Do you want to be a millionaire? Every single person does not need to be a millionaire, but they do need to be financially independent. Because your life has a lot of value and you should be allowed to make choices in your best interest.
When you have money, you have choices. You do have to be trapped in a job that you hate or an apartment, because it’s cheap and you can’t afford another place.
A lot of people think that you have to be an entrepreneur to get rich or inherit a stack of cash from a relative. But the truth is almost any employee can become rich through the choices they make with their money. By having the right accounts, consistently adding to those accounts and having a savings rate anyone can become rich.
It is not easy. Life is not easy. And it can take a frustratingly long time, I am a millennial dammit I want to be rich NOW. But the process does work. And once you see the magic happening you start to love saving and do it more, so that it takes less and less time to reach your financial independence number. You should also work on eliminating debt of course. Walk an chew gum at the same time.
Here are the 6 accounts every employee should take advantage of:
- 401k – You should definitely be investing in this, because chances are your employer is matching your contribution by a certain amount. It is tax deferred. Basically the government is encouraging you to invest in your retirement. If you are really smart you will make out the amount you can contribute to this account.
The current cap is $19,000 but Congress continues to increase this amount due to inflation. There is also a self employed version of this account that those peops can invest in.
- ROTH IRA – You need to open this account on your own through a brokerage. You pay taxes on the money when you put it in the account, but never again. So you get to keep all of the capital gains. And even pass it on to your heirs when you die if you so choose.
The current limit is $6,000
- HSA – A health savings account. Spoiler Alert: You are going to be old one day and need healthcare. This account can keep you out of the poor house and take care of all those old age expenses.
The current limit is$3,500 and the government will likely continue to increase the amount you are allowed to add to this account. The best part of this account is that you can invest your funds tax free in the market. Never paying taxes is unheard of. But you can only spend the money you put in this account on health related things.
- Stock Investment account – Once you have maxed out putting money all of these other accounts then you can invest the rest in the stock market. I recommend low cost index funds like VTI, but it’s your life.
I personally have the vast majority of my portfolio in index funds and then I use a little bit to invest in companies that I love: COSTCO, STARBUCKS, APPLE etc.
- Savings Account – These last 2 are ones that you just need to survive and function in the world. An online savings account is the best option, because they offer more interest payments than a traditional bank. The interest rate will fluctuate with the federal reserve number. Your savings account should be your emergency fund used for a very limited number of things, like losing your job.
I personally recommend having a year’s worth of expenses, but you have to decide for yourself how much money will make you comfortable having and will give you peace of mind. This is also the account where you will save up money for things like a house down payments. Just know that most accounts limit the number of withdraws you make.
- Checking Account – The account you will use the most. Direct deposit. Paying off credit cards. All of your personal expenses should come through this account. Use a bank that offer some type of interest. I use Charles Schwab. I would not use the big banks. They do nothing for you, but they can be convenient.
And those are the accounts.
Formula to become rich = spend less than you earn, invest the rest
Once you have the accounts set up, pay yourself first. Meaning automatically add money from your paycheck monthly into those accounts.
Start small and then increase over time. If you cannot afford to max out all of the accounts, start with small amounts and then increase those amounts over time. It is best to start with your emergency fund. Get that account to a good place and then go for the rest. Basically you are continually increasing your savings rate.
Don’t touch it. Once the money has gone into those accounts don’t mess with it. You need compound interest to do its magic and if you take money out or money is around you will lose.
Leave a comment. How is your wealth path going?