Are you looking for some practical ways to better manage your debt? Are you starting to become overwhelmed by your monthly payments and the building interest?

Hey, I get you! Debt is something that we all deal with. Especially now with the COVID-19 pandemic and the devastating ripple effects it will have on the economy for years to come, I feel even people who thought they were doing well financially might soon have to take on more debt than they previously would have imagined.

According to Debt.org, the typical American household now carries an average debt balance of $137,063. Credit cards alone make up $8,398 of this figure. The rest of it includes all of the other usual suspects such as your mortgage, student loans, auto loans, and personal loans.

With a number like that, its not surprising that nearly 60 percent of Americans say that debt causes stress in their lives. Debt is, after all, a contractual obligation. If you don’t pay it back, there will be consequences that can haunt you for several years to come.

So what can we do about this? Is debt just another boogie-man that we should always be afraid of and try to avoid at all times no matter the cost?

Not exactly. Debt is more like fire. If you handle it properly, then it can be very helpful. In fact, most loans are designed to do just that: Provide you with a large sum of money at a time when you need it. Could you imagine trying to save up enough money to buy a house with nothing but cash? That would be ridiculous because it would take you forever.

But just like fire, handle it the wrong way, and you’ll get burned. And believe me – it doesn’t take much for debt to set your whole financial house on fire.

In this post, we’re going to explore several ways you can learn to manage your debt better. By the end, you’ll not only have several strategies that you can start using yourself, but you’ll also know where to find some additional help if you need it.

Change Your Spending Habits

Unfortunately, one of the biggest problems with debt is how easy it is for us to get into it.

You can try to blame aggressive advertising and major media for encouraging all of our terrible consumer habits. But at the end of the day, who’s the one swiping that plastic?

That’s not judgment. It’s just the reality of the situation. Just like a person can subconsciously over-eat when they’re bored and or wanting to feel good, we can do the same harm to ourselves when it comes to spending money just for something to do.

That’s why the first thing I want you to do is to change your spending habits. Break the need to buy stuff you don’t need by going on a self-imposed spending diet.

How does that work? Simple. Every time you’re about to make a purchase, take a step back for a minute and honestly ask yourself:

• Do I really need this? Why?
• What value will it bring me?
• Can this purchase wait until later?

If you can’t truly answer these three questions, then the purchase doesn’t meet the cut and no money should be spent.

What’s the reason for doing this? First of all, I want to stop the flow of money going out of your pocket. Just like a doctor needs to stop you from losing any more blood before he can try to repair the wound, you need to stop losing any more money.

Plus, this is an excellent exercise in learning self-control. If you can master just this technique, then you’ll have the discipline it takes to implement any of the next steps for sure.

Make a Snapshot of Your Debt

Have you ever seen a movie where the police or FBI are trying to solve a big crime, and they’ve got a wall full of pictures, maps, facts, and pieces of yarn connecting them altogether?

Guess what? That’s what you’re about to do!

Well … maybe not as cool. But the idea will still be the same.

Your goal here is to get a complete and brief picture of your finances; particularly when it comes to your debt. To win at this game, you’ve got to exactly who you’re dealing with and what you owe them.

To do this, I want you to make a list containing:

• Who you’re paying and what it’s for
• How much you owe in total
• The minimum required payment
• The interest rate
• How much you’re actually paying each month

That might sound like a lot of information to gather, but trust me: It’s 100% necessary. If you were to go to a financial professional, this one would be one of the first things they would try to do with you. Why? Because once you’ve got the complete picture, it’s much easier to start looking for ways to fit the pieces together.

Plus, another thing I want you to do as you’re making this snapshot: Get motivated!

Just take a look at the list and how much you owe. Doesn’t it make you upset that all that money is leaving your pocket and going to someone else? If so, what are you going to do about it?

Turn those emotions you’re feeling about your debt into a passion-driven mission to pull yourself out.

Why You Should Always Pay Your Minimum Monthly Payment

With that complete financial picture, the next thing I want you to highlight any debts where you’re not making at least the minimum payment. First and foremost, these are the targets that we need to focus our attention on.

Why? Because not making at least the minimum payment required is significantly hurting your credit score.

When you don’t pay at least the minimum, you’re not holding up to your contractual obligation with the lender. Therefore, it gets treated as a “late payment” and counts negatively against you until you’re able to pay up. Unfortunately, payment history counts for 35% of your credit score, so every day that you fail to meet your obligation will just make your score worse.

This can be especially damaging if you’ve got a decent score. For example, a person with a credit score of 793 would drop to 660 for just one 90 day missed payment. And it would stay on their report for the next 7 years. Talk about a harsh reaction!

In addition to a damaged credit score, lets also not forget that failing to make the minimum payment means even more interest, late fees, and most likely a spike in your APR.

As you can see, it’s just bad all around. So do yourself a favor: Commit to making the minimum payment. If you need help on doing that, then here’s how …

Work Higher Debt Payments into Your Budget

One of the biggest complaints most people have about paying off their debts is that they believe they don’t have enough money to put towards them. However, this is rarely the case.

Our expenses are our expenses by choice. We pay a mortgage or rent because we choose to live where we live. We pay an auto or lease payment because we choose to drive what we drive. We spend the amount on money on groceries that we do because that’s what we choose to eat.

I think you get my point …

A budget is your spending plan. And whether you realize it or not, you’ve got a budget. It just might not be the one you necessarily chose for yourself. It could just be the culmination of bad spending habits that are now draining your checking account every month.

It’s time to do something about that. Make a list of all your income and expenses over the past 6 months. Calculate how much money is actually leftover every month (if any at all).

Take a hard look at those expenses. Which ones are truly important to you? Which ones do you genuinely need or can’t live without? What are the ones that you probably could lose?

Assign a priority to your expenses and then add up only the important ones. Now compare this to your income and see how much money you’ve got leftover. If its more, than you know what you’ve got to do …

How Much Will Additional Payments Affect My Debt?

You don’t have to be a personal finance expert to know that if you’re able to send in extra money on top of the minimum monthly payment will accelerate paying off your debt. However, I think if more people were to actually see the numbers in action, it might light a bigger fire under them to get motivated.

For example, let’s say you’ve got $10,000 in debt with a credit card that has a 20 percent APR. If you’re just making the minimum monthly payment of approximately 3 percent or $300, then it’s going to take you 4 years and 2 months plus $4,718 in interest to pay it back.

However, if you can spare even just $50 extra per month to put towards this payment, your $350 would now take 3 years and 3 months plus only $3,692 in interest to pay it back.

That’s not too bad. An improvement of 11 months and $1,026 of interest saved? I’d take it!

Try out the numbers for yourself here using this free online calculator. See how much you could be saving and let that encourage you to find as many ways as possible to put additional money towards your debt payoff.

Creative Ways to Pay Off Your Debt Faster

There are two really neat ways you can tackle your debts that don’t involve rearranging your budget at all. Both are super simple and highly effective at getting results.

The Debt Snowball Method

The first is called the debt snowball method. This is where you pay off your debt with the smallest overall balance first. Once it’s paid off in full, you then roll the money you were using to pay that debt towards the loan with the next smallest balance, and so on.

Because this strategy focuses on your smallest loans first, you’ll make a lot of small wins in the beginning. That can be very rewarding and give you the confident boost you need to stay on track.

The Debt Avalanche Method

The second is called the debt avalanche method. With this strategy, you pay off your debt with the highest interest rate first. Similar to the snowball method, once it’s paid off in full, you then roll the money you were using to pay that debt towards the loan with the next highest interest rate, and so on.

Although it might take you longer you pay off your debt with the largest interest rate first, mathematically this method should save you more interest in the long run.

No matter whether you pick the snowball or avalanche method, both work because they enable you to gain momentum every time a debt is paid off. Each time a cycle completes, the money you put towards the next debt simply becomes greater and greater.

You find all kinds of success stories all over the internet about people who have used these strategies to do incredible things. For example, check out how the executive editor of Wise Bread was able to pay off a mountain of student loans and medical debt totaling $150,000 in just six years.

More Ways to Lower Your Debt Payments

Another great way to have more money to put towards your debt payments is to lower the amount you owe every month. Here are two ways you can accomplish this.

Make a Balance Transfer

A balance transfer is when you move the balance of your loan from one lender to another. Usually, this is done because the new lender is offering you a much lower interest rate for a temporary amount of time.

Credit card companies offer promos all of the time where you can transfer the balance of a loan to their card and pay little to no interest for some time (such as 12 months).  When that happens, you’ve got a golden opportunity to avoid paying interest and use a technique like the debt snowball to put your entire payment towards paying down the principal of the loan.

Negotiate a Lower Interest Rate

Believe it or not, you can actually just call your lender and ask that they give you a better rate. Particularly with credit cards, this works really well as long as you’re not afraid to pick up the phone and put your negotiation skills to work.

Why would they give you a better rate? Because the credit card companies are not dumb. They know that if you’re trying to make your payments but struggling, then there’s a very high likelihood that you might start missing payments or default on the loan altogether. No one wants that!

If you tell them your situation and what you can afford to pay every month, sometimes without getting debt agencies and other parties involved the credit card company will be willing to work with you directly to come up with a resolution. It’s worth saving thousands of dollars in interest potentially to make one phone call and find out.

How to Get Help with Debt

It’s important to understand that you don’t have to face your problems with debt alone. There are lots of resources for getting help, and there’s absolutely no shame in reaching out to them.

Here are a few places you can turn to and find the support you need.

Credit Counseling

Credit counseling (or credit advisory) is a service that is generally provided by non-profit organizations. Typically, they’ll help you make that first big step towards getting a complete, big picture overview of your financial situation and then work with you to come up with personalized solutions to help fix it.

The sessions are usually free of charge and can often give you access to other helpful resources such as copies of your credit report, scores, educational materials, workshops, and lots more.

Debt Management Plan

One solution a credit counseling agency may recommend is that you consider a debt management plan. This is where the agency will roll all of your loans into one affordable monthly payment at a reduced interest rate from what you were previously paying. You then agree to the payment schedule and must stick to it for the next 3 to 5 years.

Note that with a debt management plan there is no new loan created. The agency is simply working with you to systematically pay off your loans in a way that best suits your situation. Also, there is generally a small startup fee as well as an ongoing monthly fee to participate in a debt management plan.

