Category Archives: Personal Finance

Saving for Retirement

The most important thing for saving for retirement..

..is to START

saving for retirement

When saving for retirement, time is your biggest asset. On the flip side, time can also be your biggest enemy if you’ve put if off for years.

The sooner you start saving for retirement, the more time the power of compounding can do its magic and the easier it will be to accumulate wealth.

If you’re first starting out in the work force at age 22, a fresh college graduate, considering “normal” retirement age of 65, you would have roughly 43 years to save for retirement.

You would think, “that gives me plenty of time to save for retirement. I can always start later.” And you would be right, but you would also be contributing more on a monthly or yearly basis to reach the same monetary goal the later you start.

For instance, to reach a goal of $1,000,000, you would have to contribute roughly $2,137 a month based on a 6% return for 20 years.

On the other hand, to reach the same goal of $1,000,000 over a 30 year time span, you would only need to contribute roughly $994 a month based on the same 6% return.

The longer you put off saving for retirement, the more you’ll have to contribute to reach the same goal. So, start early!

How much to put away?

Conventional wisdom says to put away at least 10% to 15% of your annual salary towards your retirement savings. That is certainly a great starting point, but as a panda who will live well past the age of 20, I’m anything but conventional, but we’ll get to that later.

Saving for retirement can be any combination of 401k, IRA, taxable accounts, and employer match.

The key to this is ensuring you contribute enough to get the full company match. If you don’t contribute enough to get the company match, you’re essentially missing out on free money.

401k contributions

Since 401k contributions are taken out pre-tax and before you ever really see the money, you probably won’t even miss it being taken out every paycheck. This is considered automated investing (saving for retirement). The money is taken out of your paycheck automatically and invested in the fund(s) you picked.

Typically, I like the idea of putting just enough (perhaps a little bit more) into your employer’s 401k to get the company match. The amount you contribute in addition to your employer’s contribution match can add up anywhere from 6-10%, which is a great starting point to start saving for retirement.

Company 401k plans are generally restrictive in terms of what funds and investments they offer. Fees are also a big downer in many company-sponsored 401k plans, especially for small companies, where the fees could hit 2-3% annually. In my opinion, this is way too much and not worth contributing to a tax-deferred plan if the tax savings is going to be eaten away by annual fees.

It’s better to open up a brokerage account with a similar low-cost fund that doesn’t eat into the earnings and have to pay taxes on the earnings than to lose the annual fees, which takes into account the entire account balance. You’d lose more to fees than taxes would take out of any earnings, so it’s best to make sure you take a look at the company sponsored funds and their returns and their related account fees.

If you’ve decided that you can live with the fees, historic performance, fund goals, etc., of your 401k plan’s offerings, it certainly doesn’t hurt to max out those savings if you can.

Make sure you look at your own individual situation before making any decisions.

Save past retirement accounts

Once you’ve set up your automatic 401k contributions, the next step is to take a look at putting money away in IRAs and/or regular taxable accounts. You can put a maximum of $5,500 in a Traditional and/or Roth IRA per year combined between the two. If you make too much to contribute to a deductible IRA and a Roth IRA, you can read about my take on the Backdoor Roth IRA.

Save as much as you can now, and odds are, you’ll continue your savings throughout your working years. After all, you can’t really miss what you don’t have if you’re saving most of your excess income for retirement.

Another method is to start by automatically putting away 1% of each paycheck, or whatever you can manage at this time into a separate “saving for retirement” account. Then, continue to increase that amount by 1% of each paycheck every month until it starts to hurt financially.

Similarly, you can also put away money for a specific goal (renovation fund, new car fund, etc) by setting up automatic savings.

Remember, the more you put away now, the easier it will be to reach your financial goal, regardless of what it may be.

How much is enough?

There isn’t really a hard, set number as to how much is enough to be saving for retirement, but I like to say as much as possible depending on your own financial situation and goals.

We are probably putting around 35% of our annual pre-tax income into retirement savings, with hopefully a trend towards 40%. This includes 401k contributions, employer match, IRAs, and taxable accounts. We are maxing out one 401k and not contributing to mine due to excessively high account fees (2-3%) and putting the maximum amount into IRAs every year. Plus, whatever is left over from student loan repayment and activities of daily living are put away in a taxable account.

