If you are uncertain about the Roth IRA or traditional IRA, read this article by CashMoneyLife. I have also reference some of my other posts below. This is a very important idea to understand, especially for young investors and students right out of college who are looking for ways to save and invest extra cash.
Cash Money Life - Roth or Traditional IRA
You may also want to read:
Manage Your Money
When you increase your income or decrease your spending, you’ll find yourself with more cash at the end of the month. That cash is your ticket to financial freedom, and the more you can get each month, the better off you are. The trick though, is not to spend it, but to do things that will build a stable future for you.
1. Pay Off All High Interest Debt
Anything with an interest rate over 9% needs to go as soon as possible. The extra money should be used to make double or triple payments on these debts, focusing first on the one with the highest interest rate.
These steps can help you take care of your debt:
i. Make the first list – 4 columns, Name of debt you owe, the amount you still owe on that debt, the monthly payment for that debt, and most importantly, the current interest rate on debt.
ii. Order all of the debts by their current interest rate. The one with the highest interest rate, not biggest balance, should be paid off first.
iii. Look for ways to reduce the rates, focusing most strongly on the highest current one. Readjust the priority of the list to reflect to new rates.
iv. Direct all of your extra payments towards the top debt on the list. Each month, make minimum payments on all of the debts on the list except for the top one. With that top debt, throw everything you can at it. Make a double payment or a triple payment or more.
v. When a debt vanishes, cross it off the list and feel good about it.
vi. Update the list when you acquire a new debt.
vii. Update the list when one of your debts adjusts to a new rate.
2. Build an Emergency Fund
An emergency fund is an amount of money you keep in a savings account that’s intended to be used in the event of a major crisis, such as a job loss, a medical emergency, major car damage, and so on. It’s a good idea to measure your emergency fund in terms of months’ worth of living expenses – you should have a month and a half worth of living expenses for each person you claim as a dependent.
A good rule of thumb is to have 6 – 8 months worth of living expenses in your emergency fund. If this seems like a lot, set it as a long-term goal and begin putting aside a small amount each week. Right now, I have an automatic monthly deduction from my checking account to a high yield savings account at ING. Don’t wait, begin right now with as much as you can afford.
3. Max out Retirement
Go to one of those retirement meetings at work, ask exactly how much you should be putting away to ensure that your living expenses are well-covered in retirement, and put that much away. This varies a lot depending on how much you have in right now, how much your employer matches, and so on, so you should talk to your retirement planner at work about the specifics. It is never too early to start investing for retirement!
Save 10% of your income at the bare minimum. You should not have more than 5% of your retirement in the stock of any one company. If your company doesn’t have a retirement plan, open a Roth IRA on your own with a reputable company like Vanguard. If your company offers any matching on your retirement, contribute enough so that you can get all of it. If you don’t know what you are doing, put your money in a “target retirement” fund so that it gradually becomes less risky as you approach retirement.
4. College Savings
Establish a 529 college savings plan for them and start automatically putting a certain amount into this account each month. There are many different plans, just pick a good one and start investing now. I use the New York 529 Savings Plan managed by Vanguard for my lovely niece.
5. Pay Off All Debts
If all of these are covered and you still have cash left over, the next step is to pay off all of your debts. Get rid of car loans, student loans, and your mortgage using the debt reduction plan discussed in the previous section.
6. Invest
Now, this is a good time to start investing. Trent Hamm recommends buying low-cost broad-based index funds because they don’t have many fees and grow very nicely over long periods of time. Don’t invest in individual stocks unless you’re quite content to lose the money or want to invest many, many hours in research. Trent Hamm invest with Vanguard directly through vanguard.com – their fees are miniscule, they offer a huge array of index funds, and their customer service is stellar.
Thank you for Trent of the Simple Dollar for allowing the free distribution of this e-book. For the entire e-book, click on link below.
Everything you ever really needed to know about personal finance in one page, by Trent Hamm.
RELATED LINKS:
Personal Finance in One Page: Part 1
Personal Finance in One Page: Part 2
Personal Finance in One Page: Part 3
Personal Finance in One Page: Part 4
Personal Finance in One Page: Part 5
It is never too early to start contributing to an Roth IRA account. This is my second year of maxing it out and it is performing great. Best time to start is in a depressed market like this one. Much more upside in the future than downside; that’s if you believe this is not the end of the world. :)
Please leave any comments. What are your thoughts on the Roth or Traditional? Who are better suited to each type? Let’s help each other out so that we all can aim for our own understanding of Financial Independence.
