Stop Senseless Spending
Unfortunately, people have a habit of spending their cash things they don’t need. Even relatively small expenses, such as indulging in a coffee from your favorite coffee shop every morning, can really add up and decrease the amount of money you have to invest in your 401k or Roth IRA. Large monthly expenditures spent on a luxury car and credit card debt also prevent many people from having money left at the end of the month to invest for retirement.
Fund Your Retirement Now
When you earn money, your first responsibility is to pay current expenses such as the rent, mortgage expenses, food, transportation and your utilities. Once these living expenses have been covered, the next step should be to fund your 401K or Roth IRA. Your left over money after you’ve paid your basic expenses should be spent on a funding your rainy day/emergency fund. Still have money left over? Now this is your disposable income.
Unfortunately, retirement planning is usually an afterthought for many people. Funding an IRA or 401k early on in life means you can contribute less money overall and actually end up with significantly more at retirement time than someone who contributed significantly more but started later. Compounding interest is a wonderful thing;use it to your advantage.
How much difference will funding a Roth IRA early on in life make? If you’re 23 years old and invest $250 each month in a Roth IRA earning 8% average annual return, you will have saved $985,749 by the time you are 65 years old due to the power of compounding. That’s an annual contribution of $3,000. Remember though, given a 3% annual inflation rate, your annual expenses will also double in 24 years. Start investing, and start early.
Now, suppose that you wait 10 years to start funding your investment. You’ve lost some time, so you contribute $5,000 per year. You get the same exact 8% return and you want to retire at age 65. When you reach 65, you will have saved $724,753. That’s over $260,000 less that you could have had if you started 10 years ago.
Own Your Home
At some point in our lives, many of us rent a home or an apartment because we cannot afford to purchase a home, or because we aren’t sure where we want to live for the longer term. However, renting is just not a good long-term investment. Walk away from your apartment or rental and you own nothing. Purchasing a home can be a good way to build equity and wealth. In addition, you’ll be diversifying your overall investment portfolio.
Unless you intend to relocate in a short period of time; usually 5 years, it generally makes sense to consider purchasing a home. This of course assumes you are adequately funded.
Avoid those expensive cars
There’s nothing wrong with purchasing a luxury vehicle. However, individuals who spend an inordinate portion of their incomes on a vehicle are doing themselves a disservice especially since this asset depreciates in value so rapidly. Obviously, this depends on the make, model, year and demand for the vehicle. On average, a new car loses 15-20% of its value per year. Consider checking Consumer Reports or an opinion web site specializing in automobiles for depreciation information. Generally leasing a car is a bad idea unless you own your own business. Chances are you’ve put down a sizable deposit which you will not get back. At the end of your term, you walk away and own absolutely nothing. Stop buying into immediate gratification and sacrificing your long term security. When you purchase a car, you own it. When it is time to trade it in or sell you own an asset to sell.
Wrapping in all up
You don’t have to win the lottery to live comfortably in retirement. For most people, the only way to achieve this is through consistent savings and investing. Start early and develop your savings habit.
The article above is intended to provide information of a general nature and may not be suitable for your individual situation. Please consult a qualified licensed financial advisor before making any financial decision.
Larry Lane is the editor for http://www.InvestorZoo.com a social networking site specializing in personal finance. Check Investorzoo out for deals on credit cards, high yield checking accounts, blogs, and as well as CDs.
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