Debt Consolidation Services

If your credit is in relatively good standing, you may want to consider working with a reputable debt consolidation service. This is where you’re given one big loan that you can use to pay off your debts.

The new loan is usually at a lower interest rate, and so you should find the monthly payments more manageable than what they previously were. Also, because you’ve technically paid off all your other debts, this can be helpful for your credit score. There is generally a fee for this service.

Debt Settlement Services

One of the more extreme strategies you can take to battle your debt is to work with a debt settlement program. Also called “debt relief”, a debt settlement service will work with your creditors to pay off your loans by negotiating a smaller lump-sum payment than what you currently owe. Sometimes this can be as much as 10 to 50 percent less.

As part of the process, the settlement service will ask you to stop making payments to your loans. This will cause your creditors to believe that you might default on these loans and never pay them back at all. The debt settlement service will then try to use this point as leverage to convince your creditors to accept a lesser payment.

By far, this can be the cheapest option when it comes to managing your debt. However, there are some risks to be aware of:

• The debt relief agency will still require you to make monthly deposits while you’re waiting for the creditors to settle, so you’re still not off the hook for making payments.
• When you stop making payments to your loans, this can have a severe negative impact on your credit score that could last up to seven years.
• There is no guarantee that the creditors will even accept the settlement.

While there are plenty of reputable debt relief companies available to work with, unfortunately, there have been instances where some turn out to be complete scams. Consumers need to do their research before committing to one. The FTC has some resources that can help you investigate these companies.

Filing for Bankruptcy

When all else fails and your financial situation seems to have completely collapsed, then it may be time to consider filing for bankruptcy.

Bankruptcy is when you go to court and a judge decides whether or not you are still legally required to pay back your debts. This is typically done after a careful review of your assets and liabilities.

While it may sound great to have the majority of your debts discharged, bankruptcy should be considered a last resort option. Bankruptcy will stay on your credit report for the next 7 to 10 years and will make it extremely difficult to get any future credit cards, mortgages, or any other type of loan. It could even become an obstacle to finding a place to rent or getting a job.

Be sure you’ve exhausted all of your other options before choosing to go forward with bankruptcy.

Final Thoughts on Keeping Yourself Out of Debt

While there are certainly a lot of options for managing your debt, the best piece of advice is to do everything you can to keep yourself out of debt in the first place. Developing the right money habits will be key in preventing yourself from getting into debt in the future.

To do this, take responsibility for your finances. No one cares more about your money than you. Be completely aware of how much money you’re earning and how much you’re spending. Create a budget for yourself and stick to it at all times.

Again, be heavily critical of every purchase you think you need to make. Before you reach for your wallet, ask yourself: Do I really need this?

The reason we study history is because we hope to learn how to avoid the mistakes of the past. Don’t let the past repeat itself by sinking into the same bad habits and sliding right back into debt. Keep your eyes focused on becoming debt-free and before long you’ll get there.

Photo credits: Unsplash, Pexels

The post How to Manage Your Debt and Reduce Financial Stress appeared first on My Money Design.

“Recession” … its a word that strikes fear in the hearts of investors both young and old.

Generally, when a recession hits, you know what you’re in for. The stock market tanks, your 401(k) loses value, businesses you know and love close, and major media is in a frenzy every day about the latest financial disaster to strike.

The NBER (National Bureau of Economic Research) defines a recession as “a significant decline in economic activity spread across the economy, lasting more than two quarters which is 6 months, normally visible in real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales. To date, there have been 47 recessions in the United States since the Articles of Confederation (1777).

While falling stocks and market turbulence can leave you uneasy about the security of your nest egg, the truth is: As an investor, you haven’t lived until you’ve navigated your way through a recession.

Anyone can invest during the good times. You throw money into your 401(k), it goes up, and everyone is happy! Nothing to it.

However, the part about investing that everyone forgets about is that with “reward” also comes “risk”. And when a recession hits, you know exactly what “risk” they were talking about.

When a recession hits, you need to adjust your mindset so that you don’t do anything irrational. You also need to remember that they are a perfectly natural part of our cyclical economy. Recessions are only temporary and generally only last for approximately 11 months.

Truth be told, if you keep these points in mind and act strategically, you can make the most out of a recession by buying the right kinds of assets. Here’s how to invest during a recession and treat it less like a hindrance and more like an opportunity.

Buy More Stocks

Before we can start making money during a recession, we need to first ensure that you’re not going to lose any money by doing something rash. Therefore, start by doing this.

Don’t Sell Your Current Stocks or Stock Funds

One of the worst things you can do during a recession is to sell any stocks or funds containing stocks. It can be incredibly tempting since it will feel like that’s the only way to prevent you from losing money. But I’ll urge you – don’t do it! Here’s why:

Think about the old investment mantra “buy low, sell high”. During a recession, the value of your stocks will most likely be depressed. So selling them will only make you “lock-in” to those low prices. We don’t want to do that.

Instead, leave your current allocation of stocks right where its at, and take these actions instead.

Invest New Money Into More Stocks

If there’s anything you do want to do during a recession, its to take advantage of those low stock prices and buy up as many good opportunities as possible.

The easiest way to do this will be to take your monthly automatic retirement plan contributions and increase your future stock allocations. For example, if your portfolio was 60% stocks and 40% bonds, change it to 80% stocks and 20% bonds. That way, you’ll be buying up even more low-priced securities than you normally would.

Increase Your Contribution Level Altogether

In fact, if you’ve got any money to spare, now would be a wonderful time to increase your contribution level altogether. Let’s say you’re contributing 10 percent to your 401(k). How about bumping that up to 15 percent?

Again, I know it will feel counter-intuitive. But think about how that would work. All the new money you’d be investing could be used to scoop up even more stocks at their temporarily discounted prices. As time goes on and the shares start to go back up in value, you’ll have even more of them than you would have had if you hadn’t increased your contribution level.

Re-balance Bonds and Cash in the Stocks

Okay, so I said to leave your stock allocation right where it’s at. By that, I mean don’t sell any of your stock funds. But that doesn’t mean you can’t sell some of your funds that are doing okay and then use the money to buy more stocks.

I’m talking about rebalancing your portfolio. Rebalancing is a simple practice where you reset the percentages of your stocks and bonds. Effectively, it takes money from the winning assets and use it to buy shares of the assets that have lost money. Even though that can seem counterintuitive, its a very healthy and effective way to force yourself to take advantage of the low asset prices.

Generally during a recession, bonds and even cash investments will tend to go up while the stocks go down. So if you re-balance, you’d be effectively locking into these increased prices (… the “sell high” part of the mantra from earlier …).

Stop Checking Your Portfolio

The greatest threat of sabotage to your investment portfolio is your own psyche. The best thing you can do to curb it during a recession is to just stop checking on your portfolio. Don’t look at how much its gone down because all this will do is to cause you to worry, panic, and probably do something that you’ll wish later you hadn’t.

Instead, disconnect yourself from daily market slides and bad news, and just to hold tight. Ride out the storm and wait for the storm to pass. It always does eventually.

Invest in Dividend Stocks

If its good opportunities you’re looking for when it comes to investing during a recession, then you need not look any further than dividend stocks.

Dividend stocks are the shares of companies that pay their owners a dividend or cut of the profits every quarter. In other words, for simply owning the stock, you’ll receive a payment. Dividend yields are typically anywhere from 1 to 4 percent annually with some paying even more.

Why Dividend Stocks are Good Deal

In addition to receiving quarterly payments whether the stock value goes up or down, there’s a lot to love about buying up dividend stocks during a recession.

Just like we talked about in the last section, anytime a reputable company’s share price is down due to the markets, its a good time to swoop in and buy as many shares for a bargain as possible. Dividend stocks are certainly no exception. In fact, every share that you purchase entitles you to more dividend payments, so the more the better!

Also, most companies that can pay out dividends are generally able to do so because they are making profits and have solid financials. Overall, that will help ensure that the company stays strong and will not be too adversely affected by the temporary market downturn. Together, this will give you confidence that the share price will eventually go back up and produce more capital gains.

Just be careful of companies that might try to inflate their dividend yield just to make themselves look more attractive. Usually, strategies like this are not sustainable and the company will either cut their dividend payments by the next quarter or run themselves deeper into financial issues.

Where to Find Good Dividend Stocks

Great dividend-paying stocks are not to hard to find. There are two go-to places to find them: The Dividend Aristocrats and Dogs of the Dow.

The Dividend Aristocrats are an elite group of companies who have not reduced their dividend payout in over 25 consecutive years. If you’re looking for safety and security knowing that the company will continue to pay its shareholders through thick and thin, then this a good list to comb through.

You might wish to buy the individual stocks of some or all of these companies yourself. Or, alternatively, you could make life easy and buy all of them at once by simply picking up the ProShares S&P 500 Dividend Aristocrats ETF from your favorite discount broker.

The Dogs of the Dow are the ten companies in the Dow Jones Industrial Index that have the highest dividend yield. The strategy behind picking these ones is that because their dividend yield is so high, it means that the current stock price does not reflect where the company believes it will be financially in the near future, and could potentially be a good deal. Within this group of ten companies is a subgroup called the “small dogs” where only the top five are considered.

There are some mutual funds and ETFs that invest in the Dogs of the Dow, but none of them are 100% all dogs. Since there are only ten stocks, it may be easier to just work with a discount broker and buy the individual stocks yourself.

Consider Real Estate

Stocks aren’t the only asset that usually goes down in value during a recession. Often times real estate can also become depressed during tough economic times. With the threat of job security, reduced net worth, and likely no increase in salary, many people stop looking for houses or simply let their house fall into foreclosure altogether.

While those situations are certainly tough for those people, it does create some lucrative investment opportunities for others with financial security. Here are a few strategies you may want to consider.

Upgrade Your Primary Home

Though it’s debatable if your home should be considered an investment, it’s without a doubt an asset. It’s something that has value when you buy and (hopefully) more valuable when you sell it one day.

Of course, not all homes appreciate at the same rate. For example, if you’re in a neighbordhood thats not as desireable as other ones, you might only notice your home increasing in value by a few thousand dollars per year. By taking advantage of the recession, you could leverage the depressed home prices as a chance to upgrade to a more prestigous home or area. Then you might see your home value increase more rapidly.

