38Chevy454
Thinks s/he gets paid by the post
Recently have had some discussions with a couple co-workers and it feels good to help them get financially on-track toward retirement and just financial aspects of life in general. Did not talk direct money values with them but learned enough to give them general advice.
Basically my directions to them are (copied this from an email I sent):
Also remember these are the first steps. As has been discussed many times here, there are not really good educational resources available for this, unless a person makes the effort to educate themselves. I consider this as my push to get them started down the right path and towards getting their financial health on-track. I did not want to just tell them read up in a book of which several good ones. That may come later as a suggestion, for now it is to start changing their mindset.
1) Pay yourself first = save at least the 401k amount to get the company matching contribution, pre-tax is usually best. IRS allows up to $17.5K pre-tax for individuals, plus additional $5.5K for over 50 years old individuals. This is the most crucial aspect, have it automatically deducted and invested in 401k before you even get paycheck. Hence the pay yourself first, before any other expenses.
2) Live below your means = have only good debt, which is mortgage and maybe car. No credit card debt, or store credit debt. Credit card debt is 18-24% interest and not deductible. This can be very costly! Car loan is not deductible, but if you buy a 2-3 year old car, to have a good reliable car that can be OK. House mortgage is deductible and is OK debt. Also includes aspects such as keep driving the older car, live modestly so you have some margin at end of the month.
3) Invest those 401k funds = according to your risk tolerance, I would suggest at least 60% equities (into diversified stock mutual funds) if not higher if you can handle the volatility. Over time, stock market will give best return, just don’t panic when it has a drop, ride it out until you are close to retirement.
4) If you have any kids and want to save for college for them = NM has a great deal on the 529 college savings plans in that NM allows you to deduct your contributions against your NM state taxes. 529 is able to grow tax free like a Roth IRA, so you can withdraw for college expenses without any tax liability. This is after-tax money for initial investment, but you get the partial state deduction, so that helps a bit.
5) If money left over, consider Roth IRA = after-tax money invested, but it grows tax free and no tax liability when you withdraw it later for retirement. This is hardest to do since it is after-tax money out of your take home pay; note that not having credit card debt allows more for potential Roth IRA savings.
Curious if you all have any additions or critiques to my suggestions. I know many here will not like the car loan, but no chance these folks can pay cash outright and my suggestion is to buy slightly used car or keep the older one longer time. I think they understand this is important to being able to save. They have credit card and store debt to pay off first and need to concentrate on this and their 401k's. The NM 529 plan has unique case for this state that makes it more attractive, but I think it holds for most states that 529 is usually the best for college savings.2) Live below your means = have only good debt, which is mortgage and maybe car. No credit card debt, or store credit debt. Credit card debt is 18-24% interest and not deductible. This can be very costly! Car loan is not deductible, but if you buy a 2-3 year old car, to have a good reliable car that can be OK. House mortgage is deductible and is OK debt. Also includes aspects such as keep driving the older car, live modestly so you have some margin at end of the month.
3) Invest those 401k funds = according to your risk tolerance, I would suggest at least 60% equities (into diversified stock mutual funds) if not higher if you can handle the volatility. Over time, stock market will give best return, just don’t panic when it has a drop, ride it out until you are close to retirement.
4) If you have any kids and want to save for college for them = NM has a great deal on the 529 college savings plans in that NM allows you to deduct your contributions against your NM state taxes. 529 is able to grow tax free like a Roth IRA, so you can withdraw for college expenses without any tax liability. This is after-tax money for initial investment, but you get the partial state deduction, so that helps a bit.
5) If money left over, consider Roth IRA = after-tax money invested, but it grows tax free and no tax liability when you withdraw it later for retirement. This is hardest to do since it is after-tax money out of your take home pay; note that not having credit card debt allows more for potential Roth IRA savings.
Also remember these are the first steps. As has been discussed many times here, there are not really good educational resources available for this, unless a person makes the effort to educate themselves. I consider this as my push to get them started down the right path and towards getting their financial health on-track. I did not want to just tell them read up in a book of which several good ones. That may come later as a suggestion, for now it is to start changing their mindset.