Normally when I flip through the world wide web and its various personal finance articles I lovingly shake my head in disgust. Typically I find about 99% of the material and recommendations put out there to be based on faulty personal financial practices and written by people who are not building wealth that lasts in good and bad times. But when I came across this piece in US News my attention was immediately grabbed. Although this is mainly because I now believe that Joe Udo is stalking me, it is partially because the content of the piece was spot on and couldn’t be said better by myself.
Below are Joe’s 7 ways to prepare for retirement in your 20s, along with my personal application of each.
1. Avoid consumer debt
And for that matter all forms of debt. The biggest improvement made in my personal finances came when I became debt free. Ridding myself of debt unlocked my biggest wealth building tool –> my income. Avoiding all debt has been one of the best decisions I’ve made in my life.
2. Avoid lifestyle inflation
This has been an amazing ingredient in our formula for financial peace. While it’s true that having a large income solves a lot of problems, I am also a proponent of the motto that follows, “the best defense leads to a great offense.” While our household income has steadily rose since we entered the workforce we have maintained a standard of living that equals out to a little more than $20,000 a year. I’ll sum up with this: Income can fluctuate but you can always control expenses.
3. Grow your income
In our debt busting days we worked and saved liked animals. I racked up as much overtime as I could at work and my wife even took up a part-time job teaching English as a Second Language. Dave Ramsey’s grandma said it best, “There’s a great place to go when you need money…to work!” I know in my life, sacrificing for a short while with an end goal in mind paid off huge and then some once we became debt free.
4. Sign up for a 401k account and start saving
As an overlay once we became debt free we aimed to save around 15% of our gross income in retirement accounts. I currently contribute 4% to my 401k (currently no match offered) and my wife contributes 6% to hers (100% match up to 6%). While the options in IRAs are more extensive than those offered in 401ks, my wife’s immediate 100% returns and my keeping 4% away from being stolen by D.C. fuel the road to financial peace.
5. Open a ROTH IRA
In a ROTH I contribute 11% (bringing me to 15% total savings towards retirement) of my gross income and my wife 6% (her total to 12%). The trade off in a ROTH is that while I do not get a current tax year deduction on contributions, the growth is tax free. In an example say today I invested $1,000 into a ROTH IRA into a growth stock mutual fund that made average annualized returns of 12%. In 2012 I cannot deduct $1,000 from my tax bill. But when I retire, without any further contributions, that $1,000 is now worth $51,435.75, growth totaling $50,435.75…tax free J
6 & 7 Open a taxable brokerage account/buy income producing assets
I consider these last 2 one in the same. Beyond retirement vehicles we place a priority on saving and investing. So beyond the 15% gross income that we set aside for retirement, we utilize a taxable brokerage account to invest and build wealth so that we can have access to some of our wealth without the restrictions of needing to be at retirement age. We do not buy things that depreciate in value such as: cars, jewelry and designer clothes. I buy my clothes at thrift stores and dumpster dive for my living room furniture and invest what I would have spent on those items paying retail.
So kudos to you Joe Udo, these are 7 great principles.
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