Consider Rental Properties

Ever thought about becoming a landlord as a side hustle? A recession is the perfect time to find a great deal on your first rental property.

Start by looking for single-family homes in your area where you’re familiar with the community and home prices. If you see an opportunity to buy a house at a depressed price, then start looking into what landlords in the area charge for rent. Put together a business case and see if it would be a profitable venture.

If you’re feeling very adventurous, you could always look for properties that are outside your town and in areas where you know there is a high potential for tenants or even Airbnb guests. For example, buying homes or condos in college towns or vacation destinations might help always keep your property in high demand.

Buy REITs

If buying real estate seems exciting but you’d rather not mess around with physical property, then you can still get in on the action by buying into a REIT.

REITs (real estate investment trusts) are companies that operate similar to mutual funds and ETFs where groups of investors pool their money together to finance various forms of real estate. These are generally much larger scale projects such as office buildings, medical facilities, warehouses, etc.

Other than being able to invest in real estate, the big attraction to investing in a REIT is that they produce relatively high dividend yields. REITs are required to payout at least 90 percent of their taxable income to shareholders.  Many go so far as to payout 100 percent. This means that similar to dividend stocks there is some assure that you’ll regularly be receiving payments, even during the market turbulance.

Just like stocks, there are good and bad REITs. Be sure to always do your homework upfront and only invest in reputable ones with solid financial track records.

Build Up Your Emergency Fund

If the thought of sinking your money into anything related to stocks or real estate just sounds too risky, then there’s still one more thing you can do that will be incredibly valuable: Build up your emergency fund.

Most financial gurus out there agree that your emergency fund should be a cash-only account consisting of at least 3 to 6 months worth of living expenses. The idea is that in case something unforeseeable happens (… like a worldwide pandemic …) and you were to be out of a job for several months, you’d have a financial cushion to fall back on.

While most people know this is a good idea, they rarely ever actually do this. The thought of having that much money just sitting there inside a cash account earning less than 1 percent interest seems ridicoulous. However, I take a different persepctive.

You should think of your emergency fund as a self-made insurance policy rather than an investment. If the worst were to happen and you didn’t have an emergency fund, what would you do? Rack up your credit cards and take out personal loans at crazy high interest rates? Raid your 401(k) and destroy years of saving for retirement plus sabatoge all future compound returns? Or worse – miss your mortgage or utlitliy payments and get kicked out of your home?

With an emergency fund, you prevent all of that. That’s why its important to see it for what it is and all the financial burden it can save you if you take the time to build a sizeable cushion.

Plus, who knows … Our tolerances for risk and attitudes toward investing change and evolve just like every other part of our human psyche. If you spend the time now to build up a decent emergency fund, perhaps when the next recession hits (and yes there will be another one some day), you’ll be ready to swoop in and buy up those securities at a bargain!

Photo credits: Unsplash

The post How to Invest During a Recession and Actually Make More Money appeared first on My Money Design.

Have you ever wondered what sets you apart from people who retire young?

All over the Internet, you can find incredible success stories of regular folks who were able to pull off the impossible.

But what is their secret?  How do you retire young in today’s world when so many of the odds seem stacked against you.

It’s one of my personal hobbies to read these stories and look through the details to see what makes them different.  And you want to know what I’ve noticed?

It’s not that they won the lottery or received a huge inheritance. It’s also not that they were necessarily big-time executives earning way more money than you and I.

No, the answer is actually much simpler than you might think.  Most of the early retirement success stories I’ve read have one theme in common: They all involved extremely high savings rates.

It’s true.  You can find this in nearly every case.  But just exactly how high of a savings rate are we talking about?  Let’s consult those who have actually retired young to find out.

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How Much Money Do You Need to Save to Retire Early?

So what is the right proportion of your savings to stash away if you want to kiss the cubicle goodbye?

Probably one of the oldest cited blog posts come from Jacob at Early Retirement Extreme.  In this article, he lays out a chart describing how many years each level of savings frees you:

• If you save 5% if your income, you can take 1 year off every time you work 19 years.
• If you save 50% of your income, you can take 1 year off every time you work 1 year.
• If you save 90% of your income, you can take 9 years off every time you work 1 year.

Is this actually true?  Check out these choice selections from some of the more popular early retirement blogs and see for yourself.

• Mr Money Mustache calculates it would take 10.9 years to retire if you saved 64% of your income.
• Mr and Mrs 1500 from the blog 1500 Days: “Right now, I think in our most efficient life, now that we’re not doing that, we save at least 75%. And our life isn’t compromised. We’re very happy. (From an interview on the Mad Fientist podcast).
• Jeremy from the blog Go Curry Cracker: Our overall savings rate started relatively low (albeit high by average American standards), but as income rose and we learned how to be more efficient with our spending, our savings rate passed 70%.
• Brandon from the Mad Fientist: My savings rate in 2014 averaged over 73% but I expect that number to be higher this year because my expenses have dropped dramatically.
• Frugalwoods from their blog Frugalwoods: Mr. Frugalwoods and I finally did the arithmetic on our 2014 savings and expenditures (as I’m sure you’re all relieved to know). While in any given month of 2014 we vacillated between saving 65%-82%, our average savings rate for all of 2014 is 71.4%. Woot!

Noticing the same trend as I am?

Yes! If you want to do something as extraordinary as retire early at a young age (like in your 30’s or 40’s), then you have to do something as extraordinary as reach a remarkably high savings rate!

But why is this the key?

How Does a High Savings Rate Help You to Retire Young?

One of the most interesting and often under-appreciated facts about achieving a high savings rate is the way in which it positively affects your whole financial freedom plan.

What do I mean by this?

To put it simply: When you’re putting more money away in your nest egg for retirement, you’re not just simply saving money. You’re also training yourself in the present to live / need less income. Therefore, your target nest egg amount in the future should decrease.

And guess what?

A higher savings rate + lower nest egg target = you reaching financial freedom that much quicker!

Just look at how the math plays out with these simple examples:

Scenario 1 – 10% savings rate

• You earn $50,000 per year and save 10% or $5,000 per year.
• This means you’ll need roughly $45,000 of retirement income per year, and should therefore save up a nest egg of $1,125,000.
• At this rate, it will take you approximately 42 years to reach this goal! Ouch!

Scenario 2 – 25% savings rate

• You earn $50,000 per year and save 25% or $12,500 per year.
• This means you’ll need roughly $37,500 of retirement income per year, and should therefore save up a nest egg of $937,000.
• At this rate, it will take you approximately 27 years to reach this goal. Getting better!

Scenario 3 – 50% savings rate

• You earn $50,000 per year and save 50% or $25,000 per year.
• This means you’ll need roughly $25,000 of retirement income per year, and should therefore save up a nest egg of $625,000.
• At this rate, it will take you approximately 15 years to reach this goal.

Starting to notice something?

As we move from Scenario 1 to 3, not only are you saving more money each year, you’re also reducing your ultimate savings goal. Together, these two aspects are accelerating you closer and closer to your goal of achieving financial freedom.

You might even think of this as the double-ended approach to early retirement.  You save now in the beginning, and it results in needing less in the end.  Double-impact for your efforts!

By the way – Want to know how we did those retirement calculations just now? It’s a lot easier than you think. Read our article How Much Do I Need to Save for Retirement? The Incredibly Simple Answer.

Why Can’t I Just Invest for Better Returns?

You might have looked at the previous example and said to yourself: Hey, I’m pretty smart! Why can’t I just pick a few winning stocks, double my money a few times, and then retire early?

The problem: Nearly NO ONE is ever successful at picking high yield returns – even stock brokers and hedge fund managers!

Yes, everyone at one time has heard a story from a friend or relative where they picked a “hot” stock and made a ton of cash. But what they usually leave out of the big picture is that this was probably a one-time event. Or, worse, that they lost money on ten other stock picks before finally picking a winner! Over time, it’s simply a losing strategy.

Mutual fund legend Jack Bogle, founder of the incredibly popular investment firm Vanguard, is famous for publicly declaring that “85 to 90 percent of fund managers fail to match their own benchmarks”. Instead, he advocates that the common investor would be better off purchasing shares of a simple index fund that merely tracks the overall market performance. (This idea has become so popular that it has a financial cult following of people called “Bogle-heads”.)

The take-away: You CAN’T control the market. You CAN’T beat the market. The best you can ever do with your investments is to simply match market returns.

Therefore, the only place YOU really have any control is the volume of money you invest; your savings rate.

How Can You Increase Your Savings Rate and Retire Early Too?

I think the message is pretty clear: If you want to be like these early retirement success stories and reach financial freedom as quickly as possible, then you need to boost your savings rate as much as possible.

Sounds simple enough …

But the hard question is “how do you do that exactly”?

Start With Creating an Early Retirement Plan

No one ever gets in their car or boards a plane to go on vacation with no destination in mind. Financial freedom at any age is no different!

If you want to retire early, then you’re going to need a plan. And if you want to retire at lot earlier than everyone else, than you’re really going to need a good plan!

The best place to start is with a free retirement planning tool like this one from Personal Capital.

The way it works is simple. After creating your profile and linking your outside retirement funds, it then takes your nest egg and estimates how long your money will last (best and worst case market returns). From there, you can tweak the variables to make improvements, increase security, and run different scenarios.

Bump Up That Savings Rate!

Once you’ve got a plan together, from here on out it’s game-on to optimize your savings rate!

Where should you start?

The biggest hitters will be to begin with the following places:

• Budget your money! These practical tips will be helpful.
• Get a better job.
• Fight off lifestyle inflation.
• Take advantage of tax-advantaged retirement savings like 401(k)’s and IRA’s.
• Also take advantage of other tax-advantaged savings tools like FSA’s, HSA’s, and 529 college savings.
• Saving thousands of dollars on travel.
• Refinancing your mortgage.
• Paying less for your vehicle.
• Getting a better insurance rate.
• And so many more …

Little by little, the more you work on each of these points, the more money you’ll have to stash away.  And that will get you closer and closer to your goal of becoming financially independent.

Who knows.  Maybe it will be your early retirement success story I read next!

