First, let's give a round of applause for everyone who has or will be maxing out their 401K in 2020. Maxing out your 401K is a challenging process, especially with the ever-rising cost of living, massive student loan debt, and the social media influence of thinking we need to buy everything under the sun. With a global pandemic, oh forget it! With the limit now at a whopping $19,500, we all can look forward to decent retirement living if we are saving diligently every year. However it appears that things have not just slowed down, but things are looking uncertain. One thing that keeps me still contributing is knowing that our economy over time has shown to rebound. The market has already corrected itself from a 20%+ fall in March. I also believe it's good to invest now because things are cheaper. I just bought some Starbucks stock because they were trading at a 33% discount. Now they've rebounded by over 30% thanks to addicts like me.
For my readers, believe it or not, this is my first year in participating in the 401K max-out. It only took 10 years out of college, five years of marriage and a two-year-old, whom we pay out the wa-zoo for the daycare but we got here. Like most things, it takes actual discipline to put 17% of my income away for retirement. The most significant factor of why it was so delayed, was a combination of needing after-tax savings to pay for expenses and lifestyle inflation. Yes, I said it, lifestyle inflation, it's where you go from renting a one bedroom for $705/month to 6 years later renting a two bedroom townhome for $1575. One could say, "didn't you make more money in six years?" The answer would be, "yes, I did!" The problem is that I had to make more money to keep up with my inflated bills before I could even increase my 401K contribution. I'm embarrassed to admit that I did the wrong thing of figuring our my lifestyle first and then saving. However, most of this was just because of my financial ignorance and not having the resources to teach me.
Early Beginnings with 401K
It's crazy how much you can learn and not learn about money through your upbringing. I never knew about retirement accounts until I was out of college working for a major bank. My mother was a single mom who became a widow at a young age, and so all we knew when it came to money was life insurance thanks to my dad and savings thanks to her. She had taught us that whatever we made in our paycheck, always put something away because you never know when you will need it. However, her journey with money came more after my father died. When he was alive, we had virtually no savings or emergency fund. My parents being immigrants sent whatever they made back home to Nigeria to take care of their families. They felt obligated to take care of their less fortunate family members, and so it was natural for them to give their last dollar away despite struggling in the U.S. with three children to feed. I always felt that it helped to motivate me to do well for myself and not rely on my mother financially. It can be a negative cycle to help your family when you are also trying to survive, and I didn't want to burden her after she spent a lifetime helping her own family.
So you can imagine when I came of age, I didn't understand necessarily what to do with savings but to have it. Retirement was the farthest thing from my mind and being 21, and finally making money seemed like enough for me. I had heard about our companies 401K plan, and after six months of working, I began to contribute. I was only putting away 2% at the time, which was terrible because my company was matching up to 6%. I didn't understand at the time that was like leaving free money on the table. Luckily by the time I was in my second job, I started to understand the matching concept. After a few more years and with some income increases, I also began to understand how your 401K affects your taxable income during tax season. It took me almost seven years to catch up to all this. However, once I got it, I promised to stay disciplined. That's why after hitting over six-figures within seven years of working, I knew it was time for me to max out because I had started to plateau in my lifestyle inflation and decrease my spending. I also began to figure out ways to cut down my expenses so I could make it more possible for me to contribute almost entirely to my 401K and start to have a robust after tax-savings accounts.
Robust Emergency Fund: Three to Six Months
Experts always say to have three to six month worth of living expenses in your account, and I agree with them. I think even before you max out your 401K, that's what you should be doing. I know you want to get started on maxing out as soon as possible, but it's more important to have a back-up fund in case something happens. Let's face it life happens! My husband and I recently had to pay $1100 for all new brakes on his car. It was annoying, but we had the money in our emergency fund. Also I recommend having nine months of savings in a recession. To be honest we've been hoarding casg incase
Real Estate Investing
Don't think you have to be some big-time investor to get into real estate investing. Sometimes it could be as simple as taking $500-$1000 and putting it into a REIT. I've recently researched Fundrise, a real estate fund that pools your money with other investors in providing a 2-10% return on housing investments across the nation. After reading several reviews, it appears to be easy to use and perfect for someone looking to get long term growth in their investment. I've started contributing to Fundrise after getting my bonus in March. My husband and I also have another savings account that we have been putting money away to buy an investment property within the next two years. Whether you want to be a landlord or a silent investor, get started in real estate with your after-tax funds if you can.
Contributing to a ROTH IRA
One thing I love is having a diversification of all my investments. I've had a ROTH since my husband, and I got married. The ROTH became very useful when it came time to buy our home because since we were first-time homeowners, we could withdraw up to $10,000 per ROTH towards a new home purchase. ROTH IRAs are an excellent way to put after-tax money away in case of an emergency because they are not as strict as traditional 401K or IRA accounts. Also, since your contributions to your ROTH have been taxed, you don't have to worry about taxes come tax season.
Open a Brokerage Account
Brokerage accounts are probably one of my favorite after-tax investments since I'm a young investor and still have time. I want to say, however, don't make this more than 30% of your total net worth because of the volatility of the market; then it just becomes gambling. Two accounts that I opened up at the beginning of the year is Stockpile and Acorns. Stockpile is a brokerage account, where you can buy partial or whole shares of stock. I like it because I don't have to commit to a whole share of Amazon or Netflix since their shares are rather pricey. Acorns is an excellent alternative because they take my loose change and invest it in the market. The more you spend, the more you end up investing because it rounds up and takes your change to invest. You also can have a recurring amount added to your account, which I do.
To conclude, I like to see more people become financially independent. Since 2010 when I graduated from college, the market has been great. People investments have gone up across all industries, but with a global recession its clear our luck has ran out. Now its time to scale back and make sure to no over leverage your cash. Either way, make sure to save your money and invest it in the right things. One thing that I've learned is to be conservative and risky at the correct times. Read more and don't spend your money doing foolish things because investing is all about timing, and you want to always position yourself right in the market. After-all a recession happens every 10-12 years, and we are now in a bear market.
The Lioness is a financial blogger based in the Twin Cities. After spending most of her career in accounting, she decided to leap into the world of small business, investing and savings. As she is on this journey of juggling both her career and small business, she wants to share what she is learning along the way, as she builds her passive income with her husband and family.