4 Things Making You Poor
This was originally a guest post on My Super Charged Life. If you need a little motivation now and again, be sure to check this blog out. You can see the original article here.
Do you always feel that that you can never catch up financially? For many, the rate race seems like a never ending cycle. You got to work, clock in, get your paycheck and your left scratching your head what you can do to get yourself on financial track. If you feel alone, don’t. There are many things you can do to get your investment situation on track, but for the mean time, here’s four things that are making you poor that you can change today.
1. Throwing extra cash in your checking account.
It’s definitely very wise to save and have a good chunk in savings. You should keep at least 8 months worth of emergency funds (12 months if your income is unpredictable) in a high-yield savings account. But over and above that, your missing out on the potential to earn more. Consider doing a CD Ladder or relatively conservative short term bond investments. Just stop losing money by not taken advantage of the opportunity to earn more.
2. Giving in to 401k Temptation
Doesn’t that new TV sound tempting? Or maybe you just realized that you need to buy new tires and are not sure where you are going to get the funds (because you haven’t done #1). Then it dawns on you- your 401k! Stop right there before the thought goes even further. Your 401k is not your savings account. That’s your nest egg for down the road, so keep your hands off. If you decided to take it, figure on paying a minimum 20% in tax plus a 10% penalty if you’re under 59 1/2. Giving away 30% to Uncle Sam is a sure way make yourself poor really quick.
3. Leaning too heavily on a 401k.
If you’re single and earn less than $116,000 a year, or are married and filing jointly and earning less than 169,00k, congratulations! You are now allowed to participate in one of the greatest retirement investments of all time. I’m talking about the Roth IRA. Investing in a Roth IRA means you set aside money now, watch it grow for decades and then cash out without paying a dime in taxes. A recent study found that only 15% of American households have a Roth IRA. Are you part of the 85%? Don’t be. Here’s what you need to about the Roth IRA rules for 2009.
4. 2010 tax bill- Save up Now.
In 2010, anybody will be able to take all their traditional IRA’s and old retirement plans and convert them to a Roth IRA. The amount you convert will be taxed, but you can spread the bill over three years. You might want to start saving for the tax bill now, because the 2010 conversion event will be an opportunity you will want to capitalize on. May end up being the best money move you’ve ever made.
Securities offered through LPL Financial, Member FINRA/SIPC
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Great tips, I have recently opened a Roth IRA account based off of your advice and others in the blogosphere. Being young and still wanting to have fun and on a more limited salary, I am trying my best to budget and contribute as much as I can into it, hopefully maxing out if I can. I knew nothing about them previously, so thanks for all the info.
Craig’s last blog post..The Ways to Combat Whooping Interest Rates
So is the 2010 conversion the only year that you can do it? You mentioned that the bill can be spread out over 3 years, but can the conversion be spread out instead? Or is this one of those things that only gets passed one year at a time?
staci @teaching money to kids’s last blog post..Enough?
@ Staci
You are allowed to do a conversion currently so long as your AGI is below $100k. 2010 is the first year that conversions area allowed despite your income. More many high income earners this will be their opportunity to get some money into the Roth IRA. 2010 is the only year that the tax will be allowed to be spread out as well. You don’t have to do do a full conversion either. You can spread the conversion over as long as a time period as you like. That would then accomplish what I believe you were asking.
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