Readers – What do you think is the best way to retire young?  How important do you believe the role of savings rate plays?  Are there other strategies that can be useful too?

Photo(s): Unsplash

The post What’s the Best Way to Retire Early? By Doing This One Important Thing appeared first on My Money Design.

It’s payday.  You’re happy.  But your joy doesn’t seem to last for long.

You start to pay your bills one by one, and quickly the money leaves your checking account just as soon as it got there.  In the blink of an eye, you’re pretty much right back to where you started …

You’re living paycheck to paycheck, and you can’t stop worrying about money.  And unfortunately, your story is not unique.

According to a report from CareerBuilder, seventy-eight percent of full-time workers said they live paycheck to paycheck, up from 75 percent from the previous year.

If you think that simply earning more money is going to solve your problems, think again!  In the same article, they state that nearly 10% of people who earn $100,000 or more can’t seem to find a way to make ends meet.

So what’s the solution?  Why is it that some people seem to be less stressed about money while others can never seem to get ahead?

In this post, I’d like to give you five strategies for building better money habits that you can use to pull yourself up out of the hole and put your financial worries at ease.

But first: What is it that each of these tips will have in common?  What’s the common goal that each one will have you working towards?

The Ultimate Solution to Your Money Worries = Financial Freedom!

Think about what it is that sets you apart from the Rich and Wealthy.

You might be able to list a few (and I could tell you a few of my own ideas in this article here).

But all-in-all, there is one main underlying thing that the truly Rich and Wealthy have achieved when it comes to money that helps them to be worry-free: They’ve got financial freedom.

What is financial freedom?

Financial freedom is the point where you’ve got enough savings or other income streams that you don’t have to work for money anymore.  Essentially, you could afford to live your current lifestyle for the next few decades without any concerns about money.

The classic example of financial freedom is a retiree who has saved up $1 million dollars.   If this was you, using the 4 Percent Rule for retirement, you would be able to withdraw 4% of your savings ($40,000 per year) for at least the next 30 years without any worries of running out of cash.

Now that’s confidence!

This is why building up your nest egg and savings is so important.  For most people, your nest egg will be the ultimate key to leading a life of financial independence.

This is exactly the place I want you to get with your money.  It won’t be easy, and it will take a lot of effort.  But the closer we get, the more at ease you’ll feel about your finances.  Your confidence will grow, and your time will be freed up to focus more on improving other (more important) areas of your life.

Sound good?  So how do we get started?

1- Get Control of “Money In” vs “Money Out”

Step one any time you want to improve your finances is always very clear:

You need to get a VERY clear picture of how much money is coming in and how much is actually going out.

It sounds so basic … I know.  But it’s a step that is often so trivialized that we tend to overlook it and allow our expenses to pile up.

For example, we one time went back-to-school shopping for our kids.  On the drive home, my wife and I guessed that we had spent probably $500 on items for our kids.  But later when we actually added up all the receipts, the damage was more like $1,000.

Somehow all those extra purchases just snuck up on us!

Why is tracking your finances always so important?

There’s a very popular quote by management expert Peter Drucker:

“You can’t manage what you can’t measure.”

It doesn’t matter whether you earn $10,000 per year or $100 million dollars per year.  If your outgoing exceeds your income, there are going to be money problems!  (If you don’t think so, just look at the financial trouble actor Johnny Depp got himself in back in 2017.)

So how do you track your finances?

Step 1 – Make a list of how much money is coming in.

This part should be relatively easy.  For most people, their main source of money comes from their job.

But if you’ve got other streams of income coming in, be sure to note that too.

Step 2 – Understand what you’re spending your money on.

The best way to do this is to start a monthly list or fire up a spreadsheet in Excel or Google Spreadsheets.

Start by looking back through your checking account over the last 3-6 months and seeing what bills you’ve paid, checks you’ve written, etc.

If you’ve got credit cards, break those down into separate categories too such as Food, Auto, Clothes, etc.

What do we do with all of this information once we have it?

You create a budget!

Step 3 – Creating your budget.

I know … everyone likes to hate on budgets.  But like we pointed out with the Drucker quote, if you’re not tracking what you’re doing, then you really have no hope of ever improving it.

Here’s the truth about budgets: They only work when you actually follow them.  And its up to you how you design them.

Make them too strict, and you’ll choke.  But make them with realistic goals and with enough room to fit your lifestyle, and you’ll be okay.

The goal, of course, is to always be tracking!  Always be understanding clear as day how much money is going in and how much is going out.  Without that information, you won’t know how to react and where improvements need to be made.

Bonus tip: To have complete peace of mind when it comes to budgets, I prefer to work with annual budgets over monthly ones.

Why? 

Annual budgets let me see how my finances will look and if I’ll be on track over the course of an entire year!  Honestly, it’s pretty hard to be financially surprised when you can look 12 months ahead and have a pretty solid estimate of how money is going to be in our checking account.

2- Dramatically Reduce How Money is Going Out

There’s nothing like having a few thousand dollars in the bank ready to help you stop worrying about money.  No matter what the situation or the emergency, you’ll know that you’re covered.

But how do you save up “a few extra thousand dollars”?

Let’s be real … there are fundamentally only two ways to save more money:

1. Earn more
2. Spend less

Between the two, I want to focus on #2 for a minute: Spending less.

Spending less is something we all have the power to do. 

Seriously!  No matter how tight you think your spending is now, there is ALWAYS room for improvement.

What’s the best way to get started?

1- Challenge all of your purchases. 

Why are you buying the things you buy?  Are these things you actually need, or just simply things you want?

2- Ask yourself: How will this purchase improve your life? 

Again, I love to buy things just as much as you.  But sometimes it helps to stop yourself and ask if this thing you’re about to spend your money on is actually going to improve your quality of life in any way, shape, or form?

3- Multiply the purchase by 7 and then ask yourself it’s still worth it. 

I’ve previously written an article that showed how a dollar saved today is actually worth $7 in the future.  So if that thing you want is only $100, you should really think of it as costing you $700 in future savings.  Will the purchase still be worth it?

4- Last question: Can I do better? 

Can you get a cheaper quote or buy this item online for less?  I’ve found that 99% of the time the answer is almost always YES.  I’ve had experiences where I’ve put in the effort and ended up saving hundreds or even thousands of dollars on single purchases.  It’s amazing what kind of deals you can get if you’re just willing to work towards them!

3- Save More By Paying Less Taxes

As I mentioned in the previous one section:

Spending less is one of the best ways to build up your savings.

BUT, what if instead of spending less on the things you actually like, we spent less on the things you DON’T like … such as your taxes!

How can you do that?

By calling your employer’s HR department in the morning and bumping up your 401(k) contributions!

Remember that with a 401(k), you’re saving your money BEFORE the taxes are taken out.  This means that effectively you’re saving approximately 28% more than you normally would if you tried to save your money post-paycheck (like everyone else tries to do).

Whether you’re saving an extra $100 or $10,000 per year, this 28% addition can be a very significant advantage to all savers.  Year after year, it’s really going to start to compound and add up!

(Curious why 28%?  Here’s a post that explains the math.)

Don’t forget: In addition to the tax-deferred savings, your 401(k) also gives you the opportunity to:

1. Invest your money for long-term growth as well as …
2. Rack up additional employer contributions along the way.

Over time, all of this just means good news for you.  And nothing makes you feel worry-free about money quite like knowing you’ve got a growing nest egg heading towards six or seven figures!

The bottom line: I can’t recommend this enough … work towards that goal of maxing your 401(k) every year!

4- Invest For the Future

Of the elements in the machine that takes our savings and turns it into passive income for life is investing for growth.

Suppose you were able to save $10,000 per year over the next 30 years.  You are given two choices: Either save the money in a regular bank account earning no interest or invest it in a stock market index fund.

Which one would likely produce the better results?

The stock market index fund of course!  And by a long-shot: $944,608 vs $300,000.

In terms of potential monthly passive income, that’s $3,149 vs $1,000.  Over three times as much!

This is thanks to the magic power of compounding returns!

What this means for you: In order to generate future long-term, worry-free income, you need to think big and invest for growth.

There’s a very smart way to do this: Simply put a portion of your savings that you feel comfortable with in a stock market index fund.  As an example, the S&P 500 index has returned between 9-10% over the past 25 years.

The rest of your money can go in a more conservative bond index fund.

Two very popular choices, low-cost choices are:

• Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
• Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)

What’s the right proportion to invest in stocks?

Again, what / how much you decide to invest (called asset allocation) is a personal comfort question.

But if you’re looking for some sage investing advice, the Rule of 120 seems to be a good place to start.

This works when you take your age and subtract it from 120.  The result is the percentage of your nest egg that you should have invested in stocks.  Everything else should be invested in bonds.

Example: If you’re age 30,

120 – 30 = 90% invested in stocks.

100% – 90% = 10% invested in bonds.

Just an FYI: There are other variations of this Rule where you start with 110 instead of 120.  Again, it’s just a guideline.  It’s up to you how aggressive or conservative you’d like to be with your investments.

5- Work on Your Financial Habits Daily

These tips for handling your money aren’t just a one-and-done solutions.

Just like your education, health, and weight, practicing the right habits are what’s going to keep you on track for the long-haul and give you the peace of mind you’re looking for.

Your goal: Practice the advice you’re reading and actually work it into the things you do daily.

When it comes to your finances, everyone always thinks the time to apply what you know is when you’re about to make a big purchase like a new car or house.  But that’s not true.  You can use these techniques all of the time to be constantly saving and improving your money.

For example, the next time you go to buy something online, take an extra 5 minutes and see if you can find a coupon or promo code that will give you a few bucks off.

I did this when we were in line at a store waiting to buy some new patio further.  Lo and behold, I found a coupon that knocked off $60 – just like that!

This is an example of the kind of habits I’m talking about.  As long as you’re always:

• Tracking your money
• Spending less (and hopefully way less) than what you earn
• Challenging your purchases and getting the best deal possible
• Investing for long-term growth,

Then you’re going to be able to stop working about money, achieve financial freedom, and live the life you’ve always dreamed!

Readers – What are some of the strategies you use to worry less about money? 

Photo credits: Pexels

The post How to Stop Worrying About Money – 5 Effective Strategies for Better Money Habits appeared first on My Money Design.

