Use These 5 Financial Seat Belts To Avoid Costly Mistakes

We know that some financial mistakes will occur, but the big ones are what can set us back from reaching our financial goals like retirement. There are some preparations you can take, though, to avoid those big financial mistakes or to at least lessen the blow. 

It’s like wearing a seat belt. We always wear seat belts (or I hope you do) so a minor fender bender doesn’t turn into a hospital visit. We best protect ourselves from accidents worse than fender-benders with our seat belts as well. These simple straps give us the best chance to avoid harm.

That’s why we have gone through and put together five “seat belts” for your financial situation.

1.Don't Carry A Credit Card Balance

One of the biggest mistakes that we see preventing people from retiring early or even reaching a goal like buying a home is having too much credit card debt. Credit can be a great thing if used correctly. However, it can be a huge financial setback if used the wrong way. So, how do we avoid the big pitfall? Don't think of your credit card limit as the amount of credit you're approved to spend on the card. Instead, spend only the amount that you will be able to pay off at the end of the month. This financial seat belt is to not carry a credit card balance. To avoid falling into a huge debt pitfall is to pay off your credit card every month. 

 

2. Make Saving Automatic

Many people talk about not earning enough to be able to save… and thus the reason why they can’t retire. We're currently working on a new eBook following a couple who recently retired with $1 million in their retirement account, but they didn’t even know it until he recently opened his 401k statement. This was a family making under $40K a year. The reason they were able to save such an amazing amount is because they made savings automatic. They automatically contributed to their 401k and didn’t account for that money in their budget. So, automatic savings is the seat belt to avoiding getting to 65-years-old and not having enough savings to retire.

3. Dollar Cost Averaging

This is the key to keeping you from trying to time the market. A mistake many people make is trying to outsmart the markets. Let’s be honest… nobody can outsmart the markets. A steady strategy of diversification and long-term investing gets you to your goal of retirement. Dollar cost averaging - investing a small amount of money every month, quarter, or year - at a specified time, keeps you from trying to analyze whether it’s a good or bad time to invest. That’s your seat belt from freezing up when things are bad and allows for you to instead buy when things are on sale.

4. Keep Your Mortgage Payments Low

Avoid the pitfall of being house rich and cash poor. Basically meaning that you buy too much house and aren’t able to cover the unknowns that pop up in life. We suggest that your monthly mortgage payment does not exceed 28% of your monthly income, before taxes. But that’s at the high end. Our recommendation is to have your mortgage payment be closer to 20% of your gross income. This is your seat belt to becoming house rich and cash poor.

5. Have An Emergency Reserve

This is actually the biggest way to avoid falling into a financial pitfall. Have 3-6 months worth of expenses in cash at all times. Why? So a medical emergency or a housing issue doesn’t lead you to incur debt or interrupting your financial plan… both of which will set your retirement goals back. This is your seat belt to avoiding financial unease.

Maybe you are already wearing your financial seat belt, but you still just want reassurance that you are on the right path to retirement… well, that’s why we built yourwela.com. You can sign up for free and fill out a game plan. This game plan is a set of questions which will then be reviewed by one of our advisors. They will analyze your situation and get back to you with action steps and a review of your situation. This is how we are leveraging technology to deliver financial advice. You are able to take action while at home and even while watching your favorite show. 

How Much Should I Save If I Want To Spend $100,000 Every Year In Retirement?

The key to achieving a successful retirement is careful, realistic planning. First, you need to decide what the ideal retirement looks like for you and your spouse. Will you travel? Move to an exotic location? Build a mountain cabin? Start a small business? Once you’ve set your goals, you must think carefully about how much income you need to make those dreams come true.

But what if you discover that you need a significant amount of annual income to fund your post-career life? Really significant. Like $100,000 per year? The retirement calculators will say you need to have $2.2 million in your retirement accounts to generate that level income.

Put away that paper bag. Don’t hyperventilate. There are ways to generate that $100,000 of retirement income without eating cat food from now until you turn 65.

Related: 4 Questions To Answer When Planning For A Happy Retirement

Your investments should provide only a portion of your retirement living. Here are some other income streams to consider.

