When you’re trying to pay down debt and build savings at the same time, you might wonder if one should take priority over the other. We ask a CFP if it is better for your financial future to pay down debt or save first.
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My wife is always shocked when I show her how much she’s saved in her 401K.
“I have how much??”
As I’ve become more immersed in the world of personal finance, I also took the liberty of managing my wife’s 401K contribution – like any good husband should 🙂
I’ve also automated her contribution so it’s no longer something we have to think about.
It’s easy to talk about the importance of saving. However the best system that is guaranteed to work is the one where you don’t have to think about.
The amazing thing about having savings be automatically deducted from your paycheck is that you don’t see the money that’s being deducted and eventually, like my wife, you forget it was ever there.
There are a couple ways to automatically save:
1) Deduct Directly from Your Paycheck
Ask your company’s payroll office to have a fixed amount be deducted directly from your paycheck every pay period. An easy win is with your 401K contribution. Most 401K plans allow you to deduct a percentage of your pay or a fixed amount be contributed to your retirement account. My recommendation is at minimum, contribute to your 401K up to the match. If you can do more, great!
Over the years as our salaries have increased, I have slowly increased our contribution by few percentage points each year. When you don’t ever see the additional money hit your bank account, you never get the chance to even miss it!
2) Deduct Directly from Your Checking Account
If your employer doesn’t provide this automatic savings option, you can have this deduction be automated through your bank’s checking account. You can go to your bank’s website and set it up so that every month a set amount of money is transferred from your checking account into whatever savings or other account you select.
My wife and I do this with our investments and annual expenses such as tithing, brokerage account investment and annual daycare expenses.
The more we automate, the less we see sitting in our checking account and the more we see in our other ‘hands-off’ accounts.
We realized over the years that we can’t trust ourselves with a big pile of cash in our checking account.
Automating your savings is not only effortless but a guaranteed way to build towards your goals of investing or saving for future purchases. Once you set it up, it actually takes more effort to stop the automation, so most people stick with it and are shocked to see how much they’ve saved or invested at the end of the year.
Final tip with saving. If you have a specific goal you are saving for, I’d recommend giving it a detailed label – “Hawaii Vacation,” “Retire Early Fund,” “Home Down Payment,” etc. Research has shown that when people label their goals, it results in additional contribution.
Do you have trouble saving? What do you think about automating your savings?
Nobody likes to pay tax, but it’s unavoidable, and you’ll need to make your payments on-time to avoid penalties. However, it’s important to remember that there are some key ways you can reduce your tax liability. There are plenty of options and tax planning strategies available to help you do this.
Today, we’re going to take a look at some of the best, ultimately giving you all the information, you need to know when it comes to cutting and slimming down your taxes and making the most of the options available to you.
Pay the Bill on Time
One of the most common reasons people and businesses are paying more money on their tax bill is simply because they’re not getting their returns in on time, and this is causing them to amount interest and/or fees. If you want to pay the fixed amount, always make sure you’re paying your tax return before your deadline to avoid any complications.
Invest in a Plan
There are plenty of plans and schemes out there you can get involved in to help reduce how much tax you’re paying, but this will depend on which country you’re in and what you have available to you. For example, if you live in the UK, you can invest your money in a tax-free ISA plan. If you’re in India, you can invest your money into a ULIP plan. ULIP plans can differ on what they have to offer, so make sure you’re doing your research to see which is best for you.
Make Sure You’re Paying the Correct Amount of Estimated Taxes
When you’re paying tax, you’ll be on a certain tax code that will conclude which tax bracket you’re in and, therefore, how much you need to pay. It’s always worth checking this tax code every single year and every time you make a payment to ensure you’re paying the right amount, not too little, and definitely not too much.
Claim All Business Expenses and Deductions
It may surprise you with what you can actually claim as a business expense, which is then tax-deductible, ultimately bringing your tax bill down. Everything from property charges, stationery, and even fuel for your company cars can fall under this category which is why it’s so important to examine every aspect of your business to get the most back. You don’t want to be paying tax where you don’t need too.
Reclaim Your Overpaid Taxes
Of course, you’ve probably been paying taxes for some time, but how aware are you that the taxes you’ve already paid have been the right amount? In some cases, you may have overpaid tax, and it’s always worth checking to make sure that you’re chasing this money up and getting it back into your account.
Obviously, this doesn’t bring your current tax bill down, but if you’re getting money back, at least you know you’re paying the right amount and getting back what you’re owed to help pay for this one.
As you can see, there are a few ways you can be proactive when it comes to saving money on your tax bill, but it will solely depend on your business and what opportunities are available to you. Be open and mindful with what decisions you make, and you’re sure to save yourself a lot of money in the long term.
Save, invest, prosper with My Own Advisor.