If your pool water is cloudy or a sick dark color, and you’re looking for tips on how to turn it from green to blue, then this is the post for you!

For years, I’ve had a love / hate relationship with my pool. I love it in the middle of the summer when it’s 100 degrees outside and I want a nice, cool place to float around all afternoon. But I hate it when I pull the cover off every spring only to find a puke-colored, army-green swamp where my crystal blue water used to be.

Believe me – I know how desperate you feel when your pool looks like this and you fear it will never be suitable for human life ever again! And the amount of money you can spend only to literally accomplish nothing can be ridiculous!

Don’t think so? Here’s an embarrassing story: The first spring after we installed our pool, we pulled the cover off only to find the water had turned a terribly dark green color. Trip after trip to the pool supply store, we tried literally everything they recommended with no success. We even called a “pool cleaning service” to get a quote, but the price they asked was so insane we said forget it!

I finally gave up and actually emptied all of the water from our pool in hopes that I could “start over”. Yup … 20,000 gallons of water and all the chemicals emptied into the storm drain – what a complete waste of time and money! And you want to know what happened next? As soon as I filled the pool back up with water, the green color returned and we were right back to where we started. How frustrating!

So why was this happening? Why was I having such a rough start to opening our pool? It was because I didn’t understand why my pool water was green in the first place, and what I really needed to do in order to turn it back to crystal clear blue. I didn’t invest any time into understanding the simple chemistry experiment a swimming pool is. And as a result, I probably literally threw hundreds of dollars down the drain.

You see, when you’ve got green pool water, you’ve most likely got a problem with algae. Algae is great for swamps, but not so great for backyard pools. And the sooner you understand how to properly get rid of it, the sooner you and your family can sit back on an inflatable raft and enjoy your beautiful blue swimming pool again.

That’s why I’ve written this article. After living in two different houses with swimming pools (one above ground and the other in-ground), please allow me to help you fight your pool water problem head-on by turning it from green to blue, and saving some money in the process!

1- Make sure the pump is running smoothly

First things first: As soon as you open your pool in the spring, make absolutely certain that your pump is running smoothly.

If the pump isn’t circulating the flow of your water properly, nothing else we do in this article will matter. Why is that? Because in order for the green water to travel through your pool filter and get “filtered”, it has to circulate from your pool to the filter and back. Therefore: If there’s no circulation, then there can be no filtration!

So how will you know if the pump is working properly? Try these two ways:

• Put your hand in the pool water in front of a jet. Do you feel the pressure of water blasting out? Or is the pressure weak? Or nothing at all?
• If your filter or pump has a pressure gauge on it, check that it is not reading zero or close to zero.

No pressure at the jets or a near zero reading on the pressure gauge most likely indicates that your circulation system is clogged some place. That’s a problem! Here’s a few things to try to solve it:

1. Start by cleaning out all the junk (leaves, cotton wood, etc.) from the skimmer baskets.
2. If your pump has a secondary skimmer basket right before the pump inlet, don’t forget to clean that one too. Mine is always clogged with skinny pine needles that made it past the primary baskets.
3. If both baskets are clean and the pressure is still low, check the pump impeller.  Sometimes I find pine needles in mine that I have to scoop out with my finger.

After taking these steps, check the pressure again to see if it has improved. Once it has, you’re ready to move on to the next steps.

Keep the pump running!

Also as we move on to the next steps, if you normally keep your pool pump on a timer, reset it to run all day long. This will help ensure that the green water gets through the filter as quickly as possible.

2- Clean out any organics you can see

If you can look into your green or cloudy pool water and see anything in there that shouldn’t be such as dead leaves, branches, etc., these are called “organics”, and they need to be scooped out of your pool immediately!

Why is that? Organics are what algae feed on inside of pools. Think of every dead leaf you see as the algae equivalent of a tasty meal!

So by removing the organics, you’ll eliminate algae’s main source of food, and this will help keep your pool water crystal-clear blue (after we’ve gone through the rest of these steps).

Start by skimming the top of your pool and removing anything that obviously should not be there. If you can see further into the water towards the bottom of your pool, try to scoop or vacuum what you can. If you’re unfortunate enough that your pool water looks like the Black Lagoon and you simply can’t see anything beyond the upper surface, then don’t worry. Later in Step 7 below, we’ll talk more about cleaning the bottom of the pool later as the water becomes more transparent, and give you some advice on pool vacuums.

3- Measure your chemical levels

Before we can add any pool chemicals, we need to first know what we’re working with.  To get started, take a test strip and measure your chemical levels.

In particular, we want to know the pH level of your water. Balancing your pH will affect the effectiveness of all the other chemicals.  So it will be helpful to make sure it’s as close to good as possible.

Compare your test strip results to the back of the package.

• If your pH is too low, add some pH plus (Sodium Carbonate).
• If it’s too high, add some pH minus (Sodium Bisulfate).

Amazon and pretty much every big box store (such as Walmart) has some version of these two products.

4- Raise the chlorine level

Once the pH is balanced, the next step is to zap all the algae in your pool water with some sanitizer. For most pools, this will mean adding chlorine into the circulation and increasing the levels as quickly as possible.

Depending on the design of your pool, there are lots of different ways to feed chlorine into pool

• Cartridges
• Tablets
• Powder
• Liquid
• Etc.

Our pool is a salt-water system that chlorinates using bags of pool salt and is generally not as harsh on your skin and eyes as traditional chlorine systems.

Liquid Chlorine

In addition to your normal method of chlorine delivery, I’ve always found the quickest way to ramp up the chlorine level in the pool is to dump in a few bottles of liquid chlorine. Again, it can be purchased for relatively cheap at any big-box store or pool supply retailer (I typically pay less than $20 for a case of 4).

Use approximately 2 gallons for every 10,000 gallons of water you have.  If your water is really nasty, feel free to be generous with another gallon or two. Wait a few hours for the chlorine to circulate and measure your chemical levels to make sure it’s increasing.

Side note: Speaking from experience, liquid chlorine does a really good job of destroying your clothes if it splashes back on you.  My advice is to either pour it into the pool as slowly and carefully as possible, or wear something you wouldn’t mind getting a discolored spot or two on.

5- Shock your pool to get rid of the green color

After getting the chlorine level of the pool water up, the next step is to increase its intensity by using something called “shock” (also known as calcium hypochlorite).

What does shock do? Shock is a chemical that temporarily raises the level of free chlorine in your pool to the point where algae and bacteria are destroyed.

Imagine the chlorine in your pool is a really strong person trying to fight crime. But when you add in shock, it temporarily turns that strong person into the Incredible Hulk. The bad stuff in your pool doesn’t stand a chance!

Adding shock to your pool is very simple. Go to the deep end and pour in about 2 one-pound bags for every 10,000 gallons of pool water you have.

Again, let the pump run continuously overnight. Within 24 hours as the shock does its job of killing algae and bacteria, you should start to notice the water cool change from green to blue. Don’t be alarmed if its a cloudy color; we’ll address that in the next step.

If your water is REALLY green …

If your water looks dark green or even almost black, then you’ve got a more advanced algae problem. This means you’re going to want to throw in a few extra bags of shock or repeat this step a few times.

6- How to get rid of the cloudy water

If your water is now a shade of blue but cloudy, don’t fear!  You’re on the right track and almost there.

The cloudiness you see is all the dead algae floating around. How do we get rid of it? You basically have two options:

Option 1 – Wait …

Run the pool pump for a really long time until all of the dead stuff naturally passes through the filter. However, keep in mind that this could take several days or even weeks to accomplish.

Option 2 (my preference) – Use some pool water clarifier

Clarifier is a chemical that combines with all the dead stuff in your pool and makes it heavier, causing it to sink to the bottom of your pool for easier clean up.

Personally, I’ve been using a product called Super Blue for years and it gets the job done quick.

Using it is very simple. Grab a 5-gallon bucket from the hardware and mix the clarifier in some water according to the directions on the product. Pour it into the perimeter of your pool and wait a few hours. Generally by the next day you’ll notice that the pool water is less cloudy and most of the dead particles are now on the bottom and walls of your pool.

7- Clean up the remaining scum

Now that you can finally see through your pool water, then last step is to clean, clean, clean!

By now all the dead algae should appear as brown specs along the bottom and walls of your pool. To clean this up, you’ll want to vacuum your pool and brush the walls.

Vacuuming your pool

Pool vacuums come in nearly every shape and size. Some are just hoses that connect to your pump return line while others are completely automatic. Depending on your budget, you can get as fancy as you want.

There are two that I like to use:

• I use this battery powered pool vacuum called the Pool Blaster. It simply connects to my skimmer pole and then I manually run it along the bottom of the floor sucking up organics and brown scum. I’ll admit – It takes a long time to clean and the battery doesn’t last more than an hour, but this little vacuum does get the job done!
• We also use an automatic pool vacuum called the Polaris. This is a rolling device that mates to your pump outlet and uses the water pressure to clean up the bottom of the pool. All day and all night, as long as your pump is running, this vacuum is rolling along the bottom of your pool and cleaning as it goes. Pretty effortless!

Brushing your pool walls

In addition to vacuuming the bottom of the pool, you’ll also want to take a pool brush and brush down the sides of your pool. This is to get algae off the walls and free-floating into the water where they can be sucked into the filtration system.

If you’ve got some dark spots on your pool walls or bottom surface that won’t seem to brush off, you might have some more stubborn algae. For this, you’ll need a brush with harder wire bristles instead of the normal soft nylon bristles.

8- Keep up on your maintenance

Once things are relatively back to normal and the water is looking clear blue, be sure not to stray from its weekly scheduled maintenance. Otherwise you’ll be right back at step one again!

In general, your maintenance should include the following:

• Balancing the pH
• Adding chlorine
• Shocking the water and other algae killing chemicals (like Pool Perfect Phos Free, etc)
• Vacuuming the walls and bottom of the pool
• Cleaning / back-washing the filter
• Etc.

Stay on top of this, and you’ll get plenty of great, relaxing days floating around in crystal-clear water.

Good luck and enjoy!

Featured image courtesy of Flickr / Sean Davis

The post How to Turn Cloudy Pool Water From Green to Blue appeared first on My Money Design.