Once my student loan payments are done, I hope to be putting away 50% for retirement to perhaps retire even earlier than 45. *crosses fingers*

You can also take a look at my investment strategy for 2015 to pick my brain a little. It’s probably very basic, but my mind kind of goes a mile a minute and I probably don’t explain it in detail.

saving for retirement

There are plenty of savings calculators out there that you can use to see how much and how long you would need to put away to reach a certain financial goal based on a particular annual rate of return.

I highly recommend you do some of your own research before tweaking your own savings contributions.

Marriage and Money Talk

marriage and money

Marriage for love?

Some people marry for love, some marry for money, and others marry because “it’s the right thing to do.” No matter the underlying reason for marriage, finances should always be a topic of discussion before tying the knot.

Start with yourself

Before you start any discussions with your soon-to-be-spouse, you need to take a look at your own personal financial situation. Sit down and ask yourself the same financial questions you would likely discuss.

Am I financially stable? Savings? Checking? Investments?

Do I have an emergency fund in case of unforeseen expenses? This should be 3-6 months of expenses.

How much do I bring home every month?

What are my spending habits? Am I a frugal, extravagant, or average spender?

Do I have any outstanding debts? Car loans, student loans, loan sharks? How much does that take away every month?

How is your credit score? If you don’t know, maybe it’s time to find out. After all, it’s your combined credit scores that will affect your interest rates in the future.

What are my financial goals? Short-term, intermediate-term, and long-term?

What is my investment strategy and risk tolerance?

Questions such as these allow you to better understand your own financial situation and position and figure out what you bring to the table. After all, it’s a discussion about mutual finances and the combined finances and goals of the partners in life.

Marriage is all about compromises (happy wife = happy life).. or so I’ve been told. Start thinking about things you are willing to compromise with in terms of your finances (decreased spending on electronics, getting a minivan for those future children, etc) because those are the types of things that will come up sooner or later in your marriage.

It’s almost like you are going into a business negotiation. Go prepared!

Ask your future spouse-to-be

Now that you’ve taken a look at your own personal finances, the next or concurrent step (maybe you should ask him/her to do the same when you look at your own finances) is to ask your future partner to take a look at his/her own personal finances in preparation for a discussion about future money habits and financial goals.

This way, they can also prepare both mentally and strategically for a very important discussion that sets a foundation for your financial future. Nothing is worse than having something this important sprung on you when you’re not prepared for something like this. Plus, you want to be sure that this sets a strong foundation and not a passive-aggressive balsa wood frame.

Once you’ve both gotten everything in order, set a date to talk about this and be sure to come open-minded.

Have “The Talk”

This shouldn’t really be a bad or ominous discussion. It should be an open-minded discussion between two partners about where they want their financial future to be and where they think it should be headed.

It is a way for you to brainstorm ideas and come to a consensus and compromise as to the best and most effective and equal (between the two of you) way to attain your combined financial goals. After all, two heads are better than one.

In addition to the “individual” finances that you should discuss as a financial family unit, there are several other things that need to be addressed once those finances are merged.

Are you going to consolidate all your accounts into one or two joint savings/checking accounts? Or are you going to have one joint account for bills and joint expenses and still continue to have separate accounts for discretionary spending?

Having separate accounts isn’t necessarily a bad thing. I’m almost 99.99% positive that all couples have some type of individual account. I can’t very well say 100% since I don’t know anybody.

Having separate accounts allows for separation of responsibility. A joint account to pay off bills and other joint expenses allows for joint ownership in both the money going into the account as well as the expenses incurred to be deducted from the account. Both parties are responsible for the balance of that account.

Your individual account may be there for a personal financial goal or for some spending money on a night out with the boys or a girls night out. Any large (monetary value is determined on a personal basis) should probably be discussed between both parties. The exception is a gift to the other party.

This way, you don’t have to feel guilty about spending $50 on a night hanging out with your friends and have to always be held accountable with your partner.

What about your financial goals? Do they align with each other? If not, how can you make a compromise and still make it all work?

What about your investing risk tolerance? Do you have the same tolerance? Will some convincing need to be done in order to obtain the best risk/reward ratio for your investments?

What about the future? A new house? Kids? A dog? All of these things will incur some sort of increased spending and increase your debt burden. It is good to come to a mutual understanding regarding big life events such as these with your partner before the time actually comes and it turns out you have completely different wishes.