Social Security -- You can start receiving benefits when you are 62, but you’ll get a higher monthly payment for every year you wait up to age 70. But will Social Security be around when you retire? Probably, especially if you are currently in your late 50’s or early 60’s. If you’re just starting your career, it couldn’t hurt to plan for a retirement without Social Security.

Pension – If you are one of the lucky few who still earns a pension – teachers, government workers – remember to factor that income into your monthly income.

Part-time Work – Consider taking on a part-time job to generate some additional income. Your side gig should be on your terms -- work you enjoy with hours that allow you to live out your retirement dreams. The ideal job will connect with one of your passions. If golf is your thing, get a job as a starter or tournament marshal. Love clothes and fashion? Put in a few hours per week at a boutique.

Working part-time offers the secondary benefit of social interaction and the chance to make new friends.

Rental Income – If you are in a position to buy a new home without selling your current house, consider renting the old place. This is a great idea if you plan to downsize in retirement. There are two potential benefits to renting. First, your tenant is paying the freight while you build equity in a home that is hopefully increasing in value. Second, the rent may exceed your monthly obligation on the house – mortgage payment, taxes, upkeep – in which case you are generating extra monthly income.

Related: Have Some Street Sense When Deciding Whether You Should Sell Or Rent Out Your House

Investment Income – This is a central piece of the income puzzle. A generally accepted rule of thumb says every $250,000 you save will throw off $1,000 per month in income. This money comes from dividends on stocks, interest on bonds and distributions from such alternative investments as REIT’s (Real Estate Investment Trusts) or MLPs (Master Limited Partnerships).

Obviously, the sooner you start saving, the faster you’ll reach your goals, thanks to the power of compounding, in which interest thrown off by an asset is reinvested and thus earns more interest. As the great showman P.T. Barnum noted, “A penny here, and a dollar there, placed at interest, goes on accumulating, and in this way the desired result is attained.”

Related: It's Not How Long You Save, It's How Early You Start

So, let’s put all of this together to see exactly what it will take to get you and your spouse to that $100,000 annual income:

Social Security = $3,000 per month ($1,500 each) Part-time Pay = $1,000 per month ($500 from each of your jobs) Pension = $0 Rental Income = $1,000 per month (after all expenses)

TOTAL = $5,000 per month

The above gives you $60,000 in annual income, meaning you need to generate $40,000 additional per year from investments. It takes about $850,000 in retirement savings to throw off that amount of income. That’s doable for most anyone with a bit of discipline and determination – especially if you start early.

As the chart below shows, you can amass $850,000 in 35 years by setting aside just $636 per month. But wait just 10 years to start and you need to save $1,291 per month – more than double.

True, $850,000 is a lot of money, but it’s worth every sacrifice if it funds the retirement that you fantasize about while driving home from work. And, heck – it’s a bargain next to the $2.2 million that damn calculator said you’d need to make your dreams come true.

Years Until Retirement

15

20

25

30

35

Monthly Savings

$3,043

$1,926

$1,291

$896

$636

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10 Actions Millionaires Take That You Can Too

We recently wrote about the 7 habits that made your next door neighbor a millionaire, but we think it's worth revisiting this older article of ours on 10 actions millionaires take that you can too.

In his 1996 bestseller, The Millionaire Next Door, Thomas Stanley detailed the traits of the average millionaire. Notice I didn’t say rich person... I said millionaire. These are people who have a net worth over seven figures who are also “financially free.” That excludes that guy who makes $50,000 a month but then spends $60,000 a month living in the city, driving a Bentley, and eating at Chops three times a week.

Not much has changed about this group from 1996. So today, in 2017 we’re still talking about good, old-fashioned millionaires -- couples (and some individuals) who are truly rich. These are people with plenty of money to pay the bills when the clock strikes 5 on their working careers.

I see these people every day of the week. They drive Toyotas, Hondas, Kia’s -- and the occasional Jeep Cherokee. They have saved for a long time and finally find themselves in a position to quit their job and live life on their own terms. Here’s what they have in common.

1. Job Stability – They tend to stay with one employer for a very long time - sometimes 30 or 40 years. Being a company man or woman can offer huge rewards, including a very nice ending salary, significant pension benefits, and hefty 401K balances. I know it’s almost unimaginable in this day and age to work for the same employer for a couple of decades, but there are still people who do it, including teachers and other government workers.

