Steve Buhaly: Getting Started on a Better Financial Future (Part III)

Part III closes the series with some key takeaways for starting your path to a healthy financial future.

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The Roth IRA is the less glamorous of the siblings but I think it’s very beautiful. Look at this graph. Bri puts in the max allowed every year which is currently $5,500 and goes up over time with inflation. She invests it in the S&P500 which has historically gone up an average of about 7% a year after inflation. Here’s what her account looks like if that 7% rate continues to be true. Just doing this one thing right could lead to Bri having an account worth over $1M in today’s dollars after 40 years with no taxes due. Now that’s pretty smart!

When the government offers a program this good, you should take it! Set up an account and put your money to work. If you want to keep it simple and retirement is a ways off, just put it in an S&P500 fund and check back near retirement time. Fees should be very low and you will be investing in 500 large American companies.

After investing for retirement take a look at any debt you have. Pay off debt if it’s due soon, has a high interest rate, and can’t be deducted from your taxes. Non-productive debt like car loans and personal loans are often good to get rid of. Some private student loans may also be good targets due to high interest rates and lack of deductibility. On the other hand, don’t be in too much of a hurry if some of these things aren’t true. And don’t forget that some federal student loans may have forgiveness features. Financial flexibility and the opportunity to save for retirement can easily be more important than eliminating all debt.

Once you’ve set aside some emergency cash, paid off those nasty credit cards, and started saving for retirement, what’s next? My bet would probably be a down payment for a house. It’s satisfying to have your own place and you get a big tax break on mortgage interest and over the long term, housing has historically done very well. Just recognize that transaction costs such as selling and loan fees can be large, so plan to hold it for a reasonable period of time – I would say for at least five years.

Beyond this, you’re well on your way to financial freedom. Save for the kid’s college and start building more investments – and again – for longer term plans I prefer buying productive assets like stocks or property.