3 BASKET APPROACH TO FINANCIAL SECURITY

My grandmother used to say that you should never put all your eggs in one basket. She was right. As I see it there are three baskets into which you should put your eggs. I call them the security basket, the retirement basket, and the dream basket. The security basket protects you and your family against the unexpected (such as a medical emergency, the death of a loved one, or the loss of a job), the retirement basket safeguards your future, and the dream basket enables you to fulfill those deeply held desires that make life worthwhile.

This three-basket approach may sound simple, but don’t let that fool you. If you fill the baskets properly, you can create for yourself a financial life filled with abundance and, most important, security. In today’s blog post I’m going to give you a breakdown of the 3 baskets- how much you should be putting aside, where the money should be going and how to make it automatic!

SECURITY BASKET:
The goal with your security basket here is to put away “rainy-day money” to cover expenses in case you lose your income. Exactly how much money you need to put away depends on what you spend each month.  I generally recommend to my students and clients that they put away somewhere between 3 and 24 months’ worth of expense money.

Now this 3- to 24-month range covers a lot of ground. What’s right for you depends in large part on your particular emotional makeup. Some of my students simply do not feel safe if they have anything less than two years’ worth of cash sitting in a money-market account. I happen to think that’s a bit excessive, but if that’s what it takes to make you feel comfortable, then by all means make it your goal.

Whatever amount you decide it’s important to put this money an FDIC-insured bank account (not your regular checking account but a separate one set up specially for this purpose). Until this emergency account is fully funded, you should have at least 5% of your paycheck directly deposited into it. If your employer doesn’t offer payroll deduction, arrange to have your bank automatically transfer the money from your checking account the day after your paycheck clears. To learn more check out my appearance on NBC’s Today show where I share my 6 tips for setting up an emergency account.

DREAM BASKET:
What’s a dream account? This is where you save the money that is going to pay for your home, car, wedding, trip to Hawaii, new boat, guitar, ski lessons, cooking school—whatever your dream happens to be. Most dreams require CASH, and because most people don’t have the cash, they either borrow to pay for their dream (whether by putting it on their credit cards or taking out an actual loan), or they never make the dream a reality. In some ways, your dream account is the most important account you will have because living your dreams is where the excitement of life really is. The best way to start filling this basket is to decide upon a fixed percentage of your income that you will automatically contribute every month. I usually recommend people start by investing 3%-5% of their after-tax income. As with your emergency fund, use either payroll deduction or your bank’s online bill-pay service to have a percentage of your paycheck automatically transferred into an FDIC-insured account set up just for this purpose. If your dream is at least three years away from fulfillment, start investing the money more aggressively once your dream savings total $10,000.

RETIREMENT BASKET:
In my earlier blog post I explained the critical importance of paying yourself first—having at least 10% of what you earn deducted from your paycheck and deposited directly into a 401k, IRA, or similar qualified retirement account before the government takes its bite of withholding tax. Ideally, this deduction should total 12.5% of your income (the equivalent of one hour’s worth of work each day). But whatever you can manage, you must make the process automatic. The good news is that payroll deduction is a standard feature of most 401k plans, so as long as you’re signed up, your contributions will be automatically deducted from your paycheck.

If you’re not eligible for a 401k or similar plan and as a result use an IRA for your retirement saving, you’ll have to create your own automatic “pay yourself first” program. Tell the bank or brokerage where you have your IRA that you want to set up a systematic investment plan. This is a plan under which money is automatically transferred on a regular basis into your IRA from some other source (such as a payroll deduction). Most banks and brokerage firms will handle all the arrangements for you, contacting your employer’s payroll department on your behalf and dealing with all the paperwork. (If your employer doesn’t offer payroll deduction, you can have your retirement-plan contribution automatically moved from your checking account to your IRA—ideally, the day after your paycheck clears. Most banks have free online bill-paying services that allow you to schedule regular automatic payments of specified amounts to anyone you want).

I hope this blog post helped you gain a better understanding of the 3 basket approach to financial security and has motivated you to start funding all 3 – AUTOMATICALLY! Please leave a comment below or on my facebook page. I love hearing from all of you!

Live Rich!
David Bach

The Foundation to Building Wealth

When it comes down to it, finishing rich is simple. All you have to do is make a decision to do something that most people don’t do—to Pay Yourself First. And if you’re starting late, you have to Pay Yourself First…Faster!

It really is that simple.  It’s just not easy. The catch is that you have to know what Pay Yourself First means and then you have to do it. And if you’re not where you’d like to be financially at this point in your life, chances are you don’t.

WHAT “PAY YOURSELF FIRST” MEANS

“Pay yourself first” means just what it says.  The next time you earn a dollar, before you pay anyone else any money they may have coming to them—before you pay the government its federal or state tax, before you pay your landlord the rent or your bank the monthly mortgage—you must pay yourself first.

