Chances are that you will not reach financial independence, early retirement, or any retirement without investing. Of course there are always exceptions to this like winning the lottery, owning multiple rental properties, being an entrepreneur, inheritance, etc. None of these apply to me. So in my case, the best option is to invest. Now, I’m not a day trader and don’t have the risk tolerance for picking individual stocks. I believe in the tried and true method of buy and hold. The downside to this strategy is it takes time, so start now.
In an earlier post I recommended saving in your companies 401k. Even if you hadn’t yet paid off your high interest debt. The reason for this recommendation is based on 2 things. If you aren’t taking advantage of your company match you are leaving money on the table. The second reason is time. There is a well known equation called the rule of 72. Basically, divide 72 by your rate of return and that will tell you how long in years, it will take for your money to double. So, for this example, let’s say your average rate of return is 10%. Your investment will double in 7.2 years.
At this point, if you have eliminated your high interest debt, and have built up your safety net, I recommend you re-evaluate your 401k contribution. Make sure you are at least getting the full company match. Most companies will match up to 6% so check with yours to verify.
The experts will tell you to get the match in your 401k and then start investing in an IRA. There are multiple IRA choices out there so I recommend you do your research. The 2 most popular IRA’s are Traditional and Roth. A traditional IRA is funded with pre-tax dollars, like your 401k, your investments will grow tax free. Depending on your tax situation at retirement, you will have to pay taxes on your distributions. A Roth IRA is funded with after tax dollars and also grows tax free. With a Roth IRA, depending on your tax situation at retirement, you may only have to pay tax on your capital gains (the money you made from your investments). Again, I am not a tax expert so I recommend you either hire one or do your homework.
For my personal situation, I have an excellent company match and I am very close to maxing out my 401k. For 2020 the max contribution is $19,500. If you are age 50 or older, there is an additional catch up contribution eligibility of $6,500. I’m not quite there yet but getting closer every year!
Since I want to retire early, I try to invest any extra money after all the bills are paid, into my Betterment taxable account. Again, I can access this money at any time as long as I don’t withdrawal the gains. Since we live within our paycheck, I use my year end bonus to max out my Roth IRA and put the rest in my taxable account. For year 2020, the max IRA contribution is $6,000 or $7,000 if you are 50 or older. There are several rules around IRA contributions, so I advise you to research this topic further before starting your IRA.
Disclaimer: I am not a licensed financial planner or tax expert. Any views expressed are my own and based on what I have learned on my financial journey. Please do your own research before making important financial decisions.
Fire Dog Personal Finance 