Money Girl's 5 simple principles of building wealth and achieving financial success.
Principle #4: Use Tax-Advantaged Retirement Accounts
If your employer offers a retirement plan, like a 401(k) or a 403(b), start participating as soon as possible—especially if they match some amount of your contributions. Here’s why matching is such a big deal:
Let’s say you get a full match on the first 3% of your salary that you contribute to a 401(k). If you earn $40,000 a year and contribute 10% of your salary, that comes out to $4,000 (10% of $40,000) a year or $333 a month. If that’s all you invested over 40 years with a 7% average return, you’d have a nest egg in excess of $875,000.
But now consider what happens when your matching funds kick in: If your employer matches contributions up to 3% of your salary, they’ll add an additional $1,200 (3% of $40,000) a year or $100 a month into your account.
Now you’re socking away $5,200 ($4,000 plus $1,200) a year instead of $4,000, which means you’ll have over $1.1 million after 40 years. That’s about $260,000 more thanks to those additional matching funds!
Even if your employer doesn’t match contributions, I’m still a big fan of using workplace retirement accounts because they give you multiple benefits. Not only do they automate investing by deducting contributions straight out of your paycheck before you can spend them, retirement plans also save you money on taxes each year. And you can take all your money with you—including your vested matching funds—if you leave the company.
If your job doesn’t offer a retirement plan or you’re self-employed, it’s easy to create your own with an Individual Retirement Arrangement or IRA.
Related Content: 15 IRA Rules You Should Know
Principle #5: Don’t Pay High Interest
Every dollar of interest you pay to a lender or a credit card company is a dollar that won’t be making you rich.
Get rid of high-interest debt as soon as possible so you can put your money to better use. Make a list of your debts and the interest rates you’re paying. Reducing the highest-interest accounts first will save you the most money so you can use it to pay off the debt even faster.
But if you want the satisfaction of eliminating a smaller debt first, even if it isn’t your most expensive debt, that’s fine too. The idea is to be conscious of what you’re really paying on your debt and to create a plan to cut your interest payments. Remember that if you’re only making minimum payments on your credit cards, you’re making the card company rich, instead of building wealth for yourself.