Welcome to another series here on the wildly popular I Was Broke. Now I’m Not. website. We’re passionate about helping YOU win with your money. In this series, we are going to be talking about a practical, step-by-step plan that you can use to take your finances to the stratosphere!
How To Win With Money
6. Place at least 15% of your gross income into tax-advantaged investments.
At this level, you truly begin to change your entire financial future. You have built savings, initiated investing, and eliminated all non-house, non-business debt. It is time to build wealth in a big-time way. You might call this “the dream funding” level.
Consider your annual gross income that you expect to receive this year. Multiple that salary by 0.15 to calculate your Level 6 investing goal. Suppose your gross income is going to be $40,000 this year. This means that your goal is to move at least $6,000 into tax-advantaged investments. Imagine how much this could grow to be after doing this year after year!
This money will be used to fund your big-time dreams and goals that you established way back at Level 1! This includes funding college for your child(ren), retirement, blessing others financially, dream vacations, and other items that are very important to you.
It is important to note that this 15% investment of gross income does not include any match you may receive from your employer. Whatever they may contribute is above and beyond the 15% goal.
Consider the following example:
- 28 year old parents earning a combined income of $50,000 commit to follow this process
- They achieve Level 1 (set goals) and Level 2 (save $2,500) in three months by using their tax refund
- They achieve Level 3 (invest enough to capture company match in retirement account) one month later by contributing $100 per month and their employer matches with another $100.
- They achieve Level 4 (become debt free except house) over the next 3 years
- They achieve Level 5 (save 3 months of expenses) in another 8 months
- They are now 32 years old and have arrived at this level – Level 6 – and begin to invest $7,500 (15% of gross income) into tax-advantaged accounts.
- They receive another $3,000 in matching contributions from their employer making their total annual investments equal $10,500 per year (or $875/month)
- They invest this amount every year until they are 66 (for a total of 34 years)
- Because they started investing in Level 3, they have been investing $200 a month for 32 months. This investment is already worth $7,499 at age 32!
- Using this $7,499 and assuming an annual growth rate of 12% with monthly contributions of $875/month, their investments will be worth $5,418,542 at age 66.
Get. Fired. Up!!!! By the way, this assumes that this couple never received a pay raise for 38 straight years.
Any doubt that this process will help you win with your money?
Read the entire series (available after 4/20/2013)