Set up a goal and stick to plan is very important in accumulating wealth. You might have heard a
phrase ‘ if you don’t see it, you won’t spend it’, yes it relates to paycheck that comes in every month. One of the easiest and proven method to save is to set up your payroll to distribute fund
to your various saving vehicles so that by the time it reaches your checking out, it is the money you can spend on rent/mortgage payment, food, and other discretionary
items.
Here are some of the saving vehicles you should have to achieve your saving goals and accumulate your personal wealth.
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401(k) Contribution
Contribute as much as you can to your 401k account (at the very minimum, contribute the amount which your company matches, even if you currently have student and credit card debt. why? check out my previous post specifically on this). For 2014, the max is $17,500, if you’re age 50 and over, the IRS allows an additional $5,500 catch-up contribution. This contribution lowers your taxable income which is one of the major tax savings vehicles annually. More over, the investment grows over time and has a phenomenal snowball effect. Below is a graph that shows how your investment would grow overtime, assuming a 6% rate of return, which is commonly used for demonstration purpose, of course this varies year over year.
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IRA Contribution
Traditional/Roth IRA contribution, max of $5,500, with an additional $1,000 contribution allowed if you’re age 50 and over. Roth IRA is not tax deductible regardless of your income, however, traditional IRA could be tax deductible if you are within the income limit, which further reduces your taxes. For more info on why Roth is desirable over Traditional, check out my previous post about Roth IRA. If you are above the income limit for Traditional IRA to be deductible and cannot contribute to Roth IRA due to income limit, please check out my previous post about Back-Door IRA.
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Consider a 529 Plan
Have a kid? or plan on having one? Consider 529 Plan offered by your state to get state tax deduction and save away for your child’s higher education. Typically each state offers this plan and is tax deductible if you have this administered by the state instead of through a brokerage firm. Please check with your accountant or state 529 plan for more info. Also note that 529 Plans can be used on your or your spouse’s higher education as well. I had fully took advantage of it for my master’s degree. Besides state tax deduction on your contribution, the earnings from the 529 plan is tax free when you make qualifying distributions. Morningstar did a pretty extension article on best 529 Plans for 2014.
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Do keep an eye out on Fees
Fees do eat into your earnings and wealth accumulation, especially when you have a long horizon from retirement. Here are some of the ways you can lower your fees.
- For most people, passive index fund/ETF is a good choice for low fee and covers the entire market. Check out my previous post on asset allocation. Vanguard is the king of mutual funds, and certainly has seen a significant amount of asset inflow in the past few year. I have used Vanguard for years and years and have always recommend it to passive savers.
- Consolidate your accounts, most brokerage firms offer discounts when you have certain level of assets invested with them. Many people miss this important and beneficial way to save on fees. You may have old 401k from prior jobs, or small trading accounts you open when interested in individual companies. Consolidate process is troublesome and process time is too long because companies do not want you to leave them. So be patient ad get it done, it will be a lot easier to manage when consolidated.
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Balance your portfolio
Do remember to balance your portfolio periodically, i suggest every six months. Of course, interim balance is needed as your financial situation changes. If you are not savvy with balancing your portfolio or managing money in general, i strongly suggest you consult a professional. It will take a lot of stress from you and put your financials on the right track.