5 Habits of 401(k) Millionaires

401(k) Millionaire

Today on the show, Brian and Bo are discussing an article from Fidelity on the 5 habits of 401(k) millionaires. It’s an important topic to talk about, as the responsibility of securing a financially stable retirement is largely in the hands of employees these days. Knowing what habits can help you save is crucial.

Many people don’t think it’s possible to become a millionaire, especially when you’re making less than $150,000. Brian and Bo go through each habit and state how it is possible to achieve millionaire status if you follow these 5 guidelines.

The Parameters of Fidelity’s Study

The average age of the millionaire in Fidelity’s sample pool was 59. They had been working for over 30 years, and they had earned less than $150,000. Fidelity looked at their accounts from 2000-2012.

1. Save Early On

We all know the importance of compound interest. It can’t be stated enough. If you contribute to your 401(k) steadily for 30-40 years, you’ll amass a nice nest egg to retire on.

The counterpoint? Most people aren’t staying at the same company for 30 to 40 years. But while it’s unlikely most people will stay with a company that long, as long as you have a steady, lengthy career and always make it a point to contribute, you can get there.

2. Contribute a Minimum of 10-15%

Fidelity found that the average employer contribution was 5%, and that millionaires deferred 14% of their salary on average ($13,300 annually). The employee contribution + the deferred salary = an annual 19% savings rate.

The counterpoint argued a 19% savings rate is completely unrealistic for most people. That may be true if you struggle to identify your financial needs and separate them from luxuries and wants. Saving 20% — or even more — of your salary is necessary if you want to have enough saved up to retire on.

3. Meet Your Employer Match

This is common advice and for good reason. Any time you’re not contributing up to the amount your employer will match, you’re leaving free money on the table.

Fidelity found that of the millionaires they studied, 96% were in a plan that offered an employer contribution, but not all employees opted in. If you want to reach millionaire status, rethink that: 28% of contributions in the average millionaire’s account came from an employer.

And again, the argument against this point: people can’t control if their employer offers a 401(k) match. While true, it’s something you need to take into consideration when figuring out whether or not you want to work for a certain company. Your retirement benefits are part of the total compensation package.

4. Consider Mutual Funds that Invest in Stocks

The average 401(k) millionaire had 75% of their assets invested in company stock and mutual funds. They were able to get a 4.8% annualized return.

The counterpoint said the 4.8% return required these millionaires to have outperformed the stock market by a factor of 3, given there were two market crashes during the 2000-2012 period. Brian and Bo disagree, and offer a sample portfolio that could achieve the same results.

5. Don’t Cash Out When Changing Jobs

Fidelity admits the average employee tenure of their millionaires was 34 years, so they didn’t encounter the issue of people cashing out retirement plans when they experienced a job change. If you do change jobs, it’s important to figure out alternative solutions for your funds.

It’s also common advice to not borrow from your 401(k) at all, to which the counterpoint was — it’s not that easy. Some people need the money.

(And this is why it’s critical to develop an emergency fund during good financial times, so you can rely on that first when things get tough.)

As you can tell, becoming a 401(k) millionaire is easy in theory, but many people aren’t willing to commit to the work it takes to build such wealth. What will your path look like? Will you commit to what is necessary to reach millionaire status?

7 Ways to Financially Prepare for a Baby

Financially Preparing for a Baby

Preparing for a baby takes a lot of work and energy — both spent on practical matters and things just for fun. It’s easy to get lost thinking about what colors to paint the nursery, how you’re going to afford to buy everything your baby might need, and trying to brainstorm the perfect list of names.

And of course, there’s the financial changes that come with a growing family. There’s no avoiding the fact that kids cost money — but that doesn’t have to be something new parents panic over.

Whether you’re expecting right now or planning for the future, you can start financially preparing for children. Use these 7 ideas to get you started.

Establish a Baby Savings Fund

Even though you may have a separate emergency fund established, you should consider saving up extra in light of your new addition.

What if your car were to break down, or your roof were to have a leak — along with unexpected expenses for your child? Your emergency fund could get depleted quickly.

It’s a good idea to save extra once you have someone who depends on you and the care you provide. You don’t want to have to worry about whether or not you can afford to fix, replace, or purchase something you didn’t plan on during a time that’s supposed to be happy and positive for  your household.

Adjust Your Budget

With any major life change, you should rebalance your budget. Adding a new family member to the mix is going to increase your expenses, so you’ll need to account for them.

Diapers, formula, daycare, furniture, and clothing are going to be new expenses for you. Write down a list of what you need and what you’ll likely want and estimate how much these new line items will cost.