Marriage and Money = Business

Marriage is essentially a business deal between two people who may or may not be romantically and/or emotionally involved. I say this because some people really do make marriage a business deal for tax purposes or whatever else.

The point is, before you jump into marriage head first, make sure you get your finances in order and have that financial talk to make sure that you are both on the same page.

You don’t want your finances to be in complete ruin when two people are messing around with the finances at the same time in completely different directions. It’s like having two heads that don’t talk to each other.

Fortunately for me, my wife and I are pretty much on the same page in terms of financial goals and spending habits. The only thing she doesn’t like is my higher-than-her risk of investing style of speculative high growth stocks. For that, I simply do that type of investing in my own personal Roth IRA.

 

Congratulations in your upcoming marriage and I hope this helped in setting a strong foundation for your joint financial future! 🙂

Investing 101 – A beginner’s guide

beginner investing 101

You hear about the stock market hitting new highs and the economy going up and down and the job market is getting better, interest rates are rising, housing market this and that and you want some of the action.

But first things first..

Do you have an emergency fund set up already? If not, please take a look at setting an emergency fund up now and how important it is to have one for a rainy day.

Do you have high interest debt? Interest from credit card balances will far exceed any returns from the stock market in the long run, so pay them off before throwing your money into the stock market. Take a look at reducing and eliminating debt before investing anything.

Getting started with investing

If you are a first time investor, you probably don’t have thousands upon thousands of dollars sitting idly to throw into the stock market at this time. Investing in individual stocks is also a time-consuming endeavor, from researching stocks, fundamentals, news, etc., and it can often be overwhelming at times.

Fortunately, there is an easy way to get your feet wet in the world of investing with even just a small sum of money.

Fidelity allows you to open an IRA with recurring $200 per month automatic investments that waives the $2,500 minimum to open an account.

Charles Schwab has a $1,000 minimum opening balance that is waived with a $100 minimum monthly transfer via direct deposit or Schwab MoneyLink.

Both Fidelity and Schwab have many mutual funds and index funds that have no trading fees. Many do have a short-term holding period fee of 90 days. These funds are really meant to be bought and held for many years to accumulate compounding growth with reinvested dividends and capital gains.

If you do have at least $1,000 to invest, the Vanguard STAR Fund that has a minimum opening balance of $1,000 that tracks eleven actively managed Vanguard funds. The minimum for the majority of Vanguard funds do however start at $3,000, and if you do have the money to invest, Vanguard is a favorite of mine to use when investing in mutual funds.

I do have investment accounts with Vanguard, and their low fees and great track record is definitely a place for investors that want to put money in a mutual fund or index fund and let that money sit and grow for years to come.

Open an account

Take a look at different companies and the funds they offer and pick out some that you are interested in. View each fund prospectus, which contains details on a fund’s objectives, investment strategies, risks, performance, distributions, and fees and expenses. This will tell you whether or not a particular fund is in line with your objectives, your risk tolerance, and your investment strategy.

Be sure to review all necessary documentation before investing in any fund as there is no guarantee on returns.

Once you decide where you want to open up an account, the next step is to jump in headfirst and actually open one up. These days, you can open an account up online in a couple of minutes and the verification process generally takes a day or two.

Voila! Your new account is set up and ready to go.

Funding your account

Once you have your shiny new account set up, typically you will need to set up an account from which to transfer money from. This is generally done using electronic bank transfers in which you would need your bank account number and the routing number.

Put savings on auto-pilot

To put the story short, if you are brand new to investing and want to get your feet wet, investing in mutual funds are the best way to go. They tend to be low maintenance and you can easily diversify your portfolio with a couple of funds.

Setting up automatic contributions is a great  way to set investing and savings on auto-pilot and average out your cost basis. Also, make sure to reinvest any dividends and/or capital gains to allow for compounding to really make your money grow.

Once you set up automatic investments, you can check back and re-balance as needed quarterly or twice a year and odds are, you won’t even feel the money being taken out of your account.

What’s next?

You can certainly continue to contribute, but as you age and become more knowledgeable about the world of investing, your objectives may change, and you may want to invest in individual stocks, bonds, currencies, options, etc. There’s a whole world out there to invest in. Get out there and start learning and take control of your own investments and build your own personal wealth.

You can take a look at my investment strategy for 2015 and maybe it’ll help you out too. I am certainly open to comments and questions as always.