Sit Back, Relax and Enjoy the Ride: How to Put Your Wealth Creation on Autopilot

BY: - 21 Feb '17 | Money

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The rich invest to make their money grow. Unfortunately, too few of us follow their example. We put off investing because we think we’ll be in a better financial place in the future. We tell ourselves that later on we’ll have more money to invest.

Unfortunately, later never arrives as we inherit more obligations. A spouse and kids cause expenses to skyrocket, while your income struggles to keep pace. Lifestyle inflation has the potential to sap any extra income.

That’s exactly why the best strategy is to start investing early, regardless of how little you have to invest. Use time as your ally. Small sums invested now, snowball over time to create a sizable nest egg in the future.

Consider investing just 1% or 2% of your income on a consistent basis. As your income grows the amount you invest grows as well. In addition, you may find yourself able to invest a larger percentage of your income as your financial situation improves. But don’t be afraid to start off small.

What should you invest in?

Forget the stock symbols, Mad Money style TV shows or the money magazines hyping the latest and greatest stocks. As we discussed previously, the simplest way to take advantage of the wealth building power of the stock market is by purchasing a low cost index fund.

READ: Why Boring Is Beautiful When It Comes to Your Money – Index Funds

Where should you invest?

Once you decide to invest and what to invest in (low cost index funds of course), the next question is where to invest. Two of the first places for investment should be your employer’s 401(k) or 403(b) plan and a Roth IRA.

A 401(k) plan is an employer sponsored retirement account. You direct a portion of your salary to be placed directly into your 401(k) plan for investing. Non-profits have a similar plan for employees called a 403(b) plan.

Unfortunately, not all employers offer a 401(k) or 403(b) plan, but if they do, this could be one of the smartest places to invest your money because you fund your account with pre-tax dollars. This reduces the amount of income tax you’ll pay at the end of the year. The downside is that you’ll pay taxes on your earnings as they are withdrawn after retirement.

One particular feature that makes a 401(k) or 403(b) attractive is that many employers will match the amount of money you place into your retirement account, usually up to 3-6% of your salary. If you place 3% of your salary into a 401(k) retirement account, for instance, your employer will place an equivalent amount of money into your retirement account. This is basically free money and doubles your investment immediately.

Best of all, with a 401(k) or 403(b) plan you select the percentage of your salary you want directed to the plan and it is automatically deducted from your paycheck. You can simply set it and forget it, putting your wealth creation on autopilot.

A Roth IRA is an individual retirement account that you set up with an online broker. Unlike a 401(k), with a Roth IRA you invest money that you’ve already paid taxes on. You can have money directly transferred from your checking account to your IRA account. Remember, you’ll want to invest your Roth IRA contributions in a low cost index fund to reduce risk while maximizing the long-term growth of your money.

Put your investment accounts on autopilot then ride the long, lazy road to wealth creation.

The advantage of a Roth IRA is that your investments then grow tax-free. You can withdraw your contributions from your Roth IRA anytime, tax free. You don’t pay taxes when you withdraw your contributions and earnings from your Roth IRA after the age of 59 1/2 (assuming you’ve held your account for at least 5 years). Generally, you’re only allowed to contribute $5,500 to your Roth IRA each year and if your income exceeds $133,000 as an individual or $196,000 a year as a married couple, you are not allowed to contribute to a Roth IRA at all.

Many experts suggest that if your employer offers a 401(k) or 403(b) and matches your contributions, that you should first consider contributing up to the amount of the match, before investing in a Roth IRA. This is so you can take advantage of the “free” money your employer is offering you.

Whether you chose to invest in a 401(k)/403(b), a Roth IRA, or both, the key is to start early and invest consistently in low-cost index funds, even if you don’t have much money to begin with. Put your investment accounts on autopilot then ride the long, lazy road to wealth creation.

BMWK, have you put a 401(k)/403(b) or Roth IRA to work for you?

About the author

Alonzo Peters wrote 292 articles on this blog.

Alonzo Peters is founder of MochaMoney.com, a personal finance website dedicated to helping Black America achieve financial independence.

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  1. Pingback: 5 Super Smart Things to Do with Your Refund Check – Cafe Mocha Radio

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5 Super Smart Things to Do with Your Refund Check

BY: - 27 Feb '17 | Money

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Last year the average taxpayer received a federal tax refund of nearly $3200. Having received such a large check in the past, I can fully appreciate the temptations to spend the money on something “fun”. We all work hard for our money so a new toy or vacation should be considered reasonable. Right?

But, if you can resist the temptation to splurge, your IRS “windfall” offers a unique opportunity to significantly bolster your financial situation.

1. Unshackle yourself from debt

Debt is the modern form of slavery, and the average household is drowning in nearly $7,000 of credit card debt. Worst of all, the interest on such debt is money that you’re literally throwing out the window. Eliminating $3,000 of credit card debt with an 18% percent annual interest rate would save you nearly $540 every single year in interest charges. This makes paying off such high interest debt one of the best investments you can make.

2. Take the first step to becoming a millionaire

You can’t become financially independent without planting your financial seeds. As we discussed previously, small sums invested consistently can snowball into large amounts if given enough time. Unfortunately, 56% of Americans have less than $10,000 saved for retirement. Consider investing your refund in an investment vehicle like a Roth IRA every year so that you can retire comfortably, instead of having to live your Golden Years relying on meager social security payments.

3. Provide yourself with the gift of peace of mind

Washing machines break, tires need replacing, and pipes burst. That’s life. But there’s nothing worse than facing a financial emergency without the funds to meet the challenge. That’s why an emergency fund is essential. The sad truth, however, is that 62% of adults have less than $1000 in savings. As an old African proverb advises, “save your money and one day it will save you.” Provide yourself with peace of mind. Use your tax refund to establish your emergency fund.

4. Invest in yourself

There are over 5.5 million job openings in the US. Unfortunately, many of these positions will go unfulfilled due to a widening skills gap. Potential employees simply don’t possess the skills that employers are looking for. You can use this to your advantage by obtaining additional training to gain the skills employers are seeking. Use your refund to enroll in courses at your local community college or gain additional skills through online courses. Consider additional certifications to advance in your current workplace.

The most lucrative investment you can make is the investment in yourself.

5. Save for the down payment of a major purchase.

Too often, we get in trouble by making major purchases without having the appropriate down payment. Making a 20% down payment for a home, for instance, will not only garner you a better interest rate on your mortgage, but it will also prevent you from having to pay costly private mortgage insurance (PMI). PMI is an insurance premium you’re required to pay that protects lenders in case you default on your loan. It is essentially a tax for those without enough money for a sizeable down payment.

Similarly, most experts advise that you follow the 20/4/10 formula when purchasing a car. Your down payment should be at least 20 percent of the purchase price, you should finance for no more than four years, and your total car expenses should take up no more than 10 percent of your gross income.

Using your tax refund to save for the appropriate down payment on a major purchase will save you money in the long run.

There are few times in our lives that we receive a sizeable lump sum of money. Make the most of it by using your refund cash to help further secure your financial future.

BMWK, what do you plan on doing with your tax refund?

About the author

Alonzo Peters wrote 292 articles on this blog.

Alonzo Peters is founder of MochaMoney.com, a personal finance website dedicated to helping Black America achieve financial independence.

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