It’s important to do this as soon as possible.  You might need to cut back in other areas, and that will be easier to do now before you have your hands full with the new addition to the family.

Figure Out Your Income

Will the amount of money you have coming in change once baby is here? Has one of you decided to become a stay at home parent, or will you be taking additional unpaid time off?

Nail down how much you’ll have coming in during and a few months before your baby is born, and don’t forget to check your projected budget against this number.

Also, it’s extremely important you review your employer’s policy on maternity and paternity leave as they all differ. This can greatly influence how much you’ll need to save up.

Knowing how much you have to live off of goes hand in hand with adjusting your budget. If your salary is decreasing, you’ll need to learn to live on less. Saving becomes even more important.

Review Your Spending

If your income and expenses are changing drastically, and you’re finding that money is tight, you might want to think about cutting back on some luxury expenses. These include things like going out to eat, beauty appointments that occur every month, and buying clothes and accessories.

You can also look at cutting cable, exchanging a pricey gym membership for a cheaper one at a smaller organization, or calling service providers to negotiate cheaper rates.

Put the extra money you “find” in your budget toward your list of baby necessities or savings.

Keep Your Baby Purchases in Check

The “fact” that children will cost $245,000 to raise gets thrown around a lot. Children do cost more money, but the total cost is within your control. Children cost as much as you spend on them.

You don’t have to go overboard when buying things for your kids, especially when they’re newborns.

Focus on getting things second-hand, whether they’re hand-me-downs or from garage sales. Babies grow fast! It’s not worth the money you’ll spend to buy them, say, brand new clothing when they’ll grow out of it in a few months.

Review Your Health Insurance Coverage

You’re going to be incurring a decent amount of medical costs throughout a pregnancy if you’re not covered appropriately under your insurance.

Review your health insurance plan and see what it covers, and what it doesn’t. If your spouse has access to another plan through work, check to see if their coverage is better.

This will be helpful when figuring out how much you need to have in your baby savings fund.

Consider Life Insurance and Estate Planning

Do you and your spouse have adequate life insurance coverage? This is an important factor to consider when bringing a child into the world. Life insurance is a necessity when you have others depending on you.

Something happening to you or your spouse means loss of income and loss of help with childcare. Both are equally important. Life insurance will allow your financial situation to remain stable throughout rough times.

Additionally, consider estate planning — yes, even if you’re younger. This will ensure your children are taken care of according to your wishes should something happen.

Otherwise, it’s up to the courts to determine their fate. Don’t let others decide what kind of future your children will have.

Get to Planning!

Hopefully you have more than enough time to create a plan and see if it works for you before your baby arrives. By following these seven tips, you should be in great financial shape when your child is born. The goal is to enjoy parenthood without any major financial issues getting in the way!

What Are Mid-Term Goals, and How Can You Plan for Them?

Mid-Term Goals

What kinds of financial goals do you want to work toward?

In the short term, you may like to pay off your credit card with the outrageous interest rate and to tuck away some money in the bank for an emergency fund. Perhaps in the long-term, you’d like to put a bit away towards retirement.

But what about preparing for all the things you hope to do between now and retirement? These are your mid-term goals, and they can be tough to identify and plan for. It may take a long time to achieve them, they can involve large sums of money, and they can be easy to push off in favor of shorter-term projects.

But don’t fall into this trap! Instead, educate yourself and devote a little time to thinking about those mid-term plans. Here’s how you can get started.

Find Your Mid-Term Goals

Planning for intermediate financial goals is important. But what sort of goals are we talking about here?

Mid-term goals usually happen after you’ve graduated college, secured a job and really started your career — but before you start dreaming about your day-to-day retirement schedule for when your working career is over.

In the next three to ten years, you may want to:

  • Buy a house
  • Pay for a wedding
  • Start a family or have another baby
  • Pay off student loans or go back to school
  • Go on a dream trip
  • Start a second career
  • Start a business

Many of us want to do all of these things, and it’s an expensive proposition.

With any goal, it’s essential to know exactly what you’d like to accomplish. Nail down exactly what you’d like to do, and then figure out how much money you’ll need to make it happen.

Tackling Your Mid Term Goals

One way to tackle all your goals is to sequence your goals. You’ll meet one goal, and then move on the next. Consider both the importance and the timeline of your goals.

Is there one that you’d like to do more than all the others? Which goal would you like to do in two years, and which goal would you like to do in five years? Use this to make your list.

Another approach is to save for all of your goals at the same time. Open a specific saving account for each goal and divide the money you have available to put away between the accounts (or use percentages to determine what amount goes where).

Set smaller goals for each year to remain motivated and keep those balances growing.

If you’re motivated by seeing higher balances and checking goals off of a list, you’ll probably prefer to sequence your goals. If you like the idea of pursuing all your goals at once, you might prefer the separate savings account method.

Take Care of Your Savings

Taking care of your money for medium term goals is tricky. You keep your emergency fund some place safe since it’s possible you’ll need it tomorrow. You invest your retirement money in tax-advantaged accounts like a 401(k) and a Roth IRA since you don’t expect to need it for years.

But what do you do with the money for all the goals in between? You want to preserve your savings, but you don’t want to lose out on growth if it’s going to take ten years to save up for your goal.

You want mid-term savings to be easy to access. It’s a bad idea to put the money in a 401(k) or another tax deferred retirement account as you’ll pay a penalty to access your savings.

Instead, consider a taxable investment account or a high interest savings account so you can reach your money without penalty — and give it an opportunity to work for you and compound.

Think About Your Timeline and Manage Your Risk

Since the timeline for your mid-term goals is shorter than your timeline for retirement, you’ll want to manage your risk carefully. You’ll need to strike an effective balance between protecting the savings you’ve worked so hard to accumulate while getting a bit of growth and offsetting inflation.

It depends on your timeline — is this a two year goal or a ten year goal? For more urgent goals, you can always use a high interest savings account or short term CDs. For goals with a bit longer timeline, you can consider conservative investments structured to preserve your savings in a taxable investment account.

There’s a lot of life to live between now and retirement. Start saving for your mid-term goals so you can create the life you want without worrying about how you’ll pay for it.

 

Recapping the 2015 Berkshire Hathaway Letter to Shareholders

BUFFETT

It’s our favorite time of year! Well, it’s close for financial fans and money nerds. Here’s what’s going down: Brian and Bo cover the 2015 Berkshire Hathaway Letter to Shareholders in this episode of The Money-Guy Show.

They’re excited to share these takeaways with fellow fans as there’s much that can be applied from this annual letter to our personal lives and portfolios.

In the 2015 edition of the Berkshire Hathaway annual letters, both Warren and Charlie shed light on the past 50 years of their partnership and what they hope the next 50 years will hold. Here are the highlights from each.

Highlights from Warren’s Annual Letter

Brian took tons of notes on Warren’s letter and shares the key takeaways with us:

Knowing the value of investments is priceless.

The $25 million purchase of See’s Candy, which had a $4 million cash flow with only $8 in net tangible assets. It was a great move that allowed the company to generate cash flow, which could then be used elsewhere. Brian likens this to putting your dollars to work for you in your portfolio.

Avoiding the “new paradigm.” This goes back to when the dot com boom occurred, and anything with “dot com” in the business plan was given huge valuations. As investors, we should be wary of this. P/E ratios of 200 are not normal, regardless of what pundits are saying.

A nugget of wisdom learned from Charlie: forget what you know about buying fair businesses for wonderful prices. Instead, buy wonderful businesses for fair prices.

We need to ignore market noise and focus on the basics. Warren also states you should only purchase Berkshire shares if you plan to keep them for at least 5 years. Brian says investors need to have a realistic time horizon when investing in stocks and bonds.

Warren is extremely against leveraged investments. Bo brings up that people are asking if they should mortgage their primary residence in order to invest the proceeds as rates are so low — and the answer is no!

Cash is to a business what oxygen is to a person – and people will panic in response to economic situations, we just don’t know when. Brian reminds us that having cash reserves in the form of an emergency fund is absolutely necessary.

Be aware of investments that require “sudden demands for large sums.” Brian gives the example that so many of their clients are set up for wealth and success, but they often get distracted by riskier investments that seem better. It’s key to stick to the path, because at some point, the music will stop.

Fight against companies that display “arrogancy, bureaucracy, and complacency.” As investors, we need to do the same for ourselves. Brian points out that so many people have a great income, but they’re not turning it into wealth.

Highlights from Charlie’s Berkshire Hathaway Letter

Charlie explains what the core competencies of Berkshire Hathaway are:

  • All employees should be invested in the company.
  • They want win-win results for everyone – employees and investors alike. Everyone should benefit.
  • Berkshire stays away from short-term executives. Those executives that make decisions should be there to face the results at the end.
  • They seek to minimize bad effects that come from large bureaucracies at headquarters.
  • They want to personally spread the wisdom they’ve attained throughout the years. Education is important.

What’s the Take-Home Lesson for You?

Whether you’re advanced in your knowledge of personal finance, stock markets, and smart investing, or just starting out and eager to learn the basics, there are important lessons to be learned from each of these letters. What can you apply to your own business or financial situations?