For some reason investment managers like to complicate things and make investing seem like rocket science. True financial planners (you know who you are) have a term for these individuals, “financial salespeople.”
This topic was part of the “Planning Basics in 5 Steps,” and it’s one of the most important items of planning needs. I often tell clients that the crucial number in investing is how much YOU are saving, NOT your rate of return and/or your account balance. If you have a consistent investment strategy, you will be rewarded in the long run.
Saving 15-20% of Your Income
Follow this plan of attack to get to 15-20%:
- Take the full employer match first
- Then max-out your Roth IRA
- Then back to your 401k (if they offer a Roth 401k, use that!)
Example: You save 4% of your salary and your employer match is 4% (also known as 100% match up to 4%). You then max-out your Roth IRA, which is 8% of your gross income (example: $5,500 Roth contribution with a gross income of $68,750), which puts you at 12%. Now take an additional 8% and invest it into your 401k or Roth 401k (if available). Boom, you’re at 20%. Notice that I don’t count your 401k match towards your saving %; not going to let you off that easy!
Why Do I Favor the Roth so Much?
Great question, I am glad you asked. Unless someone can make a valid argument that taxes will most likely decrease in the future (Current US Debt: $19 trillion), I much prefer paying taxes today when we know what tax rates are! After that, you get tax-deferred growth and tax-free withdrawals since you already paid Uncle Sam!
I could probably leave it at that and you would have been looking pretty good; however, I wanted to leave you with a few ideas/thoughts for your investing.
- The stock market is NOT a “get rich quick” dream; don’t start investing with that mentality because you will only be let down. The stock market is a tool to help build your wealth, not create it overnight.
- Remember that wealth building is a marathon, not a sprint. The Tortious wins the race every time I read The Tortoise and the Hare.
- Investing is about the life you want to live later on; however, it is based on your decisions today.
- A recent study conducted by American Century Investments found that 80% of respondents wish they had someone to nudge them or give them a kick in the pants to save more money. Consider this your kick in the pants!
If you’re looking for allocation advice, it won’t happen in a blog post. Allocations are based around the individual’s psychology and tolerance for risk, and the specific goals for each account. A retirement account will be invested much differently than the five year “Trip to Europe” vacation fund.
Don’t make investing more complicated than it has to be, let us stress about what all those weird ratios mean. At the end of the day, you should learn a little bit more each time you sit down with your planner. That is the sign of a great planner vs. a salesperson.
Questions and comments can always be emailed to us. We also offer one Monday per month to “Ask Chad” any questions for FREE! That would be a great time to ask any specifics on the items above or any other questions you have!