What are the differences between a Traditional, SEP and Roth IRA?
Read this article from Mint.com.
As I have always mentioned, the intention of this blog is to provide you with solid information that will allow you to make sensible decisions when it comes to money and personal finance. After reading studying many books and reading many blogs, one starts to have a sense as to what is good information from what does not work. Even though money management is different for different people in different situations, certain information works very well in general. This blog posting on The Digerati Life provides a great and simple breakdown of Dave Ramsey's basic steps to financial success.
I have listed the steps briefly; click Dave Ramsey's book to purchase from Amazon. Highly Recommended.
DAVE RAMSEY'S BABY STEPS
1. Save up for a small emergency fund.
This is very important and is usually very liquid cash that you can access quickly in the case of an emergency.
2. Pay off your debts with the debt snowball strategy.
A very important step in being free of financial distress.
3. Grow (or extend) your emergency fund.
This should equate to approximately 3 - 6 months of your expenses.
4. Save and invest in your retirement.
Put money in your employers 401k or 403b; enough to get the matching. Next, open up an IRA; a traditional or a Roth IRA depending on whether or not you think you will be in a higher tax bracket closer to retirement (which means that you should have a Roth IRA now).
5. Save for your child's college fund.
Open up a 529 plan. Save for your child's college fund. Let's face it, it's not getting any cheaper. The earlier you start the better.
6. Pay off your home mortgage early.
Once you get to this step, you can contribute more to your mortgage.
7. Continue saving, build your wealth, invest and give.
This is a great position to be in; just focus on growing your net worth.
These are a great set of tips to keep in mind, especially this challenging economic environment. These are skills we all can learn and adopt through practice. The purpose of this blog is to provide financial education; I believe this article from Zen Habits, done by J.D. Roth from Get Rich Slowly, has a lot of great material on it.
I will share with you some of my takes on the 10 skills that are stated in the article.
1. Set up a budget - Know what your fixed expenses are and know what are not. Set up how much you would like to spend on various things and stick to it.
2. Track your spending - I actually use Mint.com and MS Money. They are both great applications and really allow you to see where your money is being spent. I also recently tried Quicken Online since it somehow integrates with Turbotax, which is what I use to file taxes. The point is not what you use, but that you actually start tracking where your money goes. Even a simple Excel sheet can work. Knowing where your money is going is the first step in understanding your finances and taking control of it. Just do it.
3. Check your credit report - Your credit score is very valuable and should be kept in order. In the long run, having great credit can be very beneficial and save you a lot of money from lower interest rates in mortgages to cheaper insurance. Take care of your credit and it will take care of you.
4. Stop Junk Mail - Stop them or throw them out. Don't even look at them. They are meant to tempt you into getting things you do not need.
5. Optimize your bank accounts - Be sure that your money is in high yield savings accounts. I recommend ING Direct. Great online high yield savings account.
6. Open an investment account - It is never too early to start investing. Utilize your employers 401k or 403b and also consider opening a Roth IRA. Read the article to see the benefits. I opened my Roth IRA through Sharebuilder, which is where I do my investments as well.
7. Call around for better deals - Check around for better insurance rates, better credit cards etc.
8. Educate yourself - Learn as much as you can about finances. See link below for great recommendations.
9. Set financial goals - Set some short-term financial goals and some long-term financial goals. For example, I intend to put $5000 in my Roth IRA account by the end of July and plan to increase my investment portfolio by $100,000 in 5 years.
10. Create a money file - Have a secure place to keep all your financial data; passwords, account numbers etc.
If you have not already noticed, I have posted a lot of articles around retirement, IRAs and 401ks etc. Why? It is all part of my personal investment philosophy of preparing for the long term and having the right strategies. 360 Degree Wealth is meant to provide you with all the necessary information to assist you in making a well-informed decision. With the right information, and the right understanding, I believe most people will be able to become great financial planners. I think this article adds to that mission.
Retirement Investing is very important because it allows you to start thinking long term. The mind-set that is created when thinking long-term is valuable when it comes to investing. There are many wealthy people out there and a large majority have become wealthy because they are able to plan well; they are very responsible with their finances. An important part is retirement.
I encourage you to read this article below and get an understanding of the various options that are available to you; IRA, Roth IRA, Roth 401k, 401k, 403b etc. Understand the difference between them and know the contribution limits. Your decisions here can have a huge impact on the quality of your lifestyle closer to your retirement years.
Enjoy!!