2. Steady Savers – I’ve rarely met a rich retiree who didn’t start making the maximum contribution to a 401k in their 20s or 30s. As of 2015 you can save $18,000 in a 401k or 403b, and $24,000 if you are over the age of 50. That doesn’t count your company’s “free match” if they are generous enough to give you one.

3. Save the Raise - One trick I’ve seen these savers use is saving at least half their pay raises. Instead of putting the money towards a new boat or vacation, those added dollars end up in retirement or brokerage accounts.

4. Investors – Millionaires who own stocks tend to hold their investments for decades (not just years). They let their dividends re-invest over time and thus participate in the long-term growth of our economy. This makes them investors rather than “savers” who only invest in CDs or money markets.

5. Owners – Business owners, partners and other employees who are “fully vested” in a company tend to end up with substantial savings.

6. Mortgage – One key “rich” person move is to get rid of the mortgage by age 65. This may take two or three extra payments per year.

7. No Fancy Toys – Very few millionaires own BMWs, Mercedes, $3,000 watches, or $5,000 suits. Nearly 40% of the “rich” buy their cars used.

8. Credit –The better your FICO score, the lower the interest rates you will pay on your mortgage and car loans. The “rich” do this by carrying low debt loads.

9. No Lotto – Rich people don’t buy lottery tickets. It’s a fact. I’ve never seen a millionaire buy a lottery ticket, and I’ve never met anyone who won the lottery and still had the money three years later.

10. Own real estate - They bought homes that were not overly priced or extravagant in rentable areas. They would maintain them appropriately, rent them out consistently. They paid down their mortgages and ended up with cash-flowing assets that built their net worth slowly over 30 years.

The lesson: An average income, carefully managed, can generate considerable wealth over a period of time. To borrow a line from radio’s Dave Ramsey, “Live like no one else today, and one day you’ll be able to live like no one else.”

If you’re ready to start growing your wealth, create your free Wela account. We’ll help hold you accountable as you get started on your path to becoming a millionaire next door.

7 Habits That Made Your Next Door Neighbor A Millionaire

Back in 1996, Thomas Stanley released the book, The Millionaire Next Door: The Surprising Secrets of America’s Wealthy. We're big fans of this book in the Wela office because it gives a great overview of the keys to financial success. While we don’t believe you need to be a millionaire to be financially successful (wealth is about more than just money), we do believe that people who follow the habits of their millionaire neighbors are much more likely to be comfortable with their financial situation and more likely to reach their financial goals.

We topped the scales in with over 10 million households in the U.S. with $1 million or more in investable assets, excluding the value of their primary residence. While there was likely a variety of factors that helped push these families to seven-figures, we’re sure it was due in no small part to these families' good financial habits. Good news, you can also build these habits.

Let’s look at seven common habits of these self-made millionaires.

  1. They pay themselves first. Self-made millionaires understand that to build wealth they first have to invest in themselves. The average millionaire actually saves 20% of their income which falls in line with our TSL budget.
  1. They live below their means. They understand that it’s better to be anonymously rich rather than deceptively poor. They also know that they can’t save 20% of their income if they’re spending it every month.
  1. They’ve been with the same company for a very long time. Which is typically in a vocation that they love, and it’s rewarded them with a nice ending salary, a significant pension benefit and/or a hefty 401K balance.
  1. They don’t buy fancy cars. Very few millionaires are driving around in BMWs or Mercedes. Instead, they’re happy to give you a lift in their 10-year-old economy sedan.
  1. They’re not trying to impress the Joneses. Sure, the Joneses are nice people, but do they really need another new SUV?
  1. They are comfortable with taking some risk. They understand that without risk there can be little to no reward, so they take sensible risks like investing in the stock market.
  1. They set financial goals, but they’re different from yours. The millionaire next door understands that not planning is the same as planning to fail. They’re not saving up for things, though; instead, they’re saving for financial freedom.

If you’re ready to get started building these habits in your life, create your free Wela account. We’ll help hold you accountable as you get started on your path to becoming a millionaire next door.