21 Mar Habits for Building Wealth #4
Habit #4: SAVE about 16%
So you’ve adopted the first 3 wealth-building habits:
- You Pay Attention.
- You Avoid Bad Debt.
- You Live Beneath Your Means.
Now it’s time to get serious about saving.
You should Save about 16% of every dollar you earn.
It’s best if you start at your first job, but if you’re running behind, start today.
Better yet: Automate your savings. You can’t spend what you don’t see.
Why is this so crucial? Credit the wealth-building power of compound interest. Finance expert Dave Ramsey illustrates the impact of saving early and often – a habit that can turn $2,000 into $2.3 million!
(You’ll want to share that link with your kids!)
Stash Cash for Emergencies
In addition to saving about 16% for retirement, you must set money aside for an emergency fund. Aim for 3 months of living expenses – and make sure it’s in cash. You need to keep that money liquid and readily available.
That way, if you’re laid off or face an unexpected medical expense, you won’t turn to high-interest credit cards to tide you over.
The 4-1-1 on 401(Ks) and More
After you earmark at least 16% from every paycheck and park 3 months of cash in your emergency stash, your next move is to fully fund your retirement accounts, such as:
- Your workplace 401(k): tax-deferred money brings down your taxable income.
- Your workplace Roth 401(k): even better because it’s tax-exempt money when used for retirement.
Self-employed? No retirement plan at work?
You can open your own Roth IRA or traditional IRA, depending on how much you earn. Every year, put the maximum – up to the IRS’ annual limit— into those retirement accounts, investing in a diversified portfolio for long-term growth.
Want to save even more, even faster? Check out how finance blogger Mr. Money Mustache turned super-frugal living into an early retirement at age 30!
Once you’ve funded all of the needs outlined above, then it’s time to open an investment account. We call this a “Bridge Account,” because it can help you bridge the time between the end of your working life and when you’re old enough to take money from your retirement accounts.
There’s no limit to how much you can sock away in your bridge account. At The Meakem Group, our goal for clients is that when they retire, they have the same amount of money in their bridge account as they have in their other retirement accounts.
We can’t predict what taxes will look like in the future.
But the bridge account + other retirement savings = more choices for managing your tax liability.
Save Now, Retire Happy
Think you have plenty of time to save for the future?
Think again. If you delay, you’ll pay.
Don’t Go It Alone
Want to put our expertise to work?
You can do this. We can help!
Call The Meakem Group at (240) 743-4971.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Roth 401(k) plans are long-term retirement savings vehicles. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 70.5. Diversification does not ensure a profit or guarantee against a loss.