Chances are that retirement funding isn’t the only financial goal your eyes are set on. Buying a home, planning for a child’s education, or taking care of an aging parent can all be expensive detours along your way. Having a plan and staying the course can help your money work for you while you juggle multiple priorities and financial goals. Here’s some things to think about
Procrastination costs – start saving now! No matter how old you are, what you’re saving for, and how much you can afford to put away, start today. If you’re investing the money, compound interest has more time to accumulate over principal and you’ll solidify habits to build on as your income grows.
Make a budget and stick to it – even if you’re earning a half million dollars a year. It’s too easy to “live up” to your means, increasing your spending and expenses as your income grows. Instead, determine your monthly expenses, including a set amount or percentage of your income for saving and hold yourself accountable. Creating a “quota” for your annual travel, holiday gifting, and “toy” shopping can also give perspective, helping you enjoy your money today without compromising long-term goals.
Pay down debt – consumer debt like credit cards and high-interest loans can rob you of increased saving and earning power. Make eliminating these debts a priority. If you’re carrying multiple categories of debt, like a physician with student-loan debt and a mortgage – prioritizing these debts becomes largely about tax efficiency. Depending on the terms and structure of your loans, paying one off first over another can potentially provide greater tax benefits. For example, all interest on business loans is tax deductible in the year it’s paid, but interest on student loans have a cap deduction (in 2017 it was $2,5001). If you’re unsure or have more complex debt – ask a professional to help determine your best course of action.
Use what’s available – if your employer sponsors a 401(k) – participate. If you’re starting a college fund – consider opening a 529. If you’re a doctor looking to max-out your retirement funding – consider utilizing back-door Roth IRA contributions. Different vehicles were created to meet different investment challenges and using them properly can both create tax advantages and mitigate downside risk.
Consider your taxes - optimizing taxes can be a huge piece of the puzzle. It was Ben Franklin who said “Nothing can be said to be certain, except death and taxes.2” Really though, there is always a tax consequence for every financial decision made – from prioritizing debt repayment, to the distribution order of retirement accounts. Being mindful of these effects can keep you from making an unnecessary and expensive mistake. Plus, in the case of investments, minimizing up front taxes means a bigger base for interest to compound on.
1. IRS – “Tax Benefits for Education” https://www.irs.gov/publications/p970#d0e6339, 2017.
2. Smyth, Albert Henry (1907). The Writings of Benjamin Franklin, Vol. X (1789-1790). New York: Macmillan. p. 69.