Retiring with wealth and dignity may seem like an unrealistic idea in today’s economy but that could not be further from the truth. There’s only one reason why people fall short of achieving a fruitful retirement and that is not having a plan. It is never too early to start planning for retirement.
I’m sure you’ve heard it from your economics teachers and you’ll continue hearing it. Your twenties are the best time to start building your portfolio because of the time for compounded growth. The three areas of focus for building a retirement plan are eliminating debt, contributing towards your savings, and consistently investing.
You do not want to enter your golden years, let alone any years, with a huge pile of debt. It’s been said that money is the root of evil. Sure, money has changed some people however, aside from love, doesn’t money buy happiness? I am a firm believer it does.
Remember, just because you can make the car payments does not mean you can afford the vehicle. You have to live within your means. Here are some quick examples of how to eliminate or reduce debt:
Start a vehicle fund prior to purchasing a vehicle so that the future car purchase can be made with cash. Having a car payment takes away funds that could be used for saving or investing. Automobiles are depreciating assets that go down in value as time progresses. Do not carry debt on your vehicles.
Student loans should be kept to a minimum. There are ways to minimize the amount of student loans such as going to an in-state school, attending a community college (I highly recommend this option for general classes. Get the general classes out of the way in the cheapest and most affordable way possible. Then for the true four-year experience, transfer to a larger college/university. After all, it’s been stated numerous times that college is the best time of your life, so enjoy it), and having a part-time job throughout school.
The mortgage will likely be the biggest expense in one’s life. Wouldn’t it be nice to enter retirement with a fully-paid for home? Grinding it out for the down-payment can be draining and hard-work. But once you have enough, opting for a 15-year instead of a 30-year mortgage rate or even making extra principal payments each month, are great ways to reduce the time spent dealing with a mortgage.
Bottom Line: If you want to retire wealthy, then continue eliminating your debt and do not carry your mortgage into retirement.
Learning to save is crucial for setting yourself up for retirement. Savings are funds that are built up for future purchases. If you know that you are going to eventually purchase a vehicle, then start a vehicle fund and contribute towards it each month. Now, it doesn’t have to be huge lump sum deposits. Something set aside is better than nothing.
This goes for just about all purchases.
Don’t forget to save for emergencies. Having an emergency fund of six months of income is a great way to prepare for a job loss, family/friend, car maintenance, a natural disaster, and the list goes on. Most of these setbacks, you cannot predict ahead of time. From what I’ve noticed, one of these disasters occur right when you start getting ahead so plan for a setback because I promise, one will come about when you least expect it. So why not be prepared for it?
Investing is required for those that wish to retire wealthy. Social security should not be relied upon and should only be viewed as a bonus. Relying on the government to take care of you is foolish and won’t happen forever.
Investing in real estate is a great way to create a residual income. Investors can purchase real estate such as single family homes, land, parking lots, or multi-family duplexes and apartments that are used to rent out. This is a great way to build wealth and have income streams geared towards retirement.
Another way to invest is by putting money into the stock market. Whether we are in a bull or bear market, investors should be going long or going short on stocks. Over the long-run, the stock market has proven to be a great way to build wealth.
Anyone of age can become active in the stock market. The key is to start young and stay consistent throughout the years potentially resulting in higher gains.
Maintaining a 401K and contributing up to the company match should be the first decision investors make. Start as early as possible because you will yield the largest return on your investment as time progresses. The earliest you start, the better. However, let’s say you aren’t 18 years old reading this. Here’s what your 401K balance might look like if you started investing later on in life:
Notice how much of a difference the ending balance is when you start earlier/later? Now look at the right side of the graph. You could be missing out on way more money by not utilizing a company match.
Investors can utilize Roth IRA’s, mutual funds, index funds, and bonds however, keep in mind you want to read the fine print when it comes to selecting your plan! Find the plan that has the less costly fees associated with withdrawing your balance at retirement.
Numerous ways exist where investors can obtain income producing assets. If your very entrepreneurial, you could consider starting and owning a business. Sure, it’s quite the investment, but that investment could pay off in the near future with excess income.
Here are some tips for eliminating debt, contributing towards your savings, and consistently investing:
- Start separate saving funds (use the car example in the beginning of this article and apply it for other purchases).
- Start a savings account with a bank that’s separate from your checking account. I say this because if your checking and saving accounts are through the same bank, more than likely when you drain your checking account, you’ll transfer funds from the savings into the checking account. Trust me. I’ve done it numerous times and regret it.
- Set up direct deposit through your employer. Have a specific percentage of your pay be deposited into your checking account and the remaining percentage deposited in your savings.
- Avoid using credit cards if you can. I understand you have to build credit, however, if you decide to partake in using a credit card, only spend what you can pay off in-full each month. I cannot stress this enough. Do not get caught in the trap of paying interest.
- 60-20-20 rule. 60% of my income goes to my checking account, 20% goes towards my savings, and the remaining 20% is for investing. Adjust your percentages to best fit your needs).
- Obtain a degree that is applicable in the marketplace.
- Take smart risks and don’t put all your eggs (investments) in one basket. Diversify your portfolio because not every investment is going to be a home-run. Odds are some will do great, some will be mediocre, and others won’t do so-hot.
- Use unforeseen income as a debt payment. Unforeseen income might be birthday and holiday money, death money inheritance, student loan reimbursement, tax refunds, etc.
- If you’re going to be away from home for a few or more days, consider renting it out on Airbnb and use the income generated from it as a debt payment, savings contribution, or invest with it. Maybe even surprise your significant other with a night out. It doesn’t affect your budget and it’ll keep the spark alive
- If you live in a bottle-return-for-money state, save your pop cans and bottles up then return them for income. It might not be much, but wouldn’t it be nice to return those beer cans left from the Super Bowl party you hosted as a gas fill-up for your vehicle?
- Find a bank with the highest annual interest rate. If you are using their business to store YOUR hard-earned money, don’t you think you should get rewarded at least a bit for it? It might not be much, but it’s still something.
- Invest early. You saw the 401K chart. Now apply that to other saving and investing situations.