We are a spend culture where we tend to buy things we don’t need to satisfy our “wants” but we rarely think if they meet our “needs”. Obviously the money and our available disposable income is finite. Once you spend it, there is no buyer’s remorse. Some things you can return but often than not they come with a cost.
Today I’m not going to talk about what we can spend because that defeats the purpose of my blog, which is to plan for retirement. My goal as a financially responsible person is to be able to save enough so I can retire comfortably. That is easier to say than actually doing it. The best advise I can give is to start small and hopefully you will get a snowball effect whereby the money you save will continue to grow exponentially.
You are reading this probably you are very interested in investing your money or how to plan for retirement. Trust me it is never too early when it comes to these two subjects. I wished someone told me earlier or I could have been a millionaire (on paper) today.
Retirement Plan Contribution
Without a doubt, investing in retirement plan such as 401K plan or IRAs is the most important thing that any of us should do. The retirement plan will be your only source of income when you retire. If you still believe that Social Security benefits will be available by the time we retire, you will be in for a big surprise. The last time I read that Social Security Administration will be bankrupt by 2030 – that means all the contribution that we gave to SSA from our paychecks will disappear.
The retirement plans are what I consider out-of-sight/out-of-mind. Contributing to these funds is so seamless that you would hardly notice that it was taken out of your paycheck. The real benefit is the retirement plans are tied to stock market and historically it has been going up since the stock market was tracked. Naturally the amount you invested in the retirement plans will only go up. To give you a perspective, the average price Dow Jones index increased by a whopping 13,484% since 1930.
Investing in Stock Market
With the interest so low I’m not going to recommend saving your money in a high yield savings account. In the last several years, my combined savings in PMMA and CD of nearly $70 thousand only earned less than $200 annually. The money I invested in stock markets for the last 3 years in Robinhood has grown in value by almost 45%.
Investing in stock market has its risk but if history tells us anything, the risk can be mitigated if we understand it well. Additionally, my portfolio is telling me that the benefits outweigh the risk. So don’t wait. The earlier you invest the likelihood the value will increase is high. Before jumping head first, do read some of my posts earlier on how to mitigate the risks and what new investor should do.
Save in College Savings Plan
This is extremely helpful for anyone who have children. The college savings plan, also known as 529 account allows investor to invest in certain fixed funds and allow it to grow in value. When you need to pay for higher education, you can withdraw it without penalty tax free, as long as it is used to pay for education purpose.
The great thing about the 529 account is you can set it as recurring investment every month, again another out-of-sight/out-of-mind investment vehicle. My son started going to Rutgers University and I can tell you what a life saving the 529 account is. I believe the fund for my son account grown at least by 40% since I started investing 10 years ago.
Pay Off Credit Card Debt
Paying off debt is always the first advise any financial planner will tell you and it is no brainer. Debt, particularly credit cards, has interest rates that are usually high. This kind of debt eat in your disposable income by making the loan more expensive. For illustration purpose, the expensive handbag you purchase may have cost $4,000. By not paying the credit card in full, the cost of the handbag could become $6,000 depending on when you pay the debt off.
The biggest downside of not paying off credit card debt is the lost of income. Instead of paying off the interest on the credit cards, you could have used the money and invest in Apple stocks. Imagine the amount of money you could have made by investing in Apple stock 20 years ago. I did a quick calculation and its stock went up by about 3,900%.
This goes to back to my opening remarks, the “want” and the “need”. We all need a car for transportation purpose. However, do we need a car for convenient purpose or for self-image purpose? For example, a small SUV cost about $30,000 in today’s market while a Tesla Model X costs up to $90,000. The difference in $60,000 could be invested in stock market and let it group. There are just too many consumers who all into the “image” trap and never thought of their own personal finance. Most did not consider the additional cost of insurance and maintenance when it comes to expensive cars like the Tesla.
Understandably that purchasing something we don’t need gives us a sudden satisfaction. However, the feeling will go away very quickly and we are stuck with a huge debt that will need to be repaid.