If you’re wondering “Can I contribute to an IRA and a 401(k) this year?”, then you’ll be delighted to know that the answer is most likely: Yes.

For most middle income families, the good news is that both spouses can usually contribute to both types of retirement plans.

With a 401(k), eligibility is pretty straight-forward. Your employer will either offer one or they won’t. The employee generally just has to meet the employer’s requirements which might be being 21 years of age (or older) and having worked with the company for a minimum amount of time (such as one year).

IRAs, on the other hand, are accounts that you set up yourself. If you want to start one, you simply pick a reputable financial institution and apply. Its really no more difficult than opening a checking account.

The real question, however, is which type of IRA you will be eligible to open and whether or not it will benefit your tax situation in any way.

The IRS has several requirements about the contributions you can make which are mainly affected by your income level and tax filing status.

Despite the stipulations, having the ability to save your money in both an IRA and a 401(k) is an incredible way to build your nest egg. Every contribution you make is an opportunity to avoid paying taxes one way or another. Therefore, I encourage you to consider your options and take advantage of the one that best works for you.

In this post, we’ll take a look at the different types of IRAs and see what the rules are for being able to contribute to each one.

Three Types of IRA Contributions

Generally speaking, there are two main types of IRAs:

• Traditional – Taxes are deferred until you retire
• Roth – Taxes are paid up-front

You can learn a ton more about the differences between traditional and Roth IRAs in this post I wrote here.

Now, here’s where it can get a little confusing. For these two types of IRAs, there are actually three types of contributions you can make:

1. Deductible traditional
2. Non-deductible traditional
3. Roth

Here’s how each one is different.

Deductible Traditional IRA Contributions

A deductible contribution to a traditional IRA is what most people think of when they think about contributing to a traditional IRA.

Every time you make a contribution, it can be deducted from your taxable income for the year. That means you don’t pay any taxes on this savings up-front. Any tax payments on your contributions and the earnings you accumulate are delayed into the far-off future when you retire someday.

This is a great arrangement for anyone who thinks they will be in a lower tax bracket when they retire in the future.

Qualifications

For your contribution to qualify as tax-deductible, you need to meet 3 different criteria:

1. Tax filing status (single, married filing jointly / separately, etc.)
2. Your MAGI (stands for “modified adjusted gross income” and is generally calculated when you file your taxes)
3. If you or your spouse are covered by another retirement plan at work.

The full requirements for 2020 from the IRS website can be divided between whether or not you are covered by a retirement plan at work.

If you are covered by a plan at work:

If you are not covered by a plan at work:

More on this below when we talk about non-deductible traditional IRA contributions.

Roth IRA Contributions

Contributions to a Roth IRA are a little less complex when compared to a traditional IRA.

By design, Roth IRA contributions are not tax-deductible at the time that you make them. You pay taxes on them up-front and receive no tax benefit when you file your income taxes.

However, these contributions plus any earnings you accumulate will grow tax-free. Even when you someday retire, both the contributions and earnings can be withdrawn without any tax payment due. (The opposite of a traditional IRA.)

This can be a great strategy for anyone who believes they will be in a higher tax bracket when they retire in the future.

Qualifications

In order to make a contribution to a Roth IRA, you only need to meet 2 criteria:

1. Tax filing status
2. Your MAGI

You don’t have to worry about if you or your spouse are covered by another retirement plan at work.

For your MAGI, note that as you earn more money, the IRS will begin to reduce how much you can contribute to a Roth IRA. You’ll be able to make what’s known as a partial contribution. As your income increases, your elidgibility may phase out altogether.

Here are the full requirements for 2020 from the IRS website:

Non-Deductible Traditional IRA Contribution

If it so happens that you earn too much money to be able to contribute to both a deductible traditional IRA and a Roth IRA, then there is still one more option for you to consider: A non-deductible traditional IRA.

Technically, you are always allowed to make a non-deductible contribution to a traditional IRA. There are no income restrictions.

However, with non-deductible contributions, you do NOT get to deduct the contribution from your taxable income for the year. That means you will pay taxes up-front on this savings, but not when you retire. (… Almost like a Roth IRA.)

Then, here’s where things get different. The earnings you make off these savings are tax-deferred and delayed into the far-off future when you retire someday. (… Not the same as a Roth IRA.)

Why make a non-deductible IRA contribution?

Even if you can’t benefit from deferring taxes on your contributions, its still an advantage to defer them on the earnings you will make.

Generally, if you were to take your after-tax money and invest it in some mutual funds, at the end of the year you’d owe taxes on any earnings you’ve accumulated due to capital gains, interest, dividends, etc.

But if you invest this money inside an IRA (even if non-deductible), then you get to defer these taxes. That means your earnings will effectively grow tax-free until you withdraw them someday for retirement.

Deductible vs Non-Deductible Traditional IRA Examples

Because the eligibility requirements for traditional IRAs can be a little confusing, it might be helpful to go through a few examples to illustrate when your contribution can be tax-deductible:

Example 1:

• If you are single and your MAGI was $50,000 AND:
• You are covered by a retirement plan at work = Full deduction of your contribution.
• You are NOT covered by a retirement plan at work = Full deduction of your contribution.

Example 2:

• If you are single and your MAGI was $100,000 AND:
• You are covered by a retirement plan at work = No deduction.
• You are NOT covered by a retirement plan at work = Full deduction of your contribution.

Example 3:

• If you are married filing jointly and your MAGI was $100,000 AND:
• You are covered by a retirement plan at work = Full deduction of your contribution.
• You are NOT covered by a retirement plan at work but your spouse IS = Partial deduction of your contribution.
• You and your spouse are NOT covered by a retirement plan at work = Full deduction of your contribution.

Example 4:

• If you are married filing jointly and your MAGI was $200,000 AND:
• You are covered by a retirement plan at work = No deduction.
• You are NOT covered by a retirement plan at work but your spouse IS = no deduction.
• You and your spouse are NOT covered by a retirement plan at work = full deduction of your contribution.

Roth IRAs and High-Income Earners

If you’re really stuck on the idea of contributing to a Roth IRA, BUT you earn too much money to be eligible, don’t worry. There’s still a way you can do this …

You’ll need to use a technique called a back-door Roth IRA conversion. In a nutshell, what you’ll do is:

1. Make a non-deductible contribution to your traditional IRA.
2. Contact your financial institution and ask them to convert the funds over to a Roth using IRS tax Form 8606.

Pretty simple! You can find out a lot more about Back-Door Roth IRA conversions at this article I wrote here.

Backdoor Roth IRA conversions can be pretty useful, especially if you’re someone who plans to retire early like me. By converting your savings from a traditional to a Roth style account, you’ll be able to access this money and use it without having to pay the penalty for withdrawals before age 59-1/2.

IRA Contributions Later in Life

If you happen to still be working in your 70’s and would like to keep making contributions to your IRA’s, then there are a few things you’ll need to know.

Unfortunately, you’ll no longer be able to make any contributions to a traditional IRA. This is because by the time you are age 72, the IRS will start to require you to start making something called RMD’s (required minimum distributions). Effectively, the IRS makes you start taking money out of your IRA, or you will face a staggering 50% penalty! As you might guess, its because the IRS has allowed you to defer taxes for long enough and wants to start collecting those taxes you owe on these savings!

Since there are no RMD’s on Roth IRA contributions, you are allowed to keep contributing to one if you wish.

Get Your Full 401(k) Employer Match

While it’s awesome that you want to contribute to both your 401(k) and your IRA, you may want to prioritize one over the other first in order to maximize your money.

Generally speaking, most people should contribute in the following order:

1. Contribute as much as needed to your 401(k) to get your full employer match. This number will differ for each person.
2. Contribute up to the maximum amount of your IRA.
3. Go back to your 401(k) and contribute to it until you’ve reached the IRS max.

You can find out a lot more about these steps in detail at this article I wrote here.

What If I Have a Roth 401(k)?

If your employer offers a Roth 401(k) plan in addition to a traditional 401(k) plan, and you’ve decided to use it, then it changes nothing. All of the same rules we’ve gone through above will still apply.

Photo credits: Unsplash

The post Can I Contribute to Both an IRA and a 401(k)? appeared first on My Money Design.

If you’re looking for some good things you do with $1,000 right now, then you’re in the right place.

Anytime you’re about to receive some money, it’s important to have some good options for what you plan to do with it.

And let’s be honest: With the median household income in the U.S. standing at $61,937 per year, a thousand dollars can do a lot of good.

In fact, according to a survey reported by Fox Business, the majority of people who are about to receive $1,000 or more plan to use it to pay down their debt.

While that’s always a very responsbile use of money, is it the only option?

Depending on how you normally manage your money, there may be some other choices that would also make similar positive impacts.

In fact, if you haven’t started already, a thousand dollars can be a great way to get started on building your financial safety net.

With that said, here are my tips for the bests way to invest $1,000 that will help you grow – in some cases, both financially and personally.

1- Pay Off Your High-Interest Debt

Anytime you have some extra cash available (even if it’s just a few hundred dollars), it’s always a good idea to consider putting it towards paying off one of your debts. 

Where should you start?  Financially, it makes sense to focus on your high-interest debt.  According to NerdWallet, the average U.S. household carries $6,929 of credit card debt from month to month.  If that sounds like you, then this would be a great place to start.  Credit card balances typically carry interest rates of 20-30% APR.

Of course, they’re not the only high-interest debt you could eliminate.  Got any payday, cash advance, or high-interest student loans?  Your extra $1,000 could be helpful in eliminating any one of these areas.

Why not just invest the money? 

Something a lot of people don’t realize is that paying off a debt is effectively the same thing as investing it at the same interest rate.  For example, if you have credit card balance carries a 25% APR, by paying off this debt, you’re saving yourself from having to pay off this high-interest rate in the future, and so it’s practically the same as if you had invested it at the same rate.

Could you pay off other forms of debt? 

Even the ones where the interest rate isn’t so high?  Absolutely!  In fact, there is a well-known strategy in debt reduction called the “debt snowball”.  This is where you pay off your debt with the lowest balance first (regardless of interest rate).  Once paid off, you then continue to effectively make payments, but you put the money towards your next lowest balance.  Over time, you pay off each debt, the amount of money you apply to the next debt becomes bigger and bigger until finally, you accomplish the ultimate goal – all debts paid off! 

