Category Archives: Retirement

Ask Moneymentals: Retirement Options

Are SEPs, IRAs, 401ks, and other acronyms making you feel stupid?
Michael Goldman, CFP® and creator of Moneymentals helps us figure out why there are so many options and what questions to ask as we get set up.

Ask Moneymentals: Dealing With Grown Children Moving Home

Michael answers your questions!

In today’s world more and more adult children are moving home. So how do parents handle this?

 

How to Make Money: Save It

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.

What is Financial Freedom Anyway

It’s interesting how elusive something can be if you don’t have a good definition for it. For instance, lots of people want financial freedom, but what exactly is it? Some see it as a vague goal or distant dream. Others think financial freedom is only for an elite few. Financial freedom is a great concept, but can you define it and determine where you stand with respect to being financially free?

How Most People Think About Financial Freedom

Before I give you my take on this, let’s explore what most people think:

  • Financial freedom is being out of debt: Often people make financial freedom synonymous with freedom from the shackles of debt. I agree this is important, because until you dig yourself out, you’re certainly not free. Consumer debt—that relentless revolving credit—is extremely restrictive. It seems more painful than a secured debt like a mortgage, but today secured debt can be insecure. Recently we’ve seen how a mortgage can impinge on freedom. A house that’s under water isn’t truly a secured debt anymore!
  • Financial freedom is having just enough to meet my needs and fund my retirement: Some think a person is financially free if there’s enough money coming in from passive sources, now or in the future. The word “passive” in this case refers to income for which there’s no need to work. Investments, social security and pensions are some examples. By being careful, a person in this category can afford a traditional retirement at around age 65.
  • Financial freedom is having enough for my needs, most of my wants and a very comfortable retirement: Some people think financial freedom belongs to the independently wealthy, those who can do whatever they want without spending time working. These individuals might have had a windfall and used it wisely. It could also be that their careers, investments and money management techniques made them very prosperous. The end result is an extremely comfortable retirement and many wants being met over the years.
  • Financial freedom is being able to purchase anything and everything I want: Certain people think financial freedom applies only to the small category of extremely rich people like Warren Buffett and Bill Gates. There is nothing purchasable they cannot buy.

Financial Freedom as a Continuum

Those are reasonable ways to describe financial freedom. However, here’s why I think they miss the mark: They’re all-or-nothing definitions where you’re either free or you’re not. Financial freedom isn’t about whether or not you’re free. It’s about degrees of freedom.

At Money Mentals we don’t say, “At this point, you’re financially free.” Instead, we talk about incremental freedom. We call it Months of Freedom, which how many months you can go without having to earn an income.

Freedom to Celebrate

My blog Seeking Financial Freedom, not Just Retirement talks about how retirement is being redefined today. We need to redefine financial freedom as well, because the all-or-nothing approach is inaccurate and too restrictive. It can even be a real downer! Many people can’t feel like they’re free until they’ve achieved tremendous riches—so why start? For some, just digging out of debt is a long road.

If you think of freedom as incremental, buying another unit of freedom is within reach. Tracking your Months of Freedom gives you a lot of freedom in itself, because each little bit saved brings you closer to another month gained. Your time takes on a whole new meaning. The discipline and sacrifice involved in work become more worthwhile.

Financial freedom doesn’t have to come all at once at the end of your life. For example, someone with a small amount of freedom might choose to take a sabbatical or work part time.

Most of us never get to the Warren Buffett and Bill Gates version of financial freedom. Many may never even get to the comfortably retired version. That doesn’t mean we have no freedom at all! Let’s reframe our thinking so we can celebrate our progress and keep on becoming increasingly financially free.