Have you ever lost a decent amount of weight and then found yourself back at the same weight a year or two later? The reason for that is you work so hard at working out consistently and changing your diet to meet your goal of losing weight, but after you reach your goal, you slowly slip back into your old ways and soon find yourself back at the same weight you started with. When getting financially fit, many people are able to reach their goal of getting out of debt, but then they find themselves slowly slipping back into debt and not increasing their net worth.
The only way to prevent this from happening in your financial life is to build an emergency fund like I talked about in the last article, and saving for retirement and large purchases. If you don’t want to be broke anymore, you must become a saver. You must mold yourself to think save FIRST, and spend SECOND. This must become your mentality if you want to break the poverty or paycheck-to-paycheck cycle. Many middle-class families aren’t considered to be poor in our society if they drive nice cars and own a single family home. But the only true way to measure wealth is by someone’s net worth and if you are in debt on your assets and you have no cash in the bank, you are considered to be poor from a financial point-of-view. The only way to increase your net worth is to save money and pay off debt.
Saving For Retirement
You can find a wealth of article about investing and saving for retirement under our investing category that I have written in the past. The main thing to remember is to hold off on throwing a lot of money into retirement until you are out of debt. The only time I suggest people put money into retirement when they have a lot of debt is when their compay offers a great 401k matching program. If your company will match your contributions 100% up to X percentage contribution, contribute that maximum amount to get the full match but nothing more until you’re out of debt. If you ARE out of debt, then about 15% of your take-home pay can go towards retirement accounts. If you stick to that percentage amount for 25 to 30 years, you’ll definitely be a millionaire in your golden years.
401k or Roth IRA?
Many people ask if they should be saving for retirement in their 401k or a Roth IRA. It’s a huge discussion, but here’s the short answer: If your company offers a match, invest first in the 401k. If they don’t offer a match or you’re self-employed, open a Roth IRA. You’ll be putting in after-tax dollars, but then you won’t have to pay the tax when you pull it out during retirement. The 401k puts in pre-tax dollars, and taxes it when you pull it out at retirement. You could end up paying more in taxes if all of your retirement money is in a 401k, because your goal is to be making more money and in a higher tax bracket when you are in your 60’s and 70’s.
Saving For Large Purchases
The easiest way for middle-class families without a lot of cash to slip back into a debt situation is not by using credit cards on consumer goods. Most people who truly change their financial habits will get rid of all of their credit cards and never use them again. However, they can easily be tempted back into financing a car purchase, kitchen remodel, or ski boat. This kind of debt can be worse than credit card debt because even though it usually comes at cheaper interest rates, it will lock up a bigger chunk of your monthly income and keep you from saving for retirement or paying off your house. Even if you don’t need a newer car right now, start saving for one. Then, once you want to upgrade you can sell the old one and use the rest of the money to purchase a newer, more reliable car. And as far as luxury items go, use grandma’s philosophy: If you don’t have the money for it, don’t buy it!
Do you have any stories to share about retirement planning and saving? Do you have a story about how you paid cash for a large purchase? We want to hear it! Help encourage those that think this goal isn’t attainable for them.