As the holder of a White Wealth Belt, socking away a lot of money for the future should not be a significant priority right now. Your main objective is to get your total outstanding debt down to an easily manageable level. When you reach that point, then you should start contributing to savings and investment accounts.
White Wealth Belt (WWB)
Since debt is your primary challenge, I’m not going to delve deeply into any specific saving and investment vehicles. Just to keep it simple. Here’s what I would do if I were in your shoes.
Contribute to Employer Sponsored Savings & Investment Program
If you work for a company, your employer probably has some sort of saving and investment (S&I) program where you can contribute money toward your retirement. They might even match a percentage of your contribution. Depending on the organization you work for, you might hear the program referred to as 401(k), 403(b), 457, Thrift Savings Plan, or something similar. If you’re not sure, just contact your human resources department and ask.
Typically, these programs offer a variety ways for you to save and invest your money. You might have a choice of mutual funds, bond funds, money market funds, etc. In addition, for most of these programs you can contribute before-tax and after-tax dollars from your paycheck.
Before-tax means that your contribution will go directly into the investment account before the government can get their grubby little tax hands on it. But they would get their cut down the road when you withdraw the money.
After-tax refers to your take home pay, after the government has gotten their share of your hard earned dollars. Some S&I programs will allow you to direct some of this money into the various investment vehicles.
I could go down a deep rabbit hole telling you about the pluses and minuses of investing with before-tax versus after-tax dollars, but I won’t. For now, the big difference that you need to know is that if you make early withdrawals from an investment account where you are contributing before-tax dollars, you may have to pay steep additional penalties.
So if I was in a situation where I felt my debt was under control and shrinking nicely, I would implement a split contribution strategy.
First, I would determine how much I wanted to save/invest for the year. Let’s say that I decided that $3000 was a good number. I would then investigate whether my company’s S&I program matched a percentage of the employees’ contributions.
Here’s an example of how the whole matching thing works. Sarah Smith’s company says that she can contribute up to 15% of her salary, or a maximum of $17,000 for the year, to the 401(k) plan. They also say that as a benefit they will match her contribution, dollar for dollar, up to 5% of her salary.
Let’s do the math for Sarah whose salary is $50,000 per year. So the maximum amount that Sarah can contribute to the company’s 401k program for this year is ($50,000 x .17 = $8,500). The employer will match her contribution, dollar for dollar, up to 5%, which equates to ($50,000 x .05= $2,500). So if Sarah puts in $2,500, the company will throw in another $2,500 out of the goodness of their hearts. It’s free money! Keep in mind that these are before-tax dollars, which means that Sarah could incur a hefty penalty if she withdrew any of this money before age 59.5.
As you contemplate how to save/invest your $3000, you should think about when or if you might need this money in the near term. There can be emergencies and other unforeseen events that pop up.
But if my life was fairly stable, I would probably make a $1500 before-tax contribution to my 401(k). It would be hard to pass up the extra $1500 that my employer would add. (And definitely for next year, I would do my very best to take advantage of the full matching.)
For the remaining $1500, I would make an after-tax contribution to a low-risk account where it would be easy to get the money in the event of an emergency. Plus there would be no withdrawal penalties. Your company may allow you to make after-tax contributions to safe investments in your 401(k) account, such as money market accounts, blue chip stocks mutual funds, etc. If you can’t do this through your company’s 401(k), then contact your bank. They will have a money market or saving account option.
The above scenario is just an example. Split your contributions in the best way that fits your financial situation. But let me repeat. Don’t do this at all if you are swimming in debt and have creditors at your doorstep. Take care of that first.
- Once you get your debt under control, start saving money. Divide it between before-tax and after-tax savings and investment accounts.
In conclusion, I hope this White Wealth Belt mini-course has succeeded in putting you on the right path to achieving your financial goals and dreams.
The strategies we’ve discussed are not complex. But they are effective. At this Wealth Belt level, your attention should not be scattered in many directions. Having you focus on a wide variety of areas would ultimately lead to a confusion of priorities, frustration, and disappointment.
When I graduated from university and got my first “real” job, my financial plan was very simple. I wanted to save something every month and keep my spending down. That was it. I was just starting out and knew it was going to take a little time to build up my savings. It wasn’t until a little later on that I started getting much more specific and aggressive.
That’s why, based on my experience, I’m suggesting that you create a financial foundation that is going to serve you quite well for the rest of your life. So strengthen your credit file and score. Establish a household budget to get your spending under control. Make it a priority to eliminate debt and then save a little money when you start to breathe a little easier.
Now it’s up to you. I’ve given you the knowledge to get you to the next exciting Wealth Belt level – Yellow.
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