When talking to my friends about money I sense a common theme among most. I kind of got the feeling that many millennials, not just my friends, don’t really know how to be fiscally smart with money! So dig into this article for some good basic advice for retirement (retirement basics).
We as millennials have an advantage in growing substantial wealth, that is time. In order to become to be financially mindful, you need to have a plan of action. Following these steps listed below can help you plan for retirement and perhaps you reach financial independence sooner rather than later.
Retirement Basics: Easy Steps
Here are the basic retirement steps to make after getting your first job.
Step 0: Budget and reduce expenses, set realistic goals
Check out some of the best budgeting tools like Digit, this app allows you to set budgets and visually see how you can cut monthly expenses. This will really allow you to cut down on costly expenditures like dining out or impulse purchases when they aren’t budgeted in your monthly expenses.
Related: Got a New Job? Make Sure You’re Using This 401K App
Step 1: Build an emergency fund
A good emergency fund consists of 6 months of living expenses. This is a crucial safety net that is useful if you lose employment, or have an emergency which requires a large sum of money. It brings peace of mind and is useful in those situations.
Step 2: Employer-sponsored matching funds
Odds are that your employer offers a 401K matching plan. An employee’s 401(k) plan is a retirement savings plan. The option of an employer matching program varies from company to company. It is not mandatory for a company to offer a contribution to their 401(k) plans. If your company offers a 401(k) plan then you should contribute at least the amount they are matching.
Step 3: Pay down high-interest debts
Make a list of all your debt (student, credit card, car loans) with amounts and the interest rate. The highest interest rate should be on top and this is what you will pay off first. Paying off the highest interest debt will save you money in the long run. Once you tackle this debt, move on to the second highest debt, and so on and so forth.
Step 4a: Savings for retirement in an IRA
Roth IRA —> You pay taxes now on your principal, you get gains tax-free. You are allowed to take out principal whenever you want.
Traditional IRA —> You don’t pay any taxes on it now, pay taxes on gains + principal
Roth IRA’s are better whenever you are making a lower salary because you pay less taxes on the tax bracket per a calculator. Whenever you are in the higher tax bracket, it makes sense to go to the traditional IRA.
The reason being is that whenever you this money out, you are expected to take out a lower ‘salary’ (aka your expenses at retirement) so you pay a lesser taxes on it. Ideally, as a millennial, you would want to open a ROTH IRA. That is what I did.
For those who really want to save every penny, you can use the Acorns app which automatically invests your spare change. This makes it easy for anyone with a smartphone to grow wealth.
Step 4b: Higher education expenses
Going back to school for Masters Degree or studying up for CPA exams are an investment. These typically will raise your salary potential and should be treated as an option when considering your financial goals for the future.
As a millennial, you’re probably in no shortage of advice when it comes to retirement. There are only two real mistakes you can make with a 401k plan or investments in general:
1. Not contributing at all or not starting early enough.
2. Putting all of your money in just one fund (putting all your eggs in one basket). If you want to get started investing in the stock market, check out this beginner’s guide.
So contribute as much as your finances can withstand and diversify your portfolio and start early retirement planning today! Please leave a comment if you have any questions.
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