I cannot tell you how many times a month I hear someone say, “I wish we would have started doing this years ago.”
These sentiments often don’t apply just to our finances, but also to many “good” habits that we mean to implement. We just get too busy with life along the way. I get it.
One great characteristic of many Americans is that we work hard. We put a lot of effort and time into bringing home the bacon. Unfortunately, for all the time we spend trying to make the money, many of us don’t put the necessary amount of time into the savings and wise management of that money.
Thankfully, simple technologies have made it easier to create investment and savings plans without much effort. When you get to the point where you are ready to start investing (after you’ve paid off consumer debt and built an emergency fund) then consider setting up an automatic monthly investment plan.
401(k)s and other employer-sponsored retirement plans have been offering this service for years. Case in point: In 2008, when nearly everyone was terrified of putting and keeping their money in the markets, automatic payroll contributions to plans like these helped keep investors invested. This may have helped save many Americans from not ever being able to retire.
Though most folks weren’t dumping all of their extra money into the market as it tumbled, many forgot to turn off their automatic 401(k) contributions from each paycheck. Thank goodness. Because the plan was set up for them, people continued to invest portions of their savings into the market, and many were purchasing investments at deep discounts. The results were largely positive for those who kept in the game as the market rebounded over the next couple of years.
I look at these automatic investment plans like automatic discipline. And building wealth certainly takes discipline. There are numerous other behaviors that influence your long-term financial picture, and it would be terrific if we all developed those along the way. Setting up an automatic savings plan may be a good first step.
Here are two important numbers in our office: $458.33 ($5,500/12 months) and $541.66 ($6,500/12 months). These are the monthly amounts that many people contribute to their Roth IRA or Traditional IRA (depending on their income tax bracket) to arrive at their maximum allowable contribution limit by the end of the year. (Maximum IRA contributions in 2014 for income earners under 50 years old is $5,500. Those over 50 may contribute up to $6,500 per year.)
Smaller, calculated and automatic steps like these over time can make a huge difference. For example a 30-year-old who starts contributing $458.33 a month to his Roth IRA until he is 60 years old, hypothetically earning a 10 percent average annual return, would have over $1 million saved. In the case of the Roth IRA, that amount is 100 percent tax-free.
Now I know that $458.33 each month seems like a lot to some people each month, but it’s pretty darn close to the average car payment that an American household pays. So ask yourself the question, “Would I rather keep that car payment now or have that retirement nest egg down the road?”