I recently attended a wedding and want to wish a heartfelt public congratulations to the lovely bride and groom! Since I didn’t get a chance to give a toast over the weekend, I would like to offer some unsolicited financial advice for all see. Without further ado, here it goes:
1) Make a plan (The 3Ds)
Sit down together at least once each year to Discuss, Decide and Document your financial goals. Include a plan on how you’re going to achieve them and make all financial decisions with these goals in mind.
2) Track your progress.
Track how you are doing versus your goals monthly. Review the progress together. This will allow you to make adjustments if you are not in line to accomplish your goals.
3) Spend on what you love
Figure out the types of discretionary spending that increase your happiness and those that don’t. Generally, spending on experiences is thought to boost happiness more than spending on stuff. Make sure your spending is prioritized toward what drives your happiness. Understand what each other’s top spending priorities are and make sure they come first. If you are not spending your resources on the things that are most important to you, what’s the point?
4) Work as a team
For big financial decisions, make sure you’re both on the same page. Work together on big decisions so that either of you can veto an idea. Both of you need to be heard!
5) Max out your tax deferred retirement accounts
Since you have been successful in your careers thus far, I’m assuming you’re in the 25% tax bracket or higher. With programs such as a 401(k), 403(b) and traditional IRA, the government allows you to invest these funds before paying taxes on them. When you withdraw that money later in life, chances are you won’t be in as high a tax bracket as you are today. Therefore, you can pay Uncle Sam at a discounted rate or maybe not owe anything at all. This could save you hundreds of thousands of dollars! The 2017 maximum contribution amount for a 401(k) is $18K and for a traditional IRA it is $5,500* for each of you. If you max out both accounts, you will be saving $47K per year in deductible retirement accounts! This may sound like a lot, but the savings you realize from the deductions of not having to pay taxes on this money will help you achieve this savings. Assuming you save this $47K annually, your investments will grow to $1.4M in 20 years using a conservative 4% expected return compounded annually.
*Please note that in 2017, if you are Married Filing Jointly and you are covered by a retirement plan at work, you can only deduct a full contribution to the Traditional IRA if your Modified Adjusted Gross Income is $99,000 or less. If it’s between $99,000 and $119,000, you are eligible for a partial deduction. If it’s over $119,000 you do not qualify for a deduction for a Traditional IRA. If you exceed the income limit for deducting a Traditional IRA contribution, you should consider a Roth IRA which has higher income limits. If your income exceeds those limits, you could set up a “Backdoor Roth IRA” by contributing to a traditional IRA and converting it to a Roth.
6) Save and invest outside of retirement accounts
Saving the $47K in retirement accounts is a great start – but you can save more! Invest additional savings in a taxable brokerage account. While there are no tax advantages here, the money can be used at any time. You are a DINK (dual income no kids) family. Your earnings are high and your responsibilities are low. This is a great time to build up your savings. Doing so will give you the freedom of having additional choices in the future, provide a safety net in the event of job loss, put you in a position to earn more money by taking on additional risks and allow you to choose time over money in the future.
7) Don’t fall into the trap of lifestyle inflation
I know you two are both awesome at your jobs and will continue to see much success in your careers. Therefore, I suggest you save at least 50% of the gross value of all future bonuses and salary increases. This will keep your cost of living in check while increasing your savings dramatically and not sacrificing your current standard of living. Financial independence is achieved when your savings can sustain your annual spending. Spending less and saving more is the key to freedom.
8) Keep reading this blog!
In future posts we are going to cover what types of accounts to keep your savings in, what types of investments you should hold in each of them, ways to keep your spending low, ways to make more income, financial independence calculations and all sorts of fun stuff (at least to me) to help you accomplish your goals. If you haven’t already, please enter your email address in the sidebar to subscribe to the latest post notifications.
That’s all for now. Congratulations again!