Category Archives: saving money

The Power of a Dual Income Couple


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Albert Einstein said that compound interest is the 8th wonder of the world.  He who understands it will earn it, and he who doesn’t will pay it.  If compound interest is the 8th wonder of the world, then I feel that the power of a dual income couple is the 9th.  Being in a dual income couple can be a powerful wealth building partnership if managed correctly.

At my first full-time job, I worked with a guy named John.  John trained me when I first started at the company.  He and I became friends and we would often have conversations during lunch hour.

John was more than 20 years older than me.  He and I would talk and he would give me advice about life.  He told me that his wife was a stenographer and they lived off her salary.  They used her salary to pay their mortgage, car payments, buy groceries, and all their other expenses.  He said that they saved all the money he earned from his position.  They invested all his earnings and were planning on retiring in 20 years when they were both age 60.

I was a young man at the time and never heard of living off one salary.  This was just around the time that I was getting interested in personal finance.  It truly did sound like an ingenious plan.

When my wife and I got married, this was the basic strategy that we planned on using.  In my own experience, I have found that being in a two-income household has many financial advantages.  Here are some tips on structuring a plan to get the most out of a dual income household:


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Salaries

Start by analyzing both salaries and identify the higher of the two.  Use the higher of the two salaries for paying all the reoccurring monthly expenses including housing, food, insurance, recreation, miscellaneous expenses, and child care if you have children.  Set a goal of one day being able to use the lower of the two salaries to pay these expenses.  This can be done by focusing on reducing expenses, career growth, and even side jobs.

You might be thinking that living on one salary would be impossible.  It might not be easy, but it is defiantly doable.  Check out the Story about Liz who was featured on budgetsaresexy.com.  Liz provides for a family of five people while also saving to reach early retirement (FIRE).  Liz is also the author of the blog Chiefmomofficer.org.

 


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Debt

Before you start savings and investing, you want to analyze your debt.  If you are part of a dual income couple that has a debt, first work on paying that down.  If need be, take a few years of using the lesser of the two salaries to pay down your debt.  Start by paying off all credit cards, auto loans, and any personal loans that you might have.

Next, pay down your student loans and mortgage.  Once you are left with only student loans and a mortgage, pay them down to debt-to-income ratio (DTI) of under 15%.  After your debt-to-income level (DTI) is at a manageable level of under 15%, the higher of the two earners can work towards reducing the (DTI) even further.

To calculate your Debt-to-Income Ratio, see the formula below:

Debt-to-Income Ratio = Monthly Debt Payments/Monthly Income x 100

Example: $1000 in Monthly Debt Payments/$4000 in Monthly Income x 100 = DTI of 25%

Savings

When you are in the paying down debt stage, you should also contribute to a 401K if there is an employer match.  You want to contribute to get the max amount of what your employer is matching.  To do otherwise would be to refuse compensation.

Now it is time to start saving and investing.  First establish an emergency fund of 3-6 months of expenses in a FDIC insured savings account.  Second, max out both 401K accounts to take advantage of tax deferred savings.  Third, max out both Roth IRA accounts to grow that portion of your savings in a tax-free account.  Forth, use any additional savings to invest in broad market ETFs in a taxable account.

 


Conclusion

No matter if you are newly married or have been in a dual income couple for many years, you too can take advantage of the powerful wealth building capabilities that you have been blessed with.  My wife and I have been following this approach to reach financial independence for almost ten years.  Our savings rate is over 50% because we have learned to live on one salary.

One last note, I ran into my old co-worker John last summer after not seeing him in many years.  I was having breakfast at a local diner one Saturday morning and John was there with his wife.  We had a brief conversation.  He told me that he is retiring next year and moving from Pennsylvania to Texas where his wife has family.  It appears that he truly did follow the simple yet profound approach to reach financial independence that he introduced to me a long time ago.

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer Page.

Investing in Your 20s – It’s the Chance of Your Lifetime

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No matter how old you are, it is never too early to start investing. Whether you are in high school, college or just finished school, now is the time to start putting money toward securing your financial future. The good news is that it is easy to start investing no matter how much you have to invest, what your risk tolerance is or what your goals may be.

How Do You Start Investing?

The first step to becoming an investor is to find a broker to trade with. Most brokers allow you to make your own trades online in a matter of seconds. They will also have access to charts, analysis and news to help you make informed trading decisions.

Some brokers also offer training courses that help new investors learn the basics of investing as well as how to use the charts and tools that they offer. The broker that you choose depends partially on how much help that you want or need making investment decisions as well as how much that you have to invest at the moment.

How Much Do You Need to Start Investing?

Some brokers such as Charles Schwab will allow you to start investing with no minimum balance. Therefore, you can start contributing to an index fund with as little as $1 if that is all you had to invest or all that you wanted to put in for now.

Newer brokers such as Betterment or Motif require anywhere from $100 to $300 to get started whereas some mobile investing apps have no limits. If you invest with Fidelity, Vanguard or similar brokers, expect to need at least $1,000 to gain access to their stock or mutual fund offerings.

