To find money to invest for your future, you need to make sure that your outgoing expenses are less than the income that you are receiving. You need to develop an excess that you can have free to invest.
Now before you start to think.”well I don’t have any excess leftif I was earning more money.then I would have some free”. Let me dispel this mythand tell you that it is a known and excepted fact that the amount of money that people earn has little if any bearing on whether or not they have an excess left to invest. The only way to create an excess it to spend less than you earn, instead of spending all that you earn.
Even doctors and lawyers, who earn well over $100,000.00 per year, often end up at retirement with little more Net Worth than factory or office workers.
Net Worth is calculated by deducting the value of all the liabilities or loans you have from the income-producing assets owned to give you the net value of your income-producing assets.
Why aren’t high-income earners retiring wealthy? Why don’t they end up with a greater Net Worth than someone on a low income? It is quite simple. Human nature seems to dictate that whatever anyone earns.they spend.some even spend more than they earn and charge it on their credit card.
The higher your income growsthe more you spend and the only way to get out of this cycle is to realise that it is happening, and make a concerted effort to reverse this habit.and to begin reducing your expenditures so that you can free up money to invest.
The best way to do this, is to try the 10/90 plan. This plan simply means that as soon as you receive your pay.you put aside 10% of it for investment.and then use the other 90% to live off of. Put aside the 10%, and then pay all the bills and do the grocery shopping.and then after that whatever is left over you can spend.
Most people do it the wrong way aroundthey pay the bills, do the shopping and spend what is left over, never leaving any left to save or invest. By taking the investment money out first you will alleviate the temptation to spend it.
The road to wealth is not determined by how much you earn, but by how you utilise the income you have and how much you save and invest.
You need to take control of your finances. One of the best ways to start having more control over your money is to find out where it has all been going, and then amend your spending habits to allow you to live within the 10/90 plan.
If you write down a list of your monthly net income, then in another column write down a list of the essential items that you have to spend money on. You should be able to work out an average for telephone, gas, electricity, insurances and rates, from your previous bills. Work out an average of how much is spent on grocery shopping and petrol. If there are any other necessary utilities include them as well. Then deduct the second column from the first - and this will give you the maximum potential savings for each month.
It can be quite startling how high this figure can be and make you wonder where all the extra money went.
Another good learning experience is to simply write down for a fortnight every dollar spent and write next to it what it was for. You will soon find that there are a lot of unnecessary expenses, often caused by impulse buying, where you have spent money on items that you neither needed or really wanted, and could easily have gone without.
When you can begin to recognise these areas, and start to consider whether or not you are spending your money wisely, before you hand it over, then you will be beginning to take control over your money and are well on the way to embarking on your investment journey, which will enable you to have a financially secure future for you and your children.
Debra Lohrere is an author of several books on property investment and how to create financial security. Please visit. http://www.debra.lohrere.com/home.shtml
Debra Lohrere works as a Commodity Trading Logistics Administrator. She previously spent over ten years working in an Accounts Administration position with her primary roles being collections and financial forecasting. She also ran her own computer retailing business for many years.
Knowing the vital importance of cash flow in business led her to begin investigating the benefits of personal investments. She decided six years ago that it was time to start taking control of her personal finances and begin building a wealth base for her future.
She began researching the powerful medium of property investment as a means of bringing financial independence into a reach and began to build her own property portfolio.
Within the space of four years she was able to go from renting a house, to owning her own home and three investment properties, while having contributed very little of her own money to secure these.
She built up a large base of contacts with fellow property investors, which has proved to be an invaluable source of information.
In the big world of investing, it seems we hear a lot about what securities to invest in, but not as much about what types of accounts to invest in. There are so many different types of investment accounts, each covering a different purpose, and new types of accounts seem to be created weekly. What are some of the basic types of investment accounts and what can they do for you? This article covers some of the accounts that are available currently and why you would use each one.
Retirement Accounts
IRA stands for Individual Retirement Account. An IRA is meant for those who do not have access to employer sponsored retirement plans such as 401(k) plans or those who would like to contribute more than the maximum allowed by their employer plans. Why choose an IRA? Tax-deferred growth is the answer. With a standard savings account, you have to pay taxes on the interest or earnings that the account makes each year. An IRA, on the other hand, doesn’t require you to pay taxes until the money is taken out in retirement, thus leaving more money in the account to grow each year. In many instances you can also deduct your IRA contributions on your taxes, giving you further tax savings. It seems like a small thing especially when the account balance is still small, but over time it makes a big difference. Investing $10,000 for 30 years in a regular savings account with a 28% tax bracket and a 6% average growth rate will give you $35,565 whereas that same amount put into a tax-deferred account will give you $57,435. Eventually, however, you do have to pay taxes on the earnings in your IRA, but you are still left with $44,153 after taxes are paid. Your net gain for tax-deferred growth is just over $8500.
