The Next Step on The Road to Freedom
More Baby Steps
You've scrimped and saved, starting making your daily coffee yourself(yes, I am drinking coffee I made at home this morning), and more of your meals at home, and have your three to six month emergency account, what next? Great question!
There is a financial pyramid that you can follow. The base of the pyramid that holds the financial weight of your portfolio is going to be the most solid, low risk, and safe investments. These include your savings and checking accounts, cd's, bonds, and treasuries. The risks will be low, but so will the returns. Remember how I suggested trying to find an account for your emegency funds account that will pay at least the rate of inflation? That account is not very likely to lose value, but it is also not going to gain much value other than what you deposit to it. Low risk, low return. As your risk increases, so do your potential returns, or losses.
The next baby steps to The Road to Freedom is getting your retirement account set up. If your company has an employer sponsored retirement plan, especially with matching, sign up asap! If you are not saving at least the match, you are walking away from free money that your company is gifting you! Have that retirement money taken from your paycheck, before you see it. Pay yourself first, and get used to the new norm! If your company does not have a retirement plan, open a ROTH IRA or a tradional IRA with a reputable firm. If you get a 5% raise one year, bump up your retirement savings by 2%. You will not notice or miss the difference.
The difference between a traditonal or ROTH IRA is paying taxes later, or paying them now. There are tons of good articles out there that explain the difference. The important part is to decide what works best for your financial plan, and follow it. There are many companies out there that offer IRAs. We like to look for the range of investment options, as well as the fees they charge. Your returns can be eaten up by high fees if you do not pay attention, so research before you invest. 1-2% difference per year adds up to a lot over a lifetime! Remember, time is your friend!
Our retirement accounts are a bit risk tolerant, so we sometimes see some crazy swings in the value of our accounts. Remember, you do not lose money until you sell. A down market is an opportunity to buy more at a lower price. Dollar cost averaging will keep the purchase prices more in line with an average purchase price that is in line with the market. Keep buying, and do not lose sight of the end goal. Financial freedom!
Something to consider...investing for your future does take education, time, and patience. I've heard that most people spend more time planning their vacations than they do planning their retirement. What lasts longer?