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Cents and Sensibility Guy Steele |
Independence from
credit card debt worth
celebratingTOMORROW, we'll celebrate the independence of the United States. But isn't it time for you to declare your financial independence? To accomplish this, you don't need to revolutionize your life, but you do need to march in the right direction.
To become financially independent, your first step -- and probably your most important one -- is to control your debt. And debt is a serious problem for many Americans. Just last year, personal bankruptcies hit a record high, according to the American Bankruptcy Institute. And, in the fourth quarter of 2003, credit-card delinquencies also reached a record high, according to the American Bankers Association.
What can you do to avoid the "debt trap?" For starters, consider some good advice your parents or grandparents might have given you: If you can't afford to buy something, don't. Far too many of us follow the "buy now, pay later" philosophy only to regret our decisions when "later" finally arrives.
Even while you're lowering your debt, you can seek opportunities to boost your savings and investments. And you don't even have to find massive amounts of money to put away. Look for the small things you can do: Bring your lunch once in a while, skip the expensive espresso a few times a week, avoid purchasing new clothes you don't really need, etc. If you can come up with just $50 a month in savings, and you invest this money, you can really help yourself.
If you're skeptical about how much good $50 a month can do, consider this: If one were to invest $50 a month for 30 years in a tax-deferred account, such as an IRA, and the investment earned a hypothetical 7 percent rate of return, compounded annually, the money would grow to approximately $60,000 -- a nice little chunk for retirement. (Keep in mind that this calculation is merely an illustration; it does not represent an actual investment.)
Of course, the more money you save, the sooner you can reach your desired level of financial independence. But, as you know, after you pay your bills, it's not always easy to find money with which to invest. That's why you need to pay yourself first. Consider setting up a bank authorization to automatically route a certain amount of money each month into a growth-oriented investment. As your salary increases, boost the amount of money you put away.
Here's one more move you can make to move toward financial freedom: Contribute as much as you can afford to your 401(k) or employer-sponsored retirement plan. Your 401(k) offers you two key tax advantages. First, your earnings grow on a tax-deferred basis, so it will accumulate faster than it would if placed in an investment on which you pay taxes every year. Second, you typically fund a 401(k) with pre-tax dollars, so, the more you contribute, the lower your taxable income. If you can't afford to put in the maximum amount (which is $13,000 this year, or $16,000 if you're 50 or older), at the very least, put in enough to earn your employer's "match," if one is offered.
Financial independence doesn't come easily or quickly. But you can achieve it by making a determined effort. And the best time to start is today.
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Guy Steele is a financial planner and head of the Pali Palms office of Edward Jones. Send planning and investing questions to him at 970 N. Kalaheo Ave., Suite C-210, Kailua, Hawaii, 96734, or call 254-0688