2- Make a Tax-Deferred Retirement Contribution

Another one of the best things you can do with $1,000 is to put it into one of your tax-deferred retirement accounts. Typically for most people, this would be either your traditional 401(k) or IRA.

Why is that?  The benefit of putting this money aside in one of your retirement accounts is that you avoid paying taxes on it up-front.

Why Saving Tax-Deferred is Better!

Remember that when you save a dollar from your paycheck, its not actually a dollar.  If you’re in the 22% tax bracket, then its more like $0.78 because $0.22 went towards your taxes.  But when you take advantage of tax-deferred retirement accounts, a dollar truly is one dollar.  You avoid paying taxes on your savings until someday years (or decades) later when you finally decide to retire and live off of your savings.

Though that may not sound like much, that’s actually a 28% gain – just for being smart about how you save your money!  With an extra $1,000, that would effectively work out to $220 that you didn’t have to pay to the IRS in taxes and put into your pocket instead!

This benefit of saving so much in taxes upfront is why we choose to max out as many of our tax-deferred retirement plans each and every year.  By saving all the way up to the IRS limit of $19,500, that’s effectively $4,290 that we avoid paying in taxes and instead goes into our pockets!  When you consider that this is both myself and my wife doing this, we double that benefit to $8,580 per year!

You can read more about this in another article I wrote called “How Much Should I Contribute to My 401(k) Plan? This is the Number You Need to Hit!”.

Even Better: Tax-Deferred Earnings!

Up-front tax savings are just the beginning!  Once your money is invested in your retirement account, it then has the potential to grow and grow for decades thanks to the power of compounding returns. Just to give you some idea of the magnitude, each dollar you invested could be over 7 times as valuable after 30 years of growing. And the best part: all of these earnings are also tax-deferred!

Double Your Money with 401(k) Employer Matching

At the minimum, if you’re not already saving as much as you need to in your 401(k) in order to get your maximum 401(k) employer benefit, then your additional $1,000 can go even further.

The typical employer matches 401(k) contributions anywhere between 50 cents to a full dollar (up to some maximum amount).  Therefore, if you’re not already hitting this maximum limit yet, then there’s a good chance your $1,000 could be doubled into $2,000 – just like that! 

Keep in mind too – just like your contributions, that money also compounds over the years tax-free.  Over the life of your career, that could add an extra six-figures to your overall nest egg value!  Click here to read more.

Talk with your local HR department to find out the rules of your specific 401(k) matching plan.

What About a Roth IRA?

Roth IRAs are also great tools to use for building your retirement nest egg. But keep in mind that they are treated differently when it comes to taxes.

With a Roth IRA, you pay the taxes up-front while with a traditional 401(k) or IRA you pay the taxes in the future when you finally decide to retire.  While for some people this could work out to a better deal, it is important for you to consider what you think your position will be – do you think you’ll be in a higher tax bracket now or in the future?

In case you’re interested, click here to find out more about the differences between Roth vs Traditional IRA’s.

This technical point aside, for sure I’d not discourage someone from contributing to a Roth IRA.  My wife and I have been contributing to them for years.  The idea of growing my money tax-free and then making tax-free withdrawals while we’re in retirement is a very powerful motivator!

3- Pay Down Your Mortgage Principal

Just like paying off your high interest debt, using your $1,000 to pay down your mortgage is a very good use of the money. 

Why?  While mortgage interest rates tend to be much less than credit card rates (i.e. single versus double-digit rates), the length of a mortgage is generally much longer (generally 30 years). 

Note that you’ll want to put this money specifically towards your mortgage principal, not the interest.  The principal is the amount that you actually owe, and the interest is what you owe for as long as there is still principal remaining to be paid.  This creates a unique opportunity for you to save some money in the future if you have cash that you can spare up-front.  Because of the way mortgages are typically calculated, any extra payments to the principal could dramatically reduce the amount of interest you’ll owe later on.

To see this for yourself, check out this free online calculator to see just how much a single payment could reduce the overall amount that you owe.

Not only does it feel good to know that you’re one step closer to having paid off your house, remember that anytime you pay off the mortgage principal, this is money that should find its way back into your pocket someday.  This is because when you sell your house, as long as it is for more than you paid for it, the principal is the amount that you actually own.  Therefore, you should receive a check for this balance after the mortgage has closed.

The Financial Freedom Benefit

If you’re like me and have any ambitions of enjoying financial freedom, then paying off your mortgage can be particularly helpful.  Remember that the amount of money you need for retirement is determined by what expenses you anticipate to have.  If you’re able to pay off your mortgage early, that’s a huge chunk of money that you won’t need for retirement and don’t need to save. 

Consider the following: If your mortgage is $1,000 per month, that’s $12,000 per year you’ll need to cover in retirement.  This means for your nest egg, you’ll need $300,000 just to cover this expense. 

So if you can eliminate your mortgage before you retire, then there you go – you just reduced your nest egg savings goal by $300,000!

For more on this, read: How Much Do I Need to Save for Retirement? The Incredibly Simple Answer.

4- Build Up Your Emergency Fund

According to CNBC, only 39% of Americans said they would be able to cover a $1,000 setback if they were to experience one.  This is why I often say that one of the best things you can do with $1,000 is to simply put it aside in your emergency fund.

Most experts recommend that you should save up at least 3 to 6 months worth of living expenses in your emergency fund. But in reality your emergency fund could be even as little as $1,000.

Why you need an emergency fund

Your emergency fund is a very important part of your financial safety net.  It’s your own private insurance policy to protect against those unwanted expenses that can and will happen!

Believe me – they always happen right when you’re not ready for them.  I remember one day we were driving our car and every light in the dashboard went out.  After taking it in, we learned we needed over $2,000 in repairs!  Everything was fine the day before, and now we had a huge expense on our hands.

And that’s one example out of many I can think of.  We’ve had appliances suddenly go bad, house repairs that needed to happen right away, hospital bills that used up our entire medical deductible … the list goes on and on.

Ultimately, you never really know what life is going to throw your way.  And that’s why you need money set aside to be able to handle this when it happens.

How having an emergency fund can payoff BIG!

One of the biggest complaints I’ve heard from critics of emergency funds is that the money sits there doing nothing, and so they say it’s a big waste.  But I don’t necessarily believe that’s true at all.

The money IS doing something … it’s there to prevent you from taking on unnecessary high-interest debt.  Consider my scenario above where you have no emergency fund and all of a sudden you have a car repair that costs $2,000.  For the average person, how would they handle this?  Put in on their credit card and eat the 25% APR.   Not a good choice, but when you have no options, what are you going to do?  This is why an emergency fund is so helpful.  It keeps you out of the way of unnecessary debt and puts the control back in your hands.

Putting you emergency fund to work

Plus, who says the money has to do nothing?  You could easily put your emergency fund into an online savings account to earn a small amount of interest while it’s not in use. As long as the money isn’t “locked-in” for any specific amount of time, this is a good place to park it.

Or, another trick you could use is to put the money into your Roth IRA and use this as your potential emergency fund.  Remember: Roth IRA contributions can be withdrawn at any time because you’ve already paid taxes on it.  Though I generally like to keep retirement savings separate from the emergency fund, this would allow you to accomplish both if you’re short on cash.

5- Buy Some Dividend-Paying Stocks

Looking for a simple, smart way to invest your $1,000 that will return money to you year after year?  Why not try a few dividend-paying stocks?

Dividend-paying stocks are some of the most lucrative stocks available for one simple reason – they pay you for simply being a shareholder.  That’s right – When you own dividend-paying stocks, not only is there the potential that the stock value itself will go up in value, but the company that issued the stock will also pay you a dividend every quarter.  That’s a double benefit!

Though it’s generally only 2 to 4% of your investment per year, if you own enough of these stocks, these dividend payments can become quite substantial.  In fact, there are several early retirement seekers who base their entire strategy around this concept of one day living off of their dividends.

I owned dividend-paying stocks for years, and let me tell you – it was pretty nice to get statements showing all of those dividend payments rolling in!  Coincidently, I started with just a $1,000 investment!

What dividend paying stocks to buy?

If you’re seriously interested in getting started with dividend stocks, two very popular strategies to research are the Dogs of the Dow and the Dividend Aristocrats. 

The Dogs of the Dow are the top ten highest dividend-yielding stocks from the Dow Jones Industrial average (yes, the index you frequently hear reported on the news).  The theory here is that while you are investing in the 10 ten largest and best-performing companies, the high dividend yield reflects that their share price is lower and therefore a good bargain!

The Dividend Aristocrats are a group of companies who have not cut their dividend in 25 years or more.  Investing in these companies has often been cited as a way to (at times) outperform the market while maintaining more portfolio stability.

6- Invest in Your Career

Another terrific way to invest $1,000 is to put it into your ability to EARN even more money.  By this, I mean in the education that will help further your career.

Your job is one of the easiest places to start increasing your income.  Lots of employers are looking for people who can think, innovate, and lead beyond just the normal day-to-day activities.  And if you can be one of these people, then they will usually reward you with a promotion and a higher salary.

But how do you get there?  Generally, it will involve having the right educational credentials. 

Don’t think so?  According to Smart Asset, Americans with a college degree make an average of $59,124 per year.  That’s nearly double the $35,256 per year than workers with only a high school diploma earn.

Therefore, the first question to ask yourself is do you need a degree (if you don’t have one already)? Could you be earning more money or be in a better position if you did?

Already have an associate’s or bachelor’s degree?  Could an advanced degree like an MBA (masters of business administration) or even a doctorate help you to move forward? 

Maybe college is completely unnecessary for your field, and all you need are just a few certifications or training courses.

If you don’t think that improving your educational credentials will help you to advance with your current employer, could it help you to land a better job with a different employer?  Could you spend this money to polish your resume, work with head-hunter, get some interview coaching, and put you in a position for a better job?

Could this money help you get the education you need to change career paths altogether?

Remember: Though your education might not “feel” like a traditional investment where you can log in to your bank account and see the balance, I do believe its an investment of the self that will pay several-fold over your lifetime.