Why Should I Start Investing Today?

Compound interest is one of the most exciting concepts that you will ever learn. It is also the reason why you need to start putting money into the market today no matter how much or how little you have to get started with.

Let’s say that you bought stock worth $100 at age 30 and earned the historical average return of 11 percent per year. When you were 60, that $100 would be worth $2,289. However, if you put that $100 into the market when you were 20, you would have $6,500 by age 60 assuming an average 11 percent return.

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What Should I Know About Broker Fees and Capital Gains Taxes ?

It is important that you account for taxes and fees whenever you make an investment decision. When you first start investing, you will likely look to buy and hold a stock or index fund for many years. This is because most brokers charge a fee of $5 to $8 for each trade that you make. If you only have $100 in an account, that $8 may represent your return for an entire year.

When it comes to taxes, it is important to note that you only pay tax on the profit that is made on a given investment. Your profit is any gains above your cost basis, which is the price of the security plus any fees paid to buy or sell it. Therefore, if you bought a stock for $10 and paid $5 to buy it, your cost basis is $15. If you sold the stock for $20, you would pay capital gains taxes on $5.

If you are in the 10 percent tax bracket, you pay nothing in federal capital gains taxes. However, you may be required to pay state taxes on all capital gains. If the money is held in a traditional IRA, you don’t pay capital gains taxes while securities are in your account. Instead, you pay ordinary income taxes on any money that you withdraw when the withdrawal takes place.

Should I Open a Roth IRA or 401k Instead of a Traditional?

When you invest in a traditional IRA or 401k, you get a tax deduction in the year that the contribution is made. However, if you choose to open a Roth account, you use after-tax dollars to contribute to your account.

The benefit is that the money in your account grows free from capital gains taxes. Furthermore, it is not subject to income taxes when it is withdrawn because the money was already taxed.

Ideally, a person will invest in both a traditional and Roth IRA or 401k to reduce their tax burden both today and in the future. As a Roth IRA is subject to income limits, it may be best to contribute to a Roth 401k as there are no income limits and contribution limits are higher. A 401k is a retirement account provided by an employer, and those who are self-employed may open one on their own.

If you are serious about securing your financial future, you should start investing as soon as you have a few extra dollars to do so. Those who aren’t sure what their financial goals or timelines are may benefit from speaking with a financial adviser. This person may be able to help you create short and long-term goals as well as different investment strategies to make it easier to meet them.

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Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer Page.

Saving $100,000 by age 30


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Saving my first one hundred thousand dollars was the hardest.  When I started on the road to financial independence (FI), I was only 20 years old.  I wanted financial independence and reaching my first $100K was the first goal that I set.  I was aware that it was a lofty goal, but I embraced the challenge.  I wanted to reach this milestone by age 30.  On my way to reaching this goal, here is what I did:

Work

I had to land a job and start earning money.  When I looked for a job, my options were limited.  I did not have a college degree yet.  The economy where I lived was not great.  My options were a factory job, construction, or working in the food industry.  I selected working on an assembly line in a mattress factory.  There was nothing glamorous about the job.  It paid a decent hourly wage for unskilled labor.  It was a means to an end, so I was grateful to have it.

Learning to Save

To reach my goal of building a net worth of $100K by the age of 30, I had to save.  Saving came easy to me.  I was working hard for the paycheck and did not want to waste the money.  Every month, I would put at least $500 away towards my long-term goal.  I also put additional money away for vacations, car expenses, and costs associated with college.

Investing

I had to learn how to invest the money that I was saving.  It was the year 1997.  It seemed as if growth and technology stocks were soaring to new market highs daily.  There were often commercials on television advertising new day-trading platforms.  I was fortunate to have read a few books that taught me to stay away from such speculative approaches.  I learned to invest in mutual funds that tracked indexes such as the S&P 500.

I needed to earn 8% on my investments based on my savings and time horizon.  Historically, the stock market earned 10%.  I was confident in the information that I read.  I dollar cost averaged money into my investment account every month.  I ignored the market volatility and just kept moving forward.

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Education

Getting a good college education was important to me.  I knew going to college would help me to learn skills that would put me in a better position to earn a larger salary.  College was, however, a financial challenge to manage on my path to reaching $100K by age 30.  I did not want to incur a large student loan balance.  To avoid that, I took 60 credits at the local community college.  I paid cash for those credits.  That allowed me to incur only $18K in student loans for the additional 60 credits I needed to complete my BS degree.

Conclusion

Yes, I did reach the first goal on my journey to financial independence.  By age 30, I saved almost $120K.  The only debt I had was my student loan of $18K, so that left me with a net worth of over $100K.

Looking back, I did put a great deal of pressure on myself to reach this goal because my salary never exceeded $30K per year during this period.  It was, however, worth it.  It set me up with a solid foundation to build upon towards my next goal of a $1M net worth.

Yes, my 20s were productive, but I also had a great time.  I went on nice vacations, went out with my friends, and dated the girl who later became my wife.  I would not go back and change it if I could.

 

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