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.
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.
Michael answers your questions!
In today’s world more and more adult children are moving home. So how do parents handle this?
- 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.
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!
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!
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.
- Retirement , Saving , Uncategorized
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?
Before I give you my take on this, let’s explore what most people think:
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.
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.