Weekend Reading – Best dividend ETF, withholding taxes, Slow FI, giveaways, resolutions and more #moneystuff Welcome to my latest Weekend Reading edition where I share some of my favourite articles from the week that was across the personal finance and investing blogosphere. Earlier this week… I answered the question: When do you think it’s a good…
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The name of my company is “Making of a Millionaire” so you would think I would talk all the time about the goal of becoming a millionaire. In fact, I rarely discuss how to “become a millionaire” because that should not be every person’s goal. Every person should strive for “financial independence”. Depending on your lifestyle, you may need more or less than $1 million to reach financial independence. In this article, I’m going to discuss how to become a millionaire. Really, this should be considered a lesson in how to achieve any savings goal but I am going to use $1 million as an example for two reasons. It’s a large and ambitious savings number. It’s a round number and makes the math simple. Tallying up your current net worth The definition of a millionaire is someone whose net worth is at least $1 million. If the goal is a net worth of $1 million at some point in the future, you need to know your starting point. Your net worth is calculated by adding up all of your assets, all of your debts and subtracting all of your debts from your assets. Your net worth is a snapshot of your current financial position. Whether or not you want to become a millionaire, it’s useful to know what your net worth is. Doing so forces you to examine your debts and assets more closely. Action item: I have made this very simple for you. I’ve created a free tool that will calculate your net worth for you, it’s available right here. Before you do anything; use the tool to figure out your net worth, write it down and then come back to this article. Return on investment To grow your net worth beyond where it is today you are going to rely on 2 factors How much you save and invest. The return on your savings and investments When it comes to making assumptions about your return on investment I hope for the best but plan for the worst. Meaning I like to be conservative with my investment assumptions. I see so many personal finance “gurus” saying you should expect a 10%-12% annual return on your investments. That is simply not realistic. To make realistic investment assumptions, I rely on a source I can trust. PWL Capital is a Canadian wealth management firm that produces top-notch research. They have provided the expected future returns of different asset classes in this paper. Stocks: 6.5% Bonds: 3.7% Real estate: 3% Some people might think those returns are too low, but it’s better to be under-promise and over-deliver, rather than giving people false hope of 10%+ annual returns every single year. Future savings How much you save every month is the most important factor in growing your net worth. It’s also the only factor you have any control over. You can’t control what happens in the stock market, but you can control how much you decide to save and invest each month. When it comes to savings you need to do two things. Include the amount you want to save in your budget. Automate the sales process. I hear people tell me constantly that they “can’t find” any money to invest. I will reply by asking “how much do you have budgeted for investing every month”. The reply is usually nothing because most people don’t have a formal budget. Budgeting is really not hard. You start with your monthly take-home pay (what you clear after taxes). Subtract your fixed costs like rent, cell phone, insurance etc. Subtract your variable spending like food and entertainment. Whatever is leftover can be allocated towards saving and investing. Action item: I’ve created a free tool for you to create a budget. Click here and make a budget. There is even a line item for investing in the budget tool. There, you have no excuses as to why you don’t have a budget! Put it on automatic Once you have created a budget that includes a certain amount towards investing, there is only one thing that can stop you from following through on your investment plan; you. We humans often have the best of intentions but rarely follow through on committing to a long term change in behavior. When January 1st rolls around every gym is packed with people who are excited to follow through on their new year’s resolution to lose weight. By February 1st, most gyms are ghost towns. Budgeting is no different than dieting and exercise. We always tell ourselves we are going to stick to a budget, and we usually mean it. But, life tends to get in the way and before you know it we have reverted back to our old ways of eating cake and not budgeting. That is why you need to automate the savings in your budget. Most banks allow you to easily set up an automated withdrawal from your checking account on every pay-day and have that money placed into a savings or investment account. By doing this you are taking the concept of paying yourself first and automatic the process. This has two major benefits. It takes the decision out of your hands. You don’t even miss the money. Let’s say you created a budget that includes investing $800 per month. If you want to automate that savings, call your bank and set up an automatic withdrawal of $400 from your checking account to your investment account on the 1st and 15th (or whatever days you get paid) every month. The money is never in your checking account long enough for you to spend. After a while, you adjust your spending as if that money was never there. Think about the taxes that come off your paycheck every two weeks, most people don’t even notice because the process is automated. How to become a millionaire I’ll use a hypothetical example to make clear how to apply the concepts discussed in this article to achieve a $1 million net worth. Billy is a 31-year-old accountant living in the suburbs of a major city. He wants to know when he might expect to become a millionaire. The first thing Billy does is calculate his net worth. He starts by adding up his assets Stocks: $60,000 Bonds: $40,000 Total assets: $100,000 Billy is not a homeowner, takes the bus to work and never carries a balance on his credit card so he has no debt. Billy’s net worth is $100,000. Next, Billy decides to calculate the expected future return on his investments. Billy knows the expected future returns of stocks is 6.5% and for bonds is 3.7%. Billy invests in a portfolio that is 60% stocks and 40% bonds. So, he expects his investments to return 5.38% per year moving forward. Billy decides to create a budget and determines that he can invest $1,000 per month moving forward. Then Billy plugs his information into a savings goal calculator. Which tells him that he is on pace to become a millionaire in 24 years. So, by the time he reaches 55, Billy will be a millionaire. Putting it all together I’ve created a calculator that will tell you when you can expect to become a millionaire here. Here’s how to use it to determine when you will become a millionaire: Enter $1,000,000 into the field that says “desired amount”. Enter how much you have invested or your current net worth in the field that says “initial investment”. Enter a reasonable rate of return based on your asset mix. Enter the amount you have budgeted towards investments. The calculator will tell you when you should expect to become a millionaire. You can also use the calculator to determine any savings goal. If you’re not satisfied with your results of using the calculator, become a “Millionaire in the making” and join the 30-day money challenge where each day you will receive a new action item that will move you closer to your financial goals. This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions