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Kindle Notes & Highlights
by
David Bach
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November 19 - December 27, 2018
Over time money compounds. Over a lot of time money compounds dramatically!
two concepts that make Americans rich. The first concept is the power of “paying yourself first,” and the second concept concerns where this money actually goes…specifically, pretax retirement accounts.
three baskets into which you should put your eggs. I call them the retirement basket, the security basket, and the dream basket. The retirement basket safeguards your future, the security basket protects you and your family against the unexpected (such as medical emergencies, the death of a loved one, or the loss of a job), and the dream basket enables you to fulfill those deeply held desires that make life worthwhile.
Paying yourself first means putting aside a set percentage of every dollar you earn and investing it for your future in a pretax retirement account.
The reality is that there is an entirely legal way to avoid—or at least significantly reduce—the big bite the government takes out of your paycheck.
TO FINISH RICH, YOU SHOULD PAY YOURSELF FIRST BY CONTRIBUTING AS MUCH AS YOU CAN TO A PRETAX RETIREMENT ACCOUNT
The great thing about pretax retirement accounts, of course, is that by making use of them, you can put your money to work without first losing 40 cents or more of your hard-earned dollar to taxes. Here’s how it works. Let’s say you take $100 out of your paycheck every month and put it into a pretax retirement account. Well, that’s $100 a month that won’t be subject to income taxes—not federal taxes, not state taxes!
Here’s a simple rule of thumb: if you don’t want to have to struggle to keep your head above water when you retire, you should be saving at least 10 percent of your pretax income each year. Period.
Any savings you’re doing so you can buy a house or a new car or take that dream vacation should be on top of the $7,500.
IF YOU ARE NOT PAYING YOURSELF THE FIRST 10 PERCENT OF YOUR INCOME, YOU ARE LIVING BEYOND YOUR MEANS
IF YOU WANT TO BE REALLY RICH, YOU SHOULD SAVE 15 PERCENT OF YOUR INCOME
you should have at least $1 million in liquid assets, above and beyond the value of your home.
You don’t have to be lucky, you just have to be disciplined enough to put aside 15 percent of your income.
It’s important to note that the younger you are when you start saving, the better off you’ll be. In fact, the best time to become a massive saver and investor is when you are in your twenties.
THE TIME TO COMMIT TO SAVING—TO PAYING YOURSELF FIRST—IS NOW
when you pay yourself first into a retirement basket, you wind up paying less in taxes up front and your money grows, tax-deferred. The results of this can be truly amazing. It’s like getting free money from the government!
HOW TO SAVE $5,000 A YEAR WITHOUT GIVING YOURSELF A $5,000-A-YEAR PAY CUT
If you and your partner are already signed up for 401(k) plans, the most important question to ask is whether you are “maxing out.” That is, are you taking full advantage of the “pay yourself first” system by making the maximum contribution your plan allows?
The single biggest mistake people make when it comes to 401(k) plans is not spending enough time reviewing their investment options before they decide which ones to pick.
LOOK FOR “TARGET DATED MUTUAL FUNDS”—IN YOUR 401(K) PLAN
THE BIGGEST MISTAKES YOU CAN MAKE WITH A TARGET DATED MUTUAL FUND—DON’T MAKE THESE!
The biggest mistakes we see people making with target dated funds is that they select more than one.
According to an obscure section of the tax code known as Internal Revenue Service Rule 72(t) 2(A) iv—generally referred to as “72T”—you don’t have to pay the penalty if you take your money in what the IRS defines as “substantially equal and periodic payments that are based on life-expectancy tables.” In plain language, the IRS allows you to take a fixed amount of money out of your IRA early without penalty provided you work out a withdrawal schedule in advance and then stick to it. This is an extremely complicated undertaking that you shouldn’t attempt without professional guidance. Done
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IF I PARTICIPATE IN A 401(K) PLAN AT WORK, CAN I STILL OPEN A ROTH IRA? Yes! I love pointing this out at my seminars because so few people are aware of it. My suggestion is that you and your partner first make sure that the two of you are maxing out your contributions to your 401(k) plans. Couples who maximize their 401(k) plans and then contribute to Roth IRAs are setting themselves up to Finish Rich! I strongly recommend this if you can pull off the extra savings and you qualify based on your income.
Regardless of what everyone says, the government is not stupid! It created the Roth conversion option to generate more tax revenue for itself.
THE FINISHRICH RULES OF RETIREMENT INVESTING
RULE NO. 1 Know what your money is doing.
RULE NO. 2 Make sure your retirement money is invested for growth.
If your money is not growing at a rate at least 4 to 6 percentage points higher than inflation, you face the possibility of outliving your income. The bottom line here is that you need to invest for growth. In practical terms, this means that a portion of your retirement portfolio must be invested in equities.
RULE NO. 3 Allocate your assets so that you maximize return while minimizing risk.
The key to finding and maintaining the right balance between risk and reward is what is known as asset allocation. Asset allocation is one of those terms that can sound more complicated than it really is. In fact, all we’re talking about here is how much of your retirement money should go into relatively safe, relatively low-yielding investments (like fixed-return CDs) and how much should go into riskier, higher-yielding investments like growth stocks.
Take your age and subtract it from 110. The number you get is the percentage of your assets that should go into equities; the remainder should go into bonds or other fixed-income investments.
Once you’ve figured out how you want to allocate your assets, you’ll need to choose the actual investments. Because this decision is more specific, I recommend you discuss it with a knowledgeable financial advisor. Reviewing your risk tolerance in detail with a qualified financial advisor can really make all the difference in how you do.
RULE NO. 4 Invest in your company’s stock, but do your homework!
MANY OF YOU HAVE WAY TOO MUCH OF YOUR NEST EGG IN YOUR COMPANY STOCK AND YOU DON’T REALIZE IT! This works great, until it doesn’t work.
Many experts recommend that you never invest more than 10 to 20 percent of your nest egg in your employer’s stock. While investing in your company stock can make you rich when things go right, it can also make your poor overnight if things go horribly wrong. My recommendation today is never invest more than 10 percent of your 401(k) plan money in your company stock, and if you’re already investing or getting company stock or options, I would pass on investing in the company stock in your 401(k) plan.
The 10-K is a report that all public companies are required to file annually with the Securities and Exchange Commission. It provides detailed information on the company and its finances. Whether or not you’re planning to buy stock in your company, I suggest that you read its 10-K.
RULE NO. 5 Make sure you read all of Step Eight.
Having a “Plan B” in case things don’t work out the way you want them to doesn’t only make you feel secure, it actually makes you secure. That Plan B, of course, is your security basket, and building it is like building the foundation for your family’s financial home.
SAFEGUARD NO. 1 Set aside a cushion of cash.
Once you know the figure, you can calculate how thick your cash cushion should be. In my opinion, the bare minimum you should set aside is an amount equal to three months of expenses.
$7500 x 3 months = $22,500
SAFEGUARD NO. 2 Both of you absolutely MUST write a will or set up a living trust.
This legal document should address the following key issues: WHAT SHOULD BE DONE WITH YOUR PROPERTY WHEN YOU DIE?
WHAT HAPPENS IF BOTH OF YOU DIE AT THE SAME TIME?
WHAT HAPPENS IF ONE OF YOU GETS SICK (OR BECOMES OTHERWISE INCAPACITATED) AND CAN NO LONGER MAKE DECISIONS?
Charitable Remainder Trust: This trust allows you to continue to live off the proceeds of your estate even after you’ve donated it all to a charity (and presumably reaped some hefty tax advantages in the process). Typically set up by very wealthy families, it can provide you and your designated heirs with income for the rest of your lives, but once you are all gone, the estate will go to the charity.
SAFEGUARD NO. 3 Buy the best health coverage the two of you can afford.
SAFEGUARD NO. 4 Protect those who depend on you with life insurance.
For one thing, the average age of widowhood is now 57 and 75 percent of married women will ultimately be widowed.
Buying term insurance is one of the most romantic things you can do.