Another individual plan is a Roth IRA. It is somewhat similar to a traditional IRA but the difference is that you cannot deduct the contributions and the earnings grow tax-free instead of tax-deferred. This type of plan is good for someone with a longer timeframe to invest or those whose tax bracket in retirement will be close to or higher than their current tax rate. Tax-free growth means that you don’t have to pay taxes on any of the earnings in the account. If we start with $10,000 and invest it for 30 years at 6% growth like our example above, you would be left with $57,435. None of that money has to have taxes paid on it since the initial $10,000 already had taxes taken out and the earnings grew tax-free. Before you wonder why anyone would not automatically use a Roth IRA, consider the fact that the initial $10,000 investment wasn’t tax deductible like it was for the traditional IRA above. With a 28% tax bracket, the Roth paid $2,800 on its initial $10,000 investment. If we look at the growth potential of $2,800 for 30 years in a tax-deferred account, it grows to $16,082. So, in this person’s situation where their tax bracket is the same in retirement as it is while working with a 6% rate of growth, a Roth wouldn’t be the best option. The Roth would only grow to $57,435 - $16,082 = $41,353 when all taxes are taken into consideration while the traditional IRA would grow to $44,153. There are several online calculators that can estimate which type of IRA would be to your advantage. Search under Roth vs. Traditional IRA for more information and calculators to determine the best account for you.
In addition to individual plans there are also employer-sponsored plans. SEP IRA, SIMPLE IRA and Keogh plans are in between Traditional Individual Retirement Accounts and the standard employer sponsored plans such as 401(k)’s. SEP’s, SIMPLE’s and Keogh’s are for self employed individuals or small companies that need to put aside more money than a standard IRA allows but aren’t large enough to warrant the expense of a 401(k) plan. Each plan allows both employee and employer contributions. Each has set maximums between $6,000 and $30,000, depending on the plan and the contributor, and each has tax incentives for both the employer and the employee. These plans are great for small businesses to be able to set aside money for themselves and their employees and not have to go through the time and expense of larger employer sponsored plans.
The last type of retirement plans are employer sponsored plans. When it comes to retirement, it seems everyone knows the term 401(k). This is because a 401(k) is the retirement plan of choice for medium and large companies. In 2006, the maximum contribution to a 401(k) is $15,000. If you are over fifty and your employer offers the 401(k) “catch-up” contribution, you can contribute up to $5,000 more, so $20,000 total. Your employer may also contribute to your 401(k) plan which generally doesn’t decrease your contribution allowance. Originally, 401(k) plans were only offered to for-profit companies. Those who worked for non-profit companies such as charities, schools, universities and hospitals weren’t able to contribute to 401(k) plans but were able to open 403(b) plans which allowed most of the same contribution limits as a 401(k). Government or public employees often used 457(b) plans for their contributions and for highly compensated employees there are 457(f) plans. This eventually changed to where 401(k) plans are now available to non-profit companies so more and more of the non-profit sector are opening 401(k) plans for their employees. Taxes on these types of plan can vary from one plan to another, so it is best to consult your plan director or talk with the investment company that manages your employers plan.
Education Savings Plans
Education plans have become available in the past decade allowing parents to better save for their children’s education. Instead of trying to set money aside in taxable savings accounts, parents can now setup an education savings account that has various tax advantages depending upon the type of account used. Choosing an education savings account depends upon what your long-term goals are for the money. There are three basic types of education savings accounts, IRC section 529 plans, the Coverdell Education Savings Account (CESA) and the Uniform Gift to Minors Account (UGMA). Each plan is tailored a little differently when it comes to its tax advantages and who gets the money from each plan, but each has the same general purpose, to save for your children or grandchildren’s future.
Medical Savings Accounts
There are three different types of accounts to help you save for healthcare costs, Flexible Spending Accounts (FSA), Health Reimbursement Arrangements (HRA) and Health Savings Accounts (HSA). The first of these, Flexible Spending Accounts are also called section 125 plans or “cafeteria plans.” This plan allows participants to put pre-tax money into the account each year to cover health insurance deductibles, co-payments, dental care and other medical expenses. Cafeteria plan money cannot accumulate from year to year, however, so it needs to be used up in one year or it will be gone. The second type of medical savings account is a Health Reimbursement Arrangement. It is similar to an FSA but the employer contributes to the account instead of the employee.
