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Some people hope to become incredibly wealthy. Most just want to achieve a degree of financial freedom, and the peace of mind that comes with it.
Whatever your financial goal, achieving it requires at least some basic financial knowledge.
Which, unfortunately, is a problem for many people. Most of us weren’t taught money management basics in school. Most of us didn’t learn about investing in school. Couple that with the fact there’s no shortage of financial advice online (much of it self-serving) and it can be hard to even know where to start — much less how to finish.
All of which is why, according to a recent study, most people can’t pass a basic 5-question financial literacy test.
So if you want to enjoy some measure of financial freedom, and possibly even get rich… here are some simple truths about money and investing — that apply to almost everyone.
1. If your goal is to get rich, work for yourself.
Check out any “richest people” list. Check out the IRS list of largest gross adjusted incomes. What will you find? Aside from a few people who won the genetic lottery and inherited fortunes, the rest are almost all entrepreneurs.
That’s because, in simple terms, when you work for someone else, you will never be paid more than that person or company decides you’re worth. And your income is always capped.
Start a business, and the only limit to your income is you.
You don’t have to quit your job to start a business. Plus you’ll minimize your risk is by keeping your full-time job until you’ve build a solid foundation for success. Then you can quit your day job.
And there’s another reason to start a business: You can grow your retirement savings more than twice as quickly.
2. If you want to win the 401(k) game, own a small business.
Say you own a small business. Or even a side hustle. And you’re the only employee. You can set up a 401(k) plan and have your company match 100 percent of your contributions.
Which means if you’re under 50 you can contribute $19,000 in pretax dollars, your company can match that $19,000 with pre-corporate tax dollars for a total of $38,000 per year. And your company can make a pre-tax profit-sharing contribution of $18,000 to bring your total 401(k) allocations to the maximum allowable amount of $56,000. (As long as employee and employer contributions are not greater than your income.)
If you’re over 50, the $6,000 catch-up lets you contribute a total of $62,000. You can contribute $25,000, your company can match that $25,000, and your company can make a $12,000 profit-sharing contribution.
Compare that to the $19,000 (or $25,000 if you’re over 50) maximum personal contribution you can make if you work for someone else.
Of course that means your business has to generate sufficient income. And you need to make enough, and keep your expenses low enough, to be able to save that much money.
Even if you can’t hit the maximums, the possibility still exists to save more than if you work for someone else. (Which is why I know several people who started side hustles for the sole purpose of funding their 401(k) accounts.)
But what if you work for someone else and don’t own your own business?
3. If you work for someone else, always max out the 401(k) employer match.
If your employer will match 100 percent of your contributions up to 3 percent of your income… make sure you contribute 3 percent. If your employer will match 50 percent of your contributions to a maximum of 4 percent… make sure you contribute 8 percent.
Otherwise, you’re leaving free money on the table.
4. Don’t look at your 401(k) statements more than once or twice a year.
Few people can beat the market, and you and I are probably not among them.
Choose a sensible way to allocate your investments. Decide how much risk you can stomach, how adventurous you want to be… and then step away from your statements. That way you won’t be tempted to try to time the market. Or to shift into an income fund during a momentary dip. Or to double down on an aggressive growth fund during a momentary spike.
After all, if Warren Buffett suggests we should invest our 401(k) money an index fund, who are we not to listen?
And then use the time you save not obsessing over your 401(k) performance to…
5. Spend your time focusing on how much you save.
Again, while it’s fun to assume differently, most of us have very little control over the rate of our investment returns. Even if you channel your inner Warren and spend hours each day poring over financial data, the difference you’ll be able to make in your investment returns is likely to be small.
But what you can control is how much you save.
The faster you build your savings, the faster you achieve a critical mass of wealth, the greater the effect even marginal gains in investment return will have on your principal. For at least the first 10 years, how much you put in your 401(k) makes a much greater difference than how much you earn on those savings.
Think of it this way: When you have $20,000, earning 10 percent instead of 5 will only increase your savings by an extra $500.
But when you have $500,000… the difference is $25,000.
Saving more means finding ways to spend less money. And may mean finding ways to make more money.
Spend your time doing those things — because you can control those things a lot more easily than your investment returns.
6. Only borrow money you have to borrow.
The key, as in most financial decisions, is to separate wants from needs.
You have to live somewhere, so borrowing money to buy a house makes sense. (As long as you buy wisely and don’t borrow more than you can afford.)
But if you want a boat… and need to borrow money to buy that boat… then satisfying your want may come at a high price. Instead of borrowing so you can finance the boat now, save so you can buy the boat later.
Do that, and you may find that you only thought you wanted whatever you considered financing.
Or you’ll be sure you not only want… but can afford.
7. The best investment you will ever make is in yourself.
Want a guaranteed return? Invest in yourself. Improve your skills. Improve your network. Increase your expertise, your talent, your experience.
Invest in becoming a better version of you. That will generate better long-term results than any other investment. It’s the one investment whose outcome you can almost totally control.
And the only investment guaranteed to help you live a more fulfilling life.