In part one the example of a 14 year old who invests $5000 one time of the money earned while babysitting showed the power of compounding over a long period of time. Of course as effective as it to invest one time for a long period of time is the most effective way to make use of this is to do the same process multiple times .
Parcheesi with 72 Spaces
Previously I went over briefly the Rule of 72. After going the rule over with a few people in the last couple of weeks it seems the power of the tool is lost until it is applied in a personal finance context. The math behind the rule is simple. The number of 72 is divided by the interest rate of an investment equals the time in years the money will double.
Many people make up the excuse my job doesn’t offer a retirement plan so I can’t save for retirement. I want to show you it doesn’t take much effort to get started. This way you are facing your finances in the right direction.
Vanguard IRA Start Page
The best way to start a retirement is as soon as possible. Compound interest works better with more time. In the United States you can save for retirement with some tax benefit. There are two major retirement categories available here; 401k and IRA. A 401k is a retirement plan an employer sets up with their employees. Some jobs do not have this option so an IRA (Individual Retirement Account) can be established to have some of the same benefits as the 401k.
There are two categories of IRAs: Traditional and Roth. A traditional is tax deferred until retirement. A Roth is paid for with post tax money and is tax free at retirement. If you have a low income it may be best to pay with post tax dollars in a Roth structure if you predict your income being more at retirement age. (a college student or early career person might be ideal.) Whichever one it is more important to start than to worry about being in the wrong type account.
There are some prerequisites towards starting IRA. :
- An Income (a W-2 form is useful)
- Citizenship or Legal Residence (a Social Security number is needed)
- Income levels – Check with IRS guidelines ; (2017 – Single $117,000- $132,000, Married Joint $184,000-$194,000)
Step By Step:
- Collect general info needed:
- Social Security Number
- Savings or Checking Account
- Routing Number of above account
- Find a IRA provider
- Check Consumer Reports Broker Ranking
- Look in the top 10-20%
- Avoid the bottom 20%
- Fill out the forms
- Log on to the provider’s web page and fill out the form
- If you are a resident non-citizen you may be required to fill out, sign forms, and mail them in
This was a quick guide… Just to get the procrastinators started…