Hi there,
Welcome to my new series on Personal Finance. This is our post #5, and I would like to cover one of the most important topics in all of personal finance: Retirement Planning. Do you want to retire sooner rather than later in order to pursue your personal goals and interests? Sure, we all do! Then we need to follow certain key steps.
Start your retirement planning early: You've probably heard this one already (including from me in post #1), but it is so important that this needs to be mentioned again. It's simple math, really. If you started saving $2,500 per year at the age of 25, you would have 500,000 dollars by the age of 65 (with a 7% annual compounded return). If you started saving 10 years later at age 35, you would have to double your annual savings just to catch up. This is because your investment has less time to grow on a compounded basis.
Pay off your credit cards: credit card debt is bad for a lot of reasons. First, it has some of the highest interest rates around for any type of debt. Second, it is not tax deductible (unlike mortgage or student loan debt that provide tax benefits). If you are paying 35% annual interest rate on credit cards, it is very difficult to find an asset class that will yield a return greater than that. It's really that simple. My advice: before you start saving, get rid of credit card debt first.
Create a budget: you need to have a financial plan in order to understand how much you can save over a period of time. And then track your actual spending to see if you are over or under budget. Once you start looking at your spending habits carefully, you would be surprised to see how large your actual monthly expenses are for items like eating out and entertainment. Most importantly, think of your monthly savings as yet another expense that needs to be accounted for; in short, pay yourself first whenever you get a paycheck.
Take advantage of employer-sponsored 401(K): if your employer offers one (and most who do also provide a company match for a portion of your contribution), then definitely go for it. You are leaving money on the table if you are not. If your employer does not offer 401(K) or if you are self-employed, there is the Individual Retirement Account (IRA) that you can use to save each year. Key is to start saving in a tax-sheltered retirement account as early as possible to let your investments grow.
Choose low-cost investment vehicles: the more you pay investment advisor fees, the less you have left for yourself and the less amount that can grow on a compounded basis. Mutual funds are nice as they diversify your risk across many companies or industries. However, watch out for those with high expense ratios. Expense ratios are so damaging (and remember, even small annual fees add up over a 40 year period) that according to leading investment research companies such as Morningstar, low-cost passively managed funds outperform high-cost actively managed funds in almost every industry category.
I hope you found this article helpful and I will be sharing more information on personal finance in the next series.
Feel free to reply with your questions and I will try to guide you in the right direction. Thanks for reading!
If you liked this article, please check out my previous posts below:
Personal Finance Series #5: How to Get a Pay Raise
Personal Finance Series #4: Investment Advice - Part Two
Personal Finance Series #3: Investment Advice from Warren Buffett
If you are also interested in learning more about taxes, check out my tax series below:
Tax Series #11: Beware of Tax Identify Theft
Tax Series #10: Child Tax Credit
Tax Series #9: Standard Deduction vs. Itemized Deduction
Tax Series #8: Child Support vs. Alimony, and Why it Matters!
About the Author : I am a cryptocurrency enthusiast and a U.S. Certified Public Accountant with over 15 years of experience in accounting, taxation, and finance.
If you like this series, please follow me @qwesttexas. I am here to help the Steemit community with personal finance and tax questions, and break it down into simple steps so anyone can benefit from it. Steem On!