The employer can make contributions contingent on an employee participating in designated health and wellness programs. In June 2002 it was updated to allow funds to rollover from year to year, but it cannot be rolled over from employer to employer so if you change employers, you loose the accrued benefit. The last and most recently created plan is a Health Savings Account. This plan enables employees with high-deductible health insurance plans to set aside and invest money to use to pay the deductibles or other healthcare costs in the future.
These plans are designed to put healthcare decisions more into the hands of the employees. These plans are also portable so they move with you when you change employers and they can be rolled over from year to year.
Other Accounts
For those who are just looking to invest, a brokerage account is the medium to use. Brokerage accounts are setup through investment companies to allow you to purchase securities such as stocks, bonds, mutual funds, money markets, options, etc. Generally the money sits in a “core” account such as a money market until you are ready to invest it in other securities. There are fees for purchasing many securities which vary depending on the company that the account is setup with. Brokerage accounts can also offer check writing, debit and ATM cards for easier access to money in the account. Since there are no tax-advantages of a brokerage account, money can be withdrawn at any time from the core account. These accounts are perfect for additional savings that you want to invest in the stock market.
The standard savings account is probably what everyone is most familiar with. Offered by any bank, a savings account allows you to set money aside and receive a variable or fixed interest rate depending upon the account. Savings accounts are very liquid and can be withdrawn at any time, but they don’t allow check writing capabilities. Most savings accounts now days do offer ATM cards. Certificates of Deposit or CD’s are types of savings accounts that require money to be left in for a certain period of time in exchange for a slightly higher interest rate, these accounts are less liquid and there is generally a fee to take the money out before the predetermined period of time.
Whatever the reason or account used to set aside money, it is always a good thing. Savings in any form creates a more secure financial future and allows for problems or emergencies to be taken care of without having to obtain loans or dip into less liquid savings such as a home or other physical assets. Opening up any of the above types of accounts gets you started on the right track towards savings.
Copyright 2006 Emma Snow
Emma Snow is a writer who specializes in financial planning. She has worked in the financial industry for over eight years. Currently Emma works on a Finance and Investing site at http://www.finance-investing.com and Investing Partners http://www.investing-partners.com
Tags: finance, financial, financial advice, investment, investment accoun, investment planning, retirementGiven the growth of employee-employer savings to meet retirement goals, it is not uncommon for employees to have a significant amount of employer stock in their qualified retirement plans. When it comes time for employees to leave the nest, most are willing to directly rollover all qualified plan assets into a traditional IRA. A traditional IRA rollover offers avoidance of an immediate income tax consequence, the retiree remains in control of his/her retirement assets and the benefits of tax deferral can continue.
However, there may be another option available that should be considered, a type of combination approach. This option involves distributing employer stock to the retiree and directly rolling over the remaining balance of the plan assets into a traditional IRA. This combination approach, though not for everyone, may have significant advantages.
By not including the employer stock in the traditional IRA rollover, the retiree is exposed to income taxes immediately. This is because he/she is receiving the shares as a taxable distribution. However, the taxes due will be only on the cost basis of the stock. Therefore, it’s important to know what the actual cost basis of your employer shares are in your retirement plan. The cost basis is essentially what the plan Trustee paid for the stock. Exposing the stock to taxes now may be more advantageous in the long run because, in most cases, this cost basis of the employer stock will be much lower compared to the current market value.
The stock held outside the traditional IRA will continue to defer taxes on any appreciation. When the retiree ultimately decides to sell the shares, he/she will pay long-term capital gain rates - currently capped at 15% - rather than at ordinary income tax rates, which could run 35% or more. In addition, there are no minimum distribution requirements starting at age 70 1/2 or other nasty penalty taxes for this block of employer stock, allowing for more planning flexibility.
And lastly, the retiree’s heirs may miss out on another big tax break. If these same shares of employer stock were rolled into a traditional IRA, the heirs would ultimately owe ordinary income taxes on the employer stock, as they would on any asset held in a traditional IRA. This could result in a sizable income tax bill due at death, taxed at a potential 35%. By rolling into a traditional IRA, the heirs are unable to utilize the benefits of long-term capital gains treatment when they decide to sell the stock and may lose a tax saving opportunity.
There are many technical requirements that must be met in order for this type of distribution to qualify as what’s known as a lump sum distribution. Of course, diversification considerations and other investment fundamentals may show that rolling over stock to a traditional IRA may be the most prudent choice in many cases. Therefore, it is highly recommended that retirees considering such a maneuver obtain professional advice. Be sure to check with your financial planner or financial advisor whether you can reap the full benefits of holding on to your employer stock.
Fearing the American worker is being left in the dark, Mr. Morris, a fee based Investment Advisor Representative with Raymond James Financial Services, Inc., helps 401k participants get the most out of their retirement plan.
Tags: 401k, investment, retirement