Ever since we started our fire journey nine years
ago we've received so many questions from different people about personal finance,
saving money, and investing it today. We're going to walk through the questions that
you ask us more than any other question so here are those questions answered!
The next question is what are the different types of retirement accounts and which ones do I need
this is a great question and we get this a lot 401ks and IRAs are two different types
of investment accounts that can help you save let's talk about 401ks first your employer will
provide this as a benefit this lowers your taxable income because most contributions are taken out
before taxes your employer selects the investment options so this so your options can be limited and
you don't have necessarily access to the entire stock market and all kinds of different assets
your employer may match up to a certain percentage what I've heard is a three to six percent match is
more common the other retirement account that you can invest in is an ira and an ira stands
for individual retirement accounts so it belongs solely to you it typically offers a wider range
of investment options and it isn't tied to your employer so you don't necessarily get that much
but you do get more freedom and flexibility with what you choose when should you invest in an ira
or 401k you might ask a 401k which should be used when you have access to one through your
employer and if they do a matching program it's a great opportunity for you to use that the ira
should be used if you're wanting another way to save alongside of that 401k so if you're looking
to get a broader access to different stocks or if you're looking to transition to some form
of self-employment so now that we talked about traditional iras and 401ks let's talk about Roth
so with Roth iras and 401ks you pay your taxes on contributions upfront then when you want to
withdraw you don't pay any taxes on the growth there are contribution limits to each one of those
accounts with the traditional 401k you have up to 20 500 and that's currently in the year 2022. so
when you turn 50 you can also do a catch-up of 6 500 each year if your employer offers that and the
match you definitely want to take full advantage of that first the traditional ira is up to the
contribution limit is up to 6 000 per person when you turn 50 you can contribute an additional
1 000 each year for that the traditional ira is great if you want to save outside of your employer
plan and you expect to be in a lower tax bracket at retirement the next one is a roth 401k is the
same as the traditional the contribution limit of the twenty thousand five hundred again with
the roth it's if you think you're going to be in a higher tax bracket at retirement and your income
doesn't exceed the max so another related tip for you guys just as an extra bonus is that one of the
most common things that we see and other financial advisors out there see is that this one's kind
of funny people are really good about putting the money you know contributing the money to 401ks and
iras but typically what they i guess one of the most common things they find is they put the money
in there but then they don't actually invest it into anything so it's just sitting in that account
and it's not actually invested in any kind of mutual funds or index funds no assets just sitting
there in the money market basically which you get with current interest rate environment you're
getting a very low rate if anything at all maybe maybe one percent so please don't be one of those
people and make sure that if you are contributing to an ira or a 401k that you are actually
selecting funds to invest your money in once it's in that account the next question is what is
dollar cost averaging and is it good for me dollar cost averaging is a strategy to manage risk when
you're buying stocks etfs or mutual funds instead of investing in a particular security all at one
time like we see so often with a single purchase price dollar cost averaging you divide up the
amount of money you'd like to invest into small quantities and you invest over time at regular
intervals this decreases the risk that you might pay too much before the market prices drop dollar
cost averaging is a good strategy for investors with lower risk tolerance since putting a lump sum
of money into the market all at once can run the risk of buying at a peak which can be unsettling
if prices fall dollar cost averaging takes the emotion out of investing by having you purchase
the same small amount of an asset on a regular basis this means that you buy fewer shares when
prices are high and more when prices are low let's say you plan to invest 1200 hours in mutual fund a
this year you have two choices you can either invest all your money at once or you can invest a
hundred dollars each month so if you bought twelve hundred dollars worth of mutual fund a at a price
of ten dollars per share in january you would own 120 shares if you bought 100 worth of mutual fund
a a month for 12 months so you spent 100 a month your average price per share would be 9.58 and you
would own 125.24 shares of that mutual fund day in this example that we shared with you dollar cost
averaging buys you more shares at a lower price per share when mutual fund a increases in value
over the long term you'll benefit from owning more shares the next question is i'm maxing out
my retirement account what should i do beyond that first off congratulations on maxing out your 401k
just go crazy for a little while
that's not an easy thing to do we know from experience it requires a lot of sacrifice a
lot of dedication if you met the max the 20 500 for a year then we recommend first opening an
ira account like we've said before an ira allows you more freedom and what you can invest in and
it allows you to increase your nest egg over time along with that 401k that would continue
earning as well if you're in your 20s 30s or 40s a roth ira is typically your better choice
in your 50s and 60s a traditional ira may offer better tax benefits for your needs remember an ira
in the max of that account that you can contribute is six thousand dollars per year per person if you
have a qualified high deductible health plan you can save and invest in a health savings account
this gives you both pre-tax and after tax benefits and you don't have to pay any income taxes on
contributions or withdrawals the max contribution for 2022 is 3650 for individuals and 7 300 for
families the other option is once you've used up all of your tax advantage investment options
you can look into a traditional taxable brokerage account while you won't save on taxes by investing
here you won't tie up your money in ways that make it more difficult to reach in the future
retirement and health savings accounts charge taxes and penalties if you withdraw
early or don't meet qualifying withdrawal rules with this type of account you can withdraw at
any time with no restrictions however you do pay taxes on capital gains the next question is if i
have a small amount of money to invest is it even worth it to make a long story short the answer is
yes always invest even if it's a small amount we believe that even those small
investments can lead to big returns over time especially with compound interest let's say you
invest just one hundred dollars today and saw a five percent annual return thanks to compound
interest if you don't touch your investment for 30 years you'd have 430 dollars that's an okay return
but imagine if you invested a hundred dollars monthly for 30 years into a common index fund
like the s p 500 which has an average yearly return over the last 30 years of 10.7 percent
but just for this sake let's say you make it a little more conservative at eight percent return
that 100 each month would be worth over 146 000 so with all of that your total contributions would be
36 000 which means that your money would have quadrupled over the last 30 years so that 100
a month can really lead up to something much bigger than you would think yeah just give
it time pretty much so the next question is we are wanting to achieve financial independence
how do we start first you identify your phi number or your financial independence number
there's a few different ways to calculate your financial independence number but the general
rule of thumb is your annual expenses times 25 equals your fod number second is pay down debts
that are in your way net worth is a big part of achieving your financial independence having
a lot of debt will drag this number down third avoid lifestyle inflation this is a big one and
something that a lot of americans fall into and so as you get used to a more expensive way of life
based on your salary increasing year over year budget friendly meals lose their appeal and
you may end up wanting to use your credit card and keep cost of living the way that
you used to the difficult thing here is like once you start giving into those temptations and you
increase that cost of living it's really hard to bring it back down and it starts to hurt so it's
probably just better to try to stay away from those things and whenever you get raises or
increase in your salary or side hustles save that money put it away put in an investment account so
yeah make it automatically draft so that you don't see it and you're not tempted to spend it another
um step to achieving financial independence is to prioritize your savings spend on what matters
to you and not the rest of the world boost your income like we've talked about before in previous
faqs find ways to do a side hustle like a youtube channel or sell stuff on facebook marketplace or
amazon or ebay make sure you take care of yourself along the way i know that's an easy one to just
let go of even if you are trying to achieve financial independence make sure that you are
continuing to to put yourself first too invest for your future and don't try to sprint to the finish
line it's a it's a marathon but you're gonna get there and focus on your own journey don't let the
rest of the world tell you what you need to do really you you know your goal you know your end
that's where you want to get to you can do it thank you guys so much for watching and walking
through these questions and answers with us today if you have any questions that weren't covered
today please be sure to leave them in the comments below and we'll answer them in another video
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