Keep these four things in mind and build generational wealth
Thinking about the future isn’t sexy. We like living in the “now.”
There’s no time like the present, especially for the young, working adult.
Well, the present called, and the consumer price index rose 9.1% since last June. Inflation is having a hall-of-fame season this year.
How does that make you feel about the purchasing power of your dollar? I bet you don’t want to work your whole life, so eventually, you’ll need some money saved up for retirement.
Here are four mistakes to avoid so you can be comfortable financially in the future.
In a Roth IRA, you put post-tax dollars into an individual retirement account. Unlike a traditional IRA, you can withdraw without paying taxes on your contributions, but not until you’re 59 and a half.
You also can’t withdraw your funds within five years of opening the account, counting from the tax year of your first contribution or more. But that doesn’t matter if you start investing at a young age.
Think of it like this — taxes suck, right? So why pay taxes on your investments twice?
How much are you going to invest per year anyway?
If you follow the 50–30–20 rule (I’ll talk more about this later), the 20 represents the percentage of your monthly income you should save or invest.
Now, you can do much more with your savings than invest in a ROTH IRA, mainly because there’s a maximum contribution per year.
The maximum total annual contribution for all your IRAs combined is $6,000 if you’re under 50 and $7,000 if you’re 50 or older.
So imagine you make $50,000 before yearly taxes — you should invest 20% or $10,000 yearly. You might as well put $6,000 into a ROTH IRA, divvy the money into a few index funds, and let your money compound over time.
Compounding is a powerful force. Look at these two charts for reference.
On the left, if you were to invest $6,000 per year, starting at 27, assuming 7% annual returns, you’d have $713,601 in your account.
But wait five years until you’re 65, and you’d have over $300,000 more.
Isn’t that crazy? That’s because the longer you let your money work for you, the more likely you’ll achieve financial freedom.
And don’t worry, only nonqualified withdrawals from your Roth IRA create ordinary taxable income at your marginal tax rate.
My Robinhood account looks like a rollercoaster after plummeting downhill at 60 miles per hour.
At the time of writing, the S&P 500 is down 19.65% year-to-date. Other stocks, index funds, and ETFs have mostly followed suit.
We’re in a bear market, possibly heading toward a recession. If you’ve held onto any small or large cap stocks since 2021, they’ve likely plummeted quite a bit.
Luckily, I’ve never invested money I don’t need right now, but I paid the price of tuition. Looking back, I should’ve known what would happen, but how could I?
I started investing in 2020 and got caught in the market’s hype.
Small caps were growing exponentially, tech was booming, and people thought Ethereum would hit $10,000. But when the market started to take a turn for the worse, I made the best decision I possibly could have.
I didn’t sell out of fear.
Investing is all about psychology. Buying individual stocks, even small caps isn’t a problem. The problem is when you accidentally transfer your wealth to those who know what they’re doing.
The most important lesson is to reverse what you think you know is suitable for the market. If the market is rising at a historical rate, it’s not a good time to get in.
Warren Buffett famously said:
“Be greedy when others are fearful, be fearful when others are greedy.”
For the millennials and Gen Z’s, here’s a meme that’ll make more sense.
When I started investing, I didn’t realize the government printed more than $3 trillion in 2020 alone (almost 20 percent of all existing USD).
Then we got our stimulus checks. We had more free time than ever but nowhere to spend the money because of the lockdowns. So we opened up Robinhood accounts and started trading.
The retailer investor got attention, and we were excited about Gamestop, but this influx of money into the markets came at a cost. All that printed money exponentially inflated the economy, and today, the reality of inflation scared us.
We started pulling money out of stocks in troves, and the market tanked by more than 20% this year.
The lesson: You can invest in individual markets but choose to invest in companies you genuinely believe will thrive over the next 20 years. Don’t sell; just strengthen your positions.
Unless you’re a full-time day trader, play the long game.
Before I moved states, I had a pretty considerable checking account.
I needed that money in there because I planned on putting a down payment on a new car.
It wasn’t the most financially savvy move for a 26-year-old, but it’s not like keeping my money in savings accounts would do me much better. After all, the car is an investment in my life.
And, lucky me, cars are actually appreciating right now, so in a way, I made a sound investment and even got a low-interest rate on it, so I’m borrowing money against inflation.
But, generally speaking, investing cash or keeping it in a savings account is a hedge against inflation, meaning the value of your dollars goes up in the markets vs. down in a checking account.
However, these days, is it better for your cash to lose value to inflation or to the markets?
The point is to keep as much cash on hand as is a comfortable amount for you, especially in today’s stock market climate.
I don’t mean this literally.
Finance gurus hate Starbucks, Coffee Bean, and almost every coffee shop because of the markup.
To be fair, though, while the markup of coffee is a big one, I go to the local coffee shop and snag a medium nitro cold brew for $3.95.
I could buy many more expensive things like designer clothing, a more luxurious car, or weekly steak dinners. A coffee costs a few bucks, and it makes me happy, so I’m willing to treat myself occasionally.
Seriously, I treat myself to a coffee to motivate myself to get out of bed and start my day. The morning coffee sets the tone for the rest of the day, and coffee is a high ROI purchase.
It gives me energy, and it tastes good.
The bottom line: not every seemingly useless purchase is an irresponsible one. Yeah, you can and should make coffee from home since it’s much cheaper over the long run, but there’s something to be said about the simple things.
You almost always deserve a marked-up cup of coffee.
Mind your purchases. If a couple of coffees each month can fit comfortably in your budget, do what you want.