Generation 42

Archive for the ‘Money’ Category

The plans known as 401(k), 403(b), and SIMPLE allow you to contribute a percentage of your salary, usually around 15 percent, into the plan. A 401(k), which takes its exciting name from a selection in the tax code, is an all-around plan that almost any company can enter into. A 403(b) plan is what you have if you work for a nonprofit organization, such as a hospital, university, or research organization. The 401(k) and 403(b) plans work in much the same way; if I refer to a 40 1(k) plan here, it will also apply to you if you have a 403(b) plan.
A SIMPLE is a retirement plan that took effect January 1, 1997. The acronym stands for savings incentive match plan for employees. This plan can be adopted by employers who employ one hundred or fewer employees with at least $5,000 in compensation for the previous year and who do not maintain another employer-sponsored retirement plan. The SIMPLE is not subject to the same rigorous rules as the 401(k), so many employers may opt to go with this kind of plan, although as you’ll see it also has its limitations.
The contribution and withdrawal rules for Simple are just a little different, but the same basic concepts apply.

With Judy, as with the rest of us, it is not the amount of money earned that is important. It is how much of that she does not have to give to the IRS, how much she really does get to keep.
Money that goes into a retirement fund is money you do not have to pay taxes on until you take it out. Depending on your income tax bracket, you might be able to keep 28 percent more of your money right off the top. Because of the tax savings, contributing the maximum to your retirement account right now will not deprive you of as much current income as you might fear. And where it will make a vast
difference is in what you’ll have to spend later.
Let’s say that I convinced Judy to raise her 401(k) contribution to $500 a month or $6,000 a year, and let’s say, too, that she is in the 28 percent tax bracket for federal taxes and the 11 percent bracket for state taxes. She will have saved $140 a month on her federal taxes and $55 a month on her state taxes. If she didn’t put this money away, she would really get to spend only $305 a month after paying her taxes.
Your situation might be a little different, depending on what tax bracket you are in or whether the state you live in imposes an income tax, but the concept always holds true.
Finally I convinced her, and she promised to up her contribution to the maximum that very week, which she did. She called me a few days later: the very day she raised her contribution, her boss had called her into her office to give her a midyear raise. This was the first time in all these years she had been given a raise before the end of the year. She was stunned.
I wasn’t. This sort of occurrence, however you want to explain it, is not uncommon; I’ve seen it happen many times. I attribute it to the second law of financial freedom: Respect attracts money.
Judy had decided to respect herself, chosen to put the creed into action and take the steps to nurture her money. And by doing the right things with her money, she attracts more money.

Your mind is the most powerful tool you have, and in the same way my clients just mentioned did, you must make it believe that you make less than you do so that you will naturally spend less.
Your mind believes that if you bring home a monthly paycheck of $3,000, then you have $3,000 to spend. And you’ll spend it, all of it. If you get a raise and start bringing home $4,000 a month, you’ll spend all of that, too, and wonder how on earth you managed on less. But if you start bringing home $3,500 a month, your mind will adjust to it, and you’ll naturally spend less. The way to do it is exactly the way my clients do: just put it away before you ever see it.
You won’t be depriving yourself. You’ll be paying yourself. You’ll be on your own payroll and soon be able to enjoy two of life’s great pleasures: counting your money as it grows and dreaming of how you’ll spend it when the time comes.

No, no, no—this does not mean you should make less money; I hope you make as much money as you can! But there is a simple and remarkably effective way to make yourself spend less. You invest more. By putting more money into your retirement accounts, so your take-home check will be less and you will quickly train yourself to spend at a lower level, just as you used to do when you were making less money. (If you still don’t see how you can spend less, which will show you how to do so.)
If you do this now, if and when that day comes when you’re asked to attend an early retirement seminar, or when those rumors in your office about downsizing become reality, you’ll be ready. You’ll be the one with the $400,000 or more with which to face the future.
You may say, as many of my clients have, “But, I can barely afford to pay my bills as it is. How do you expect me to live today and still put money away for my retirement?”
If you think you cannot make it today, while you’re working and have a paycheck coming in, how in the world do you think you’re going to make it in the future, when you will have essentially the same bills to pay but no paycheck coming in? The answer is that you won’t. But if you set it up now, even on a modest salary, you can put aside an impressive amount of money.
Not long ago a couple came to my office—early forties, nicely dressed, two children, annual salary of $35,000. The wife didn’t work outside her home, because the children were too small, although she planned to go back to work in a few years. They owned their own house and had fourteen years left on their mortgage. They paid their credit card bills in full every month. They already had a sizable nest egg, because the husband had been aggressively investing the maximum in his 401(k) plan at work. They had a few other investments that were doing nicely, earmarked to fund their children’s education. I remember asking them, “How is it possible that you can do all this on just $35,000 a year?” He answered: “We only spend what we see. The company takes Out the maximum for my 401(k), and I also have them send money directly to our credit union. The credit union sends money directly to a mutual fund to invest it. Our take- home money isn’t much, but at least we know we can spend it all and not have to worry. So it works.” I asked them why they had come to see me, and they said they wanted to make sure they were covering all their financial bases. With immense respect for the job they were doing, I sent them home and told them not to change a thing.

This is one of the reasons why the rich get richer. If you’re respectful of your money, and do what needs to be done with it, you will become like a magnet, attracting more and more money to yourself. For some of us, this goes against the grain. We’ve all heard that “money is the root of all evil,” and it’s easy to have the notion that caring for our money is a task that should be beneath us. We know there are more important things in lifelike people. But that doesn’t mean you should neglect your money. Your financial life, remember, is like a garden. If you tend a garden carefully, nourishing the flowers, pruning, and weeding, it’s going to be a lot more beautiful than if you water it hardheartedly now and then.
Wouldn’t you like your financial garden to be beautiful and bountiful? Don’t you deserve it? If you treat your money with disrespect, you are actually not giving yourself the respect that you deserve. And when you fail to respect yourself and your money, you actually repel wealth from yourself, and you block more wealth from coming your way.
The consequences of not respecting money may show up in your life in any number of ways. You might lose some of what you have just by neglecting to pay attention. As soon as you pay off one credit card, your car breaks down and now you owe even more. Maybe you didn’t get that job you felt certain was yours. A wonderful relationship, or so you thought, just goes out the window over money. However this repulsion takes place in your life, the root cause of it is disrespect of yourself and your money.
When I say this to my clients, some of them get very defensive and say, “But , I am the most respectful person I know when it comes to money.” When we look closely at all their actions relating to their money, however, we eventually see that they are not as respectful as they would like to think.
When you start really respecting yourself, those you love, and your money, the result is that you start having control over your money. What follows from that is control over your life.