Your employer says, “Do you want this extra money?” You reply, “No, I’ll take less income and more taxes.”

At first, only contribute the amount required to get the full match. If no match is offered, go to the next priority.

3. Kill the Debt: Nothing destroys a sense of freedom like being shackled to a load of debt. If you’re worried about bills and chained to your job (or two) by debt payments, it’s a sure
sign that the debt owns you and you’re not free.

While debt-elimination is critical, this is not step 1 because someone who is debt-ridden and lacks a 911 Fund is one bill away from bankruptcy! Debt-elimination isn’t step 2 because matching represents additional income. Credit card interest might be 20%, but you get approximately a 125% return on matched contributions because of the match plus tax savings.

4. Get a Roth IRA: You ask, “Should I put money in a Roth or my employer’s plan?” Roth IRAs are the best deal because they grow tax-free, and after age 59 1/2 you can withdraw the money tax-free. You can also limit your fees and have more investment choices instead of being restricted to employer offerings. A Roth is the only type of tax-sheltered account where you can withdraw invested moneys (but not earned interest) penalty-free. A Roth can also be a second-layer emergency fund or savings vehicle. However, since they’re investment accounts, Roth IRAs can lose value. If you plan on withdrawing early, invest conservatively. To complete this step, invest up to the yearly limit, which is $5,000 per person and $6,000 if you’re over 50.

5. Revisit 911: Make sure there’s enough in your emergency fund. Consider building it to the 6-month mark, especially if you’re self-employed, the primary bread winner or a person with irregular income or job insecurity.

6. Take Your Pick: Way to go! If you’ve still got Freedom dollars left, you have many options:

Max out your employer retirement plan contribution
Start a college savings account for your kids
Enjoy some guilt-free Freedom
Give extra to meaningful charitable causes

Keep these steps handy. They make a good savings roadmap for practicing wealthy habits on the road of financial freedom!

Simple Saving: Organizing Your Accounts

- Saving , Uncategorized

My financial spring cleaning happens early in the year as I prepare to file taxes. I usually go through my folder containing various documents I’ve accumulated for tax time. If you’re like me, you’re not perfectly organized either. In fact, after reading about the various accounts you need for financial fitness, you might think, “You talk about all these different accounts… What’s the simplest version I can assemble of that?” Today’s blog brings everything together so you can keep your financials in order.

Now is the time to organize and simplify. Why be bogged down in old paperwork and dormant accounts? You might have accounts you opened for a special purpose and forgot about or accounts you used before moving to a different city. You could have old 401(k) accounts from previous employers and investment accounts with various brokers. Let’s look at the easiest way to get organized!

Two Types of Accounts

You can categorize your accounts as either cash-flow accounts or saving and investing accounts. Cash-flow accounts are needed either for frequent access or as a 911 emergency fund. Saving and investing accounts involve money you won’t be touching for a long period of time.

Your needs are different with each type of account. When opening cash-flow accounts, look for convenience and low fees. Because the money isn’t parked for a long time, interest rates aren’t top priority. You can try squeezing out that extra .5% interest, but it’s not worth sacrificing convenience. A local bank or credit union where you can go in person is ideal, and online access helps.

Saving and investing accounts are different. You need good investment options—including index mutual funds and ETFs—and minimal expenses. Service is more important than convenience, because you don’t need a local branch. Look for high returns combined with low fees. Every percentage point of interest is significant.

Cash-Flow Accounts

Here’s a list of cash-flow accounts that help you reach and maintain financial fitness. Though credit card accounts represent cash flow, they’ll be covered in a later blog, and you only need one—or none!

Spending account: You use this checking account to pay bills and expenses each month.
Income account: This is a savings account where you deposit your paychecks. Automatically transfer your monthly “allowance” to your spending account as I’ve described in my uneven cash-flow blog.
Purpose-goal account: Use a savings account for accumulating money toward your short-term purpose goal.
A 911 Fund account: This is your emergency fund containing three to six months of expenses. Use an FDIC-insured savings account with a good interest rate, and remember quick access is of primary importance.

Saving and Investing Accounts

If possible, choose a single investment company for the saving and investing accounts listed here. The exception is a 401(k) or 403(b) account, because your employer picks the custodian.

A 401(k) or 403(b) account: This should be your current employer’s retirement plan. Contribute enough to get the employer match if one is offered.
Roth IRA: If you qualify, this is usually your first choice for easy investing for financial freedom. That’s after getting any 401(k) employer match.
IRA rollover account: If you have a 401(k) with a previous employer, roll it over immediately. You only need one IRA rollover account for all plans you’re rolling over.
Educational investment account: If you’re saving for your child’s college education, open a 529 education account. You only need one regardless of the number of children you have, and it’s a great place for cash gifts from the grandparents.
Other investments: To save for additional long-term goals, you may need a regular investment account, sometimes called a brokerage account. You need just one of these. If your goal is less than five years away, save the money instead of investing it.

Simple but Practical Financials

My simple saving blog helps you decide where to put your money first. It would be nice to simplify everything to the point of having only one or two accounts. However, to take advantage of tax savings and the mental accounting that comes with separating money according to its purpose, you’re best off with categories like I’ve outlined here. This strategy balances simplicity with sensibility.

How to Make Money: Save It

- Retirement , Saving , Uncategorized

There’s plenty of advice out there about how to make money in the financial markets. Many people think investing is the key to wealth-building, and investment strategies abound. There are also people who, strategy or no strategy, dream about picking that magic stock that will put them on Easy Street. Sure, investing’s important—but if you really want to know how to make money, you’ve got to go back to square one: saving.

Something as mundane as saving doesn’t get much press. However, you’ll make more money by saving it than by intently focusing on earning from the gyrations of the market. Even a better-paying job won’t help if you don’t know how to make money the boring way. If your saving habits remain the same and you’re spending the rest, the net effect of a pay increase is zero.

Go for the Greatest Money-Making Impact

The leading and most important factor for wealth building is saving.

Obviously, even a phenomenal investment strategy is useless without money. Although saving ranks number one for how to make money, few have learned to be savers! Not even Warren Buffett could invest what the average American household has saved and turn it into an adequate retirement nest egg. You must contribute to your nest egg by saving, because the market will not do it for you. To earn a dollar in interest, you need to save twenty of those dollars first – that’s assuming a 5% rate of return!

Learn how to Make Money Using the Gardening Concept

Your earning ability is like the garden plot where you can plant. The more you earn and the more years you’re working, the bigger your plot is. That gives you more potential for wealth. Saving is planting the seeds. However, even a huge garden plot (large income) won’t yield a decent crop if you don’t plant (save) much. Investing is the crop diversity and fertilizer. Being smart about fertilizing can add to the yield of your crop, but it doesn’t replace having a plot or sowing seeds.

Those with great big plots who don’t plant many seeds won’t have much to show for it. People who have tiny gardens but plant and fertilize diligently can eat well and have quite a bounty!

Put Saving Strategies Before Investing Strategies

Lots of people get tied up in knots trying to figure out how to make money through investing. Don’t fall prey to this confusion! The gardening concept described above is the best perspective you can have. For most of your earning years, how much and how consistently you save has more impact on your long-term wealth than the return you get on your investments.

Improving your rate of return only has a significant impact after you’ve accumulated a large investment portfolio. Getting 1% more in interest on a $1 million portfolio is significant. Struggling to eke out a 1% interest increase on $10k portfolio won’t make much difference. What’s really powerful is saving and adding to the plants in your garden so there’s more for that higher interest rate—the fertilizer—to work on. While you’re saving, don’t forget to examine your finances as a whole to be sure you’re ready for the investing step.