It’s amazing the number of reasons people give for not starting on a savings and investing plan that will immeasurably improve their lives, as well as those of their loved ones. For instance, time and time again people tell me they will start saving and investing on a regular basis sometime in the future. But unlike the great football coach George Allen, who was famous for his “the future is now” credo, the future never comes for these people.
And, according to a recent retirement survey, there are plenty of them. For instance, 24 percent of workers have less than $1,000 in savings, according to the latest Employee Benefit Research Institute survey. And 47 percent say they have less than $25,000 in total household savings and investments.
The future, unfortunately, is dangerous for many of these people. They live on the edge of financial disaster most of their lives. And some people fall over the edge and into the pit of financial hopelessness.
But it doesn’t have to be this way. You don’t have to be a manana investor; you can start changing your life and do it soon. Indeed, tax time—the time around the middle of April each year when Americans have to file a tax return to the taxing authorities known as the Internal (Infernal?) Revenue Service—is a great time to get started on the road to financial independence.
How? Many people can get a tax break for saving. The financial independence road is a happy road. It is one in which we can pay for things with cash—not credit card debt—and still have substantial assets to take care of ourselves for the rest of our lives.
How does one start?
If you don’t have a great income and have no retirement assets, why not start an IRA, an individual retirement account? You can sock away $5,500 a year (I’d recommend putting your IRA in a super low cost index fund that invests in a broad index such as the S&P 500).
O.K., for many people $5,500 seems like a hell of a lot of money. But remember this: If you have a low income, the IRA contribution is most likely deductible. That could mean you put in $5,500 a year, but the government lets you take off some $1,800 or so from your tax bill. So the government is giving you a break but only if you take advantage of it and in each tax year. You can contribute for the previous year but only until the tax filing deadline for the tax year in mid-April. Otherwise you have lost the opportunity for that tax year and can never get it back. Some things in life can be recovered. But lost time, the philosopher tells us, can never be recovered.
No going back to previous years to retrieve a lost tax break. I’m sorry to say that the latter often occurs. Once I did a story on those who failed to take advantage of a retirement savings accounts break. I went to the American Savings Education Council source. He calculated that each bill Americans pass up billions of dollars in unused savings deduction breaks in qualified retirement accounts. What a shame.
Still, the missed opportunities don’t stop there. I have known of people who worked with me in workplaces where the employer had a generous 401(k) retirement plan—-the employer matched a lot of the employee’s contributions. The employer hired good money managers such as Vanguard or Fidelity or some other big money manager to help the employee choose appropriate investments for his or her account—and guess what?
Some employees didn’t contribute a cent to the 401(k) plan. Unless these people knew they were going to die young, I believe they were engaging in financial self-destruction. They were deliberately going in the opposite direction from the road to financial independence.
Financial independence can be achieved by many people, people who have a savings and investing plan and the discipline to follow it each pay period and year.
Doubling Your Money Without Risk
Here I’m not going to advocate playing the lottery and investing in some fly-by-night company that will make you a millionaire overnight. GregoryBresiger.com can’t help you with that. Here I am going to explain a very simple strategy based on an Uncle Charlie strategy. Sometimes a family will have an Uncle Charlie who will try to educate the children in the values of thrift. The latter are endangered values in a society in which consumption seems to be everything and production—savings and investing—is disparaged. It is treated in culture and tax policy as though it was something anti-social.
But, in fact, healthy savings and investing rates have been the basis of almost every society in history improving its standard of living. And it often begins with the family, with values given to children who carry them for the rest of their lives. Uncle Charlie will promise that for every dollar the child saves, he will match it dollar for dollar up to a limit. It is the wisdom of the elders passed from one generation to the next. We have a small part of the Uncle Charlie system here in the United States.
When $7,000 Becomes $15,000
Say you put $5,000 into a 401(k) account and your employer matches it with a $5,000 account. The government lets you out of some $1,600 of taxes because you contributed on a pre-tax basis. Counting the tax breaks, you actually lay out about $3,400 but your 401(k) account gains $10,000 of value.
At the same time, you make a $5,500 contribution to your IRA and the government gives you an approximately $1,800 tax break. After tax breaks, you actually lay out some $3,700, but gain $5,500 in value. So, in these two transactions, you end up saving and investing about $7,000 but your two retirement accounts—your IRA and 401(k)—are credited with some $15,000. Do this on a consistent basis—each pay period and every year—over a long period and you will accumulate hundreds of thousands of dollars over 20 years. Now let’s assume a moderate rate of return, say eight or nine percent a year. Over 30 years, we’re talking about millions of dollars.
But this strategy only works if you take advantage of matching opportunities and tax breaks that are available to almost everyone in the middle and low income brackets. It only works if you are ready to break out of the manana syndrome, act today and make the commitment to a long-term plan.
Go ahead. Take your first step. Start down the road of financial independence.