Building Wealth

How will most of us build wealth? It’s not sexy. It’s not fast and exciting. It’s slow and over time. Sure there will be some that hit the next big thing and get rich quick. And if you have big goals and ideas, then go for them!

For the majority of us (and even those who have wealth), we need to spend less than we earn. We need to systematically save on a CONSISTENT basis.

Weekly, monthly…make it so you can’t get back at it easily. Don’t leave it in your checking account. I have part in a savings account with my regular bank that’s a little easier to get to and then more in a money market account that I have to transfer money from my bank to so it takes a couple of days if I need it back. Currently I’m using American Express Saving Account. (Not an ad, I just like it and use it personally).

You can start small and make periodic increases so you build the habit. Initial goal is 3-6 months of living expenses, more if your income fluctuates. As that goal is funded, you can work on personal goals such as home buying, vehicle purchase etc, and retirement planning. Work towards saving 20% or more of your income.

The key is to start and do it consistently!

IRA or Roth IRA

What’s the difference between a Roth IRA and a traditional IRA?

A Roth IRA you contribute after tax dollars, meaning you get no tax benefit from making the contribution. You get tax free growth and when you withdraw the funds, it’s tax free. There is also no required distributions with Roth IRA’s.

With a tradtional IRA, you contribute before tax dollars. It reduces your taxable income by the amount you contribute. Say your taxable income is $50,000 and you make a $5,000 IRA contribution. Your taxable income is now $45,000. You still get tax free growth, but it’s deferred. When you make withdrawals from your traditional IRA, you pay ordinary income tax on the amount withdrawn. You are also required to start taking distributions at age 72.

The contribution limits for both a traditional IRA and Roth IRA are $6,000 for 2019 and 2020 with a catch up of $1,000 if you are over 50. You have until April 15th to make a contribution for the previous year.

There are some income limits with both types of IRA’s that may limit what you can do. Roth IRA’s have income limits of $196,000 for married filing jointly and $124,000 where the ability to make contributions is limited and eliminated at $204,000 and $139,000.

For the traditional IRA and you are covered by an employer’s retirement plan, the ability to deduct the income is limited starting at $103,999 for joint and $64,999 for an individual.

So what do you choose. As with most aspects of financial planning, it depends on your situation. If you know you’ll be in a lower tax bracket in retirement, choose the traditional IRA. If you know you’ll be in a higher bracket in retirement, choose the Roth. That’s likely hard for most people to know that far in advance. In general, the younger you are, start with a Roth. Having the growth and withdrawals tax free and no required distribution is a great advantage. Your income may also play a role in what’s available to you with the limits mentioned above.

What other topics would you like to see covered?

Financial Freedom

I have a lot of conversations about money with my 13 year old son. He’s my spender. He get’s money and he finds something to spend it in. Typically electronics and video games.

He also likes expensive things….cars, cologne, food, etc.

So we discuss the possibilities of income and saving.

I spend a lot of time talking about the importance of saving money no matter your income level.

If you make $30,000 and spend $35,000 or even if just spending all that you make at $30,000, you aren’t setting yourself up for the future. There’s no back up plan if you lose your job, or don’t like your job and would like to take some time off and find something new, or travel on a sabbatical.

And that doesn’t change if you make $200,000 and spend at or over $200,000. Or 1 Million. If you keep spending all that you earn, you don’t have financial freedom. You need to keep earning at that level to maintain your lifestyle. Sure, at the higher levels you have more ability to adjust your lifestyle if needed. But do want to be forced to do that, or sell your house, your car etc if you lost your job. That’s not freedom.

Start the habit of savings and spending less than you earn at every level. The more you save, the more financial freedom you have.

How do I start saving?

How do I start saving?

I want to save for a new house, vacation, or maybe even a year long sabbatical.

What’s your current lifestyle?   What are you willing to give up now to get what you want later.  That’s a tough lesson for all of us. 

The 3 biggest needle movers for being able to put more in savings:  housing, vehicles and eating out. 

Housing is easily most of our biggest expense.  Conventional wisdom suggests not spending more than 25-30 percent of your gross income on housing.  A bank will always be willing to let you borrow the max your income will allow if you are buying.  But does that help get to your other goals?  Consider buying or renting a place for less to help meet your other goals.  Have a roommate if your able. Could you live in a different area that would save additional dollars.  You can decide how much you are willing to trade to reach your goals faster. 

Vehicles are another big ticket item.  Buying new on something that will lose value, especially if you have to borrow the money to purchase it, can land you in a position where you owe more than the car is worth.   Consider saving money to buy a reliable used car that you can pay cash for. 

There’s also a lot of smaller things that can make an impact over time:

Bringing lunch versus eating out

Cut the Starbucks habit

Don’t order alcohol with dinner out

Cut cable

Ride your bike to work

Take your income – your expenses = Net savings or discretionary spending.

Making a few cutbacks might make it easier to start putting away $50-$100/month.  If you want to save more, you can look for more ways to save. 

If you put away $100 a month with nothing to start and do that for 20 years earning an average of 8% return you’ll have $59,294.00 and will have invested $24,000 of your own money. 

The key is to just start! 

Tell me some of your favorite ways to save money? What would like to learn more about?

Personal Finance.

Personal finance.  I love the behavioral side of finance.  We all make decisions with our money that’s based on our emotions and not logic.  We don’t save when we know we should. We spend emotionally. How do we find the balance of what we should be doing with our money and what we want to do with our money.  

I’ll be diving into a lot of different topics about finance.  What are some things that you are most interested in learning about?

Saving

Budgeting or alternatives to budgeting

Renting vs owning a home

Leasing vs buying a car.

Basics of investing.

Debt reduction plan

Insurance – types  and what you may need

College savings

Giving back – charity 

What’s an IRA – and should I have one

Retirement plans – What’s a 401k

I own a small business, how can I save for retirement

Send me a message if there’s a topic you’d love to see covered!