Ask 10 people what it means to retire rich, and you will get 10 different answers. Some people say rich is being able to buy anything you want, others will say being rich is the ability to quit your job and travel the world. Regardless of what your definition may be, the fundamental idea behind being rich is having enough money to do what you want, without stressing over the cost.
While retiring rich is not easy, it is far from impossible. Even households with modest annual incomes can begin to acquire wealth, but it is going to take some work and commitment, and more importantly it is going to take time.
I wish there was a secret I could tell you which would allow you to wake up tomorrow and have a million dollars in your bank account. If I could I would, but obviously no such secret exists. What I can tell you though, is that if you follow a few tips, and have the patience to let things happen, you can start down the path to riches.
Tip #1: Get out of debt before anything else
Nothing can act like a roadblock to becoming rich more than debt. Before you start thinking about ways to boost your savings or investment accounts, you have to start making steps to pay down, and eventually eliminate, your debt. The main reason for this is that the interest you are paying on that debt is almost certainly higher than the yield you can expect to generate from investing and savings accounts.
Your credit cards are the first debt that you should target. Credit cards are great for certain things, but if you are carrying a high balance on your credit cards you are giving money away each and every month to high interest payments. The best tip to eliminating your credit card bills is to begin to consolidate your balances. Move whatever balances you can from high-interest cards to low-interest cards. Pay the minimum balances due on the low interest rate cards, and devote all the rest you can afford each month to the higher interest rate cards. Most importantly, you need to break the habit of using your cards unless absolutely necessary. It will take a while to free yourself from credit cards, but once they are gone you will amazed at how “rich” you feel all of a sudden.
Auto loans and home mortgages are not loans you have to focus too hard on eliminating, but you should pay a bit extra each month in order to shorten the loan periods. If nothing else, round up each payment to the nearest $100. Make sure the extra payment is being applied to principal, and the loans will go away much quicker than scheduled.
Tip #2: Know where your money is going
Do you ever catch yourself at the end of each month wondering what happened to all your money? Don’t worry you are not alone. In today’s world, so many of our bills are getting handled by auto-pay that we forget what they are. Too many people have absolutely no idea where their money is going each month. How can you manage your money, and plan for the future if you do not know where it is currently being spent?
You do not have to do anything fancy here, it could be something as simple as keeping a journal, or building a spreadsheet so you can log where you are spending your money. If you can do this vigilantly for a couple of months you will start to find places where you can cut back on your spending.
When it comes to saving for the future, and building wealth, knowledge is power, and until you get a grasp on where your money is currently being spent, you will never have the knowledge you need to start putting a little aside each month to reach your goals.
Tip #3: Max out your retirement contributions
If your employer has a 401k or individual retirement account program, be sure to take full advantage of the offer. It is easy to put off contributing to your 401k, especially when you are younger, but this is a big mistake. 401k contributions come out of your salary, so they are pre-tax dollars. This in and of itself is a great reason to contribute the maximum amount possible each and every year as it lowers your tax bill in addition to bolstering your savings.
In some cases your employer will even match your contribution up to a certain level. If you find yourself in this situation, you should definitely be putting in the absolute maximum amount possible. This is free money, and nine times out of ten is more than you can expect to earn in the market during any given year, so it is always a good idea to maximize your contribution in order to maximize your match.
Never give in to the urge to cash out of your 401k early. Emergencies do happen, and sometimes you have no choice, but it should be a last resort. You will get hit with huge penalties, and on top of that you are basically taking money from your retirement years when you need it the most.
If and when you leave your current job, do not take a check from your employer for your 401k balances. If possible, simply roll it over to your new job’s 401k, otherwise roll it into an IRA in order to avoid penalties.
If you do not have a job with a 401k plan, then you should consider setting up an IRA. There are different types of IRA plans, and it is up to you to decide which IRA is best for your needs.
Tip #4: Start today
We have touched on this several times already in this article, but this is the most important thing to remember… you must start planning today if you want to retire rich. Time is on your side, but it is also constantly working against you. The earlier you get to work on your retirement plan, the more likely it is to work out in the end.
In an ideal world, we would have all started putting a little money aside each month since we were 21, but we all know that is not reality. However, no matter what your age, it is not too late… but you need to start today.
Start keeping track of everything you spend, start paying attention to your credit card bills, and always pay more than your minimum. Start talking to your human resources representative at work to make sure that you are hitting your maximum contribution each year.
The best tip of all is to remember that it is up to you! No one is going to put in the work for you, if you want to be comfortable in your retirement years, you need to start working toward that goal, and start to do so today.