7- Save It for Your Children’s College

College is expensive!  Currently the average cost for a full year of public college (tuition, boarding, fees) is $16,757 according to the NCES.  But don’t expect it to stay at that price.  Between 2006 and 2016, prices rose 34%!

Even if there’s even a 1% chance you think that your child will go to college someday, do them a favor!  Put that $1,000 away in a college-savings plan that will grow with time.

There are a lot of options for parents looking to save up money for their children’s education.  My favorite recommendation is a 529 education savings plan.  Think of it like a 401(k), but with the purpose of paying for college instead of funding retirement.

We’ve been stashing money away in our children’s 529 plans since they were born.  It’s crazy how just a few hundred dollars per month can grow into several thousands of dollars by the time the kids are almost ready to graduate.

529 savings plans are available in each U.S. state and offer you taxable savings on contributions when you file your state return.  Similar to a 401(k), the money grows tax-free.  Even when you go to make withdrawals, as long as they are for educational-related expenses, you won’t have to pay any taxes.

8- Improve Yourself

Perhaps that $1,000 could be used to do the things you’ve always wanted to do to improve YOU!

For example: Are you happy with your weight or body composition?   $1,000 could go a long way in joining a gym, working with a personal trainer, and getting the right resources to better understand healthy eating habits.

When I was starting to get unhappy with my own waistline, I made a conscious effort to buy a handful of ebooks from Amazon and join our local Plant Fitness.  For a lot less than $1,000, in just a few months, I was eating smarter and working out regularly and managed to shave off 30 pounds of unnecessary fat!

Maybe you always wanted to learn how to play the guitar, speak another language, be better at photography, or improve your golf swing.  It doesn’t matter – what you enjoy is the thing that makes you happy, and so why not invest in something that will grow that happiness.

9- Support a Good Cause

Last but not least, one thing you could consider doing with $1,000 is to give it to a good cause.

Perhaps there’s a charity or foundation that you know does good things for your community. Or maybe there’s a local family you know that has hit hard times and could use some help.

No matter what the situation, if you’re in a good financial position and feeling selfless, then consider going above and beyond to help someone or something in need.

Readers – What would you do with an extra $1,000?  What do you think is the best way to invest $1,000 so that you grow either financially or personally?

Photo credits: Pexels, Unsplash, Pixabay

The post What Are the Smartest Things You Can Do With $1,000 Right Now? appeared first on My Money Design.

So you want to save for retirement, and you’ve heard good things about both 401(k)’s and IRA’s.

You’d love to save your money into both types of retirement accounts. But unfortunately, that might not be possible.

First, there’s the big question: Are you even eligible? Maybe you work at a place that doesn’t offer a 401(k) plan. Or maybe you have no idea if you qualify to open an IRA.

Next, if your finances are anything like most American households, then there’s only so much money to go around. Your paycheck is only so big, and you might only be saving somewhere around 10 percent of it. There might be enough to spread around.

Finally, there’s the debate of what’s best for you and your money. Do any amount of searches in Google for IRA vs 401(k) plans, and you’ll soon find that the jury is always out. Some people absolutely love IRA’s over 401(k)’s, while other people will fight tooth and nail to convince you that the opposite is true.

With so many differences of opinions, who’s right and who’s wrong? And what are you supposed to believe?

In this post, we’re going to skip past all the boring, recycled facts about retirement planning and get straight to the point of addressing the big question: Should I put money in a 401(k) or IRA first?

By the end, you’ll have a better understanding of what questions you need to first ask yourself, and how your answers will shape which plan is truly the best place for you to save your money.

First Thing to Know – Either is a Good Choice

Before anything else, let’s address the first question regarding eligibility for the retirement plans.

It will be helpful for you to know that it’s very common for most middle-class Americans to be able to save their money in both an IRA and 401(k). Generally for:

• A 401(k) plan, your employer simply has to offer one.
• An IRA, you get set this up yourself with any major financial service provider (and is no harder to do than setting up a regular bank account).

To be sure if you qualify due to your income level or employment status, you can check the IRS requirements at this link here.

Above all else, both a 401(k) and IRA are a great choices for your retirement savings over traditional bank accounts because they offer the unique advantage of tax-deferment.

Remember that when you save your money in a regular bank account, it’s with AFTER-tax income from your paycheck, meaning that you’ve already paid taxes on this money.  On the other hand, with retirement accounts, you make your contribution BEFORE the taxes are taken out.

Why does that matter?  Let’s say you have the choice to save $10,000 of earnings this year.  By the time you receive that money in your paycheck, it will be approximately $7,500 because $2,500 went to taxes.  But with your retirement accounts, you get to stash the whole $10,000.  That’s a huge 33% difference!

So given the choice between the two retirement plans, where’s the best place to start?

1- 401(k) Employer Matching Contributions

The first question to ask yourself is whether or not your employer offers you any sort of 401(k) matching contribution.  This is money that your employer kicks-in to your 401(k) alongside your contributions.

If your employer does this, start saving your money inside your 401(k) and do everything you can to maximize it!

Seriously.  Passing up employer contributions is like leaving free money on the table.  It’s just plain foolish.  I’m sure if your boss was walking around passing out $100 bills, you wouldn’t pass that up.  So why pass up the chance to collect the same thing using your 401(k)?

According to Investopedia, on average, most employers will match anywhere between 50 cents and $1 for every $1 you contribute to your 401(k) (up to some pre-set maximum amount).

Wow!  A dollar for dollar match?  You’d be effectively doubling your money for doing nothing more than simply choosing to save it.

Also not to mention that, just like your contributions, this money grows tax-deferred until someday in the future when you withdraw it for retirement.  Good deal!

Unfortunately for the IRA, since this is your personal plan, it is extremely rare for employers to help in any way with contributing to it.

Bottom line: If you’re employer offers 401(k) matching, you’re definitely going to want to start contributing to the 401(k) plan. Contribute as much as you need to in order to get the full matching benefit!

2- Fees and Flexibility

Following employer matching contributions, the next point to consider on using a 401(k) or IRA first is that of fees and flexibility.  And in this debate, usually the IRA wins.

Because you can choose which investment company to start your IRA, you’re going to find a lot less expensive options than probably what your 401(k) will offer.

For example: My go-to for investing is Vanguard.  They offer lots of fund choices that carry an annual expense ratio of 0.25%.  In fact, they’ve got a very popular stock market index fund that costs only 0.04% per year.  This means you’re paying $4 for every $10,000 you’ve got invested.  That’s almost nothing!

By contrast, the average 401(k) fund carries an annual expense of 1.0% according to the Center for American Progress.  That’s more like $100 for every $10,000 you’ve got invested.  Which would you rather pay?

Combine this with the fact that IRA’s don’t have any administrative fees.  401(k) plans do.  Most people don’t realize it, but they’re actually also paying an additional fee to their plan administrator to simply “run” the 401(k).  CNBC found that depending on the size of your company’s plan, this could be an extra 0.27 – 1.13% annual expense.

Also because you get to choose who your IRA is through, this gives you an added benefit of choosing among thousands of options.  With a 401(k), most of the time your plan is limited to only the choices that your plan administrator will allow.  If you don’t like those options, then you’re generally out of luck.

Finally, with IRA’s, you have a little bit more flexibility over the fund.  With 401(k)’s, you have to ask for your plan administrator’s permission to take out loans or file for special withdrawals.  With an IRA, since you are the boss, you make these decisions with your investment service provider.

Bottom line: After contributing as much as you need to get your full 401(k) employer match, route the remainder of your savings into your IRA.

3- How Much Do You Plan to Contribute?

After fees, the next topic to consider is how much money you plan to save every year.

For most people only saving about 10 percent of the median Amercian income of approximxatley $60,000, this works out to $6,000 per year. So points 1 and 2 above are enough to take care of this.

But what if you earn more money than that, and therefore have more money to go around?

What if you’re a super saver, and you go above and beyond your peers by saving 25% or even 50% of your income in an effort to hit those financial freedom goals much sooner?

This is where the IRA’ will fall short. Although it’s great for flexibility and usually lower in fees, the maximum amount you can contribute is quite a bit less than your employer plan.

As of 2020, the maximum annual contribution you can make to an IRA is $6,000. That’s not nearly as much as the $19,500 you’re allowed to stash away in your 401(k). Even if you plan to put money in both your IRA and your spouse’s IRA, that’s still only $12,000 altogether.

Plus, remember the first thing we said: Both plans are good because they offer tax-deferment. Regular brokerage and savings accounts with after-tax money can’t do that.

Therefore, you’re going to want to go back to your 401(k) and start increasing your contribution levels.

Bottom line: After you’ve maxed out your IRA, you should then switch back over to your 401(k) and continue to save your money there.

Do I Use a Roth or Not?

One more ingredient to make this subject just a little bit more complicated is the issue of whether or not to use a Roth-style account.

As you might already know, Roth accounts are the opposite of Traditional-style accounts.  With a Roth, you pay your taxes now, the money grows tax-free, and then remains tax-free even after you’ve retired.

To Roth or not comes down to one simple question: Do you think you’ll have more expenses now or in the future?

What is this question getting at?  It’s trying to identify whether you think you’ll be in a higher tax bracket now or later.

If you think you’ll have fewer expenses at retirement, then this means you’ll likely need less money, be in a lower tax bracket, and therefore the Traditional style account would be better suited for you.

But if you plan to live more luxuriously, travel, or just plain enjoy your money more in retirement, then chances are you’ll be in a higher tax bracket and the Roth makes more sense.

To find out more about the differences between Roth and Traditional style accounts, check out our full guide here.

Maximize Your Savings

Again: The best-case scenario when it building up your nest egg, you’re going to want to max out your retirement savings accounts as much as possible!

When you do this, it accomplishes every one of the goals we’ve discussed so far:

• Minimizing your taxes as much as possible, which translates to more money in your pocket.
• Maximum employer contributions.
• Tax-deferred or tax-free growth.

If you’re looking for some practical tips on how you can start saving more your hard-earned income, then please check out my book Save MORE, Earn MORE.  Here you’ll find some proven strategies for stashing more of your money every year.

Readers – Where do you recommend to your friends that they put their money first – a 401(k) or IRA?  What order or strategy do you like to use to get the most out of each one?

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