Foundation #9: Your retirement is YOUR responsibility

I am counting on absolutely nothing from the federal government during retirement. If they figure out how to save social security it will be a nice bonus but until then I am not counting on it! :)

This post had to follow foundation #8 because it is one of the great examples where the numbers are dead simple but behavior always gets in the way. Saving for your retirement is really very simple you need to just DO IT! I recommend people put 20% away for retirement and here is how I suggest you do it

Step 1: If you have a 401k availiable, contribute up to your company match.

Step 2: Max out your Roth IRA, which is $5k in 2008.

Step 3: Increase your 401k contribution so that the total of all 3 steps equals 20% of your total income. The max 401k contribution for 2008 is ($15,500).

So let’s have a little fun and play with some numbers to see what kind of nest egg you can have with 3 simple steps:
Start contributing: 25
Single Income 50K:
401K 3% = $1500 + $1500 company match
Max Single Roth: $5k
Additional 401k %: 4% / $2,000
Yearly Retirement Savings: 20% / $10,000
40 years @ 10% = 5.3 Million!

Start contributing: 25
Household income 100K:
401K 3% = $3000 + $3000 company match
Max 2 Roth’s: $10k
Additional 401k %: 4%
Yearly Retirement Savings: 20% or $20k
If you start this at 25 and grow it 40 years @ 10% = 10.6 Million!

Start contributing: 30
Household income 150K:
401K 3% = $4500 + $4500 company match
Max 2 Roth’s: $10k
Additional 401k %: 7% ($11k)
Yearly Retirement Savings: 20% or $30k
If you start this at 30 and grow it 35 years @ 10% = 9.5 Million!

Notice how the 100k income that starts 5 years earlier will outrun the $150k income! Starting earlier is key but either way you will have 10 Million! And the real kicker – half of that is not taxable as a reult of the Roth contribution. I did not start maxing out my 401k and Roth IRA until a few years ago and it was one of the few financial regrets I have!

Let’s take a different angle. Maybe you don’t have access to a 401k. As long as you make less than $99k (single ) $156k (married) you can contribut to the Roth IRA. If you did just that, the numbers would look like this:

Start contributing: 25
Single Income 50K:
Max Single Roth: $5k
40 years @ 10% = 2.6 Million!

With just the Roth you can have $2.6 million at retirement that is TAX FREE! A 4% draw on $2.6 million equals $100k a year TAX FREE! So the bottom line in all this: you need to find $416 in your monthly budget to max out your Roth IRA and fund your retirement. This is right around the average car payment in America!

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Foundation #8: 80% of personal finance is behavior 20% is knowledge and the numbers

All the personal finace foundations build on each other – #8 continues with the concept that personal finance is much more about behavior than it is about the numbers. Figuring out the basic principles that put you on the right path to financial success is the easy part! It is following through with the behaviors and habits that is the hard part. Most people know that contributing to a 401k is a good idea but so many don’t follow through with the behavior to make it happen. How many people this year blew right past April 15th and did not fund their 2007 Roth IRA? How many people spend more than they make? If I had to pick who was to be better off financially: a CPA with bad financial habits and a recent college grad with good financial habits I am always going to pick the recent college grad! You can’t make up for bad habits with better financial knowledge.

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Foundation #7: Live Almost Debt Free

We have had a little bit of a hiatus on the 10 foundations of personal finance that I started writing about last year but I wanted to finish it off. So here is #7!

I started listening to Dave Ramsey in 2006 but followed many of his principles before I had ever heard of him or the daily radio show. Dave’s view of debt is spot on: You will never find financial freedom or success if you continue to have “payments”. Credit is so easy to come by today, (although it has tightened up recently) that it is easy to pile up all kinds of stuff on credit from cars to clothes to even air conditioners (heard that on the radio today!)

Like Dave Ramsey, I subscribe to there being only one kind of debt that is part of a solid financial plan: mortgage debt. This is the “almost” part of living debt free. With that said, you need to be smart about your mortgage debt. The banks will approve you for well over what you can afford. Remember, the banks are looking to maximize profit not look out for your best interests. It takes a lot of discipline to not spend what the bank will approve you for but in the long run it is one of the most important financial decisions you can make. In my view your mortgage should not exceed 2.5 times your house hold income. Why does that number work?

Household income: $50k
Purchase Price: $150k
Downpayment: $25k
Mortgage: $125k
15 year Mortgage Payment + Taxes ($1250) & Insurance ($500) @ 6% ~ $1200 month
Monthly Take home ~$2900
Housing to Income ratio 40%.

You might balk at the 15 year mortgage but I can’t emphasize how important that is. Forget the interest savings for a minute, the number one reason to go with a 15 year mortgage is it will force you to keep your housing purchase within your means! I have had a mortgage for 5 years now on two different houses and both have been 15 year notes. If you start out with a 15 you will never miss the 30 :)

The 40% housing to income is on the high side but if you have yourself on a budget you should be able to swing that. Dave Ramsey recommends 25% and that should be the goal but up to 40% is ok with a household income of $50k

If you double the numbers they look like this:

Household income: $100k
Purchase Price: $250k
Downpayment: $50k
Mortgage: $200k
15 year Mortgage Payment + Taxes ($2500) & Insurance ($1000) @ 6% ~ $2000 month
Monthly Take home ~$5400
Housing to Income ratio 35%.

In addition to the 2.5 times rule I also like to use the rule that your down payment should be half of your household income. Again, it forces you to make a housing purchase you can afford.

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Astral Update

So far the new job is going well. I have been busy getting up to speed on all things cosmetics and skin care which my family and friends find highly amusing! We just launched the new Pur Minerals website last week:

PurMinerals.com

It is a custom built Ruby on Rails eCommerce platform!

If you have not tried Pur Minerals head over to PurMinerals.com and order a starter kit. All the women in my family have converted! We also have a free shipping promotion for Memorial Day right now!

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