The fact is that most of us pay everyone else before we pay ourselves. The first person we pay is the government through our withholding taxes. Then we usually pay the rent or our mortgage and the rest of our bills.  If anything is left at the end of the month, then maybe we pay ourselves by putting a few dollars into a savings or retirement account.

Unfortunately , this approach simply doesn’t work. For one thing, by letting the government take its portion first, there’s often not enough left over to pay yourself much of anything.

WHERE DO I PUT IT?

Fortunately, there is a way to pay yourself before you pay the government, a way where you don’t lose a third of your paycheck to taxes. And best of all, it’s legal.  It involves opening a PRETAX retirement account and putting a portion of your salary into it. Every dollar of your income that you deposit (up to certain limits), as long as it stays in the account, is not subject to any taxes. And neither is any of the interest (or capital gains) that you earn on it.

HOW MUCH?

My suggestion is simple. Starting today, you should work at least one hour a day for yourself. This means you should Pay Yourself First for your future by putting a minimum of 10%-12.5% of your gross income or 1 hour a day of your income into what we call a pretax retirement account.  For Business owners this would be 10% of your gross income or 1 deal a year (or 2, 3 etc.. depending on your specific situation).

MAX IT OUT

The single most important investment decision you ever make may well be how much to automatically Pay Yourself First into your retirement account.

If you are already enrolled in your company’s retirement plan or have set up an IRA plan, SEP IRA etc…, congratulations. But that doesn’t mean you’re done yet.  Now you need to find out how much you are using it.  Are you saving 4%?  That’s about what most people do.  Unfortunately, most people retire poor, dependent on Social Security or family to survive. You are not most people.

In a perfect world, the fastest way to become rich is to MAX OUT THE PLAN. Here’s the maximum allowable based on current tax law:

  • IRA/Spousal IRA – $5,000
  • 401k/403b Plan – $17,000
  • SEP IRA – $50,000
  • Solo 401k – $50,000
  • Defined Benefit Plan – $200,000

Now, it’s okay to start off slowly, saving a smaller percentage of your income at first, and gently working your way up to where you need to be. Even if you think the best you can do is to save just 1%, don’t let that stop you. Anything is better than nothing.

At the same time, try to be ambitious. After all, this is your future we’re talking about. However much you think you can afford to Pay Yourself First for your future—do more. If you think you can save 4%, save 6%. If you think you can save 10%, save 12%.  Most of us tend to underestimate how much we think we can manage. As a result, we wind up low-balling ourselves … and our futures.

IS THAT ALL THERE IS?

To be honest, not everyone is as enthralled by the idea of Pay Yourself First as they should be. In fact, it makes a lot of people angry. You may be one of them.  Please trust me on this.  Nothing will help you achieve wealth until you decide to Pay Yourself First.  Nothing.  You can read every book, listen to every tape program, order every motivational product, subscribe to every newsletter there is, and none of it will get you anywhere if you let the government and everyone else have first crack at your paycheck before you get to it. The foundation of wealth building is Pay Yourself First. So what are your next steps?

  • Decide to Pay Yourself First for your future.
  • Open a retirement account
  • Fund it with at least 10% of your gross income (1 hour a day of your income)

I hope that you found this information helpful and that you will make the decision to start paying yourself first TODAY!

Live Rich,
David Bach

 

NBC’s Today Show – Money 911 – April 4, 2012

If you missed me this morning on NBC’s Today Show, Money 911 make sure to check it out now. We answered questions about using a rental income as a retirement plan, using a 401k to pay off a mortgage, and if you should open a credit card or line of credit to increase your credit score. Hopefully our answers can help you too!

Live Rich,

David Bach

NBC’s Today Show – Money 911 and Live Chat – February 8, 2012

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If you missed me on NBC’s Today Show – Money 911 make sure to watch the segment above! We answered questions about how a divorce and a name change can affect your credit score, how to carry over your 401k from a previous employer, and if child support can affect your assets. It was a great segment so be sure to check it out!

I also had the chance to chat LIVE and  answer your money questions on Today.com. Thank you to everyone that joined me, there were so many AMAZING questions today and I tried to type as fast as I could to answer as many as possible. If you missed the chat make sure to read the archive HERE to see if I answered a question that could help you.

Here’s just one of the MANY great questions from the chat today!

Guest asked: “Hi – I am contributing 15% to my 401K but my company only matches 50% up to 6%. Should I be doing something else with my 9%?”

I replied:“Dear Guest! You should leave it alone…you are brilliant and doing everything right. You will look back later in life and be sooooooooooooo GLAD you put 15% in your 401k plan. You friends will wonder how you go to retire ten years before them and it will be because you saved three times more than they did! Well done, stay the course.”

Live Rich,
David Bach

 

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NBC’s Today Show – Money 911 and Live Chat – February 1, 2012

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If you missed me on NBC’s Today Show – Money 911 make sure to watch the segment above! We answered questions about what to do if you’re marrying someone with a poor credit score, how to contribute to your 401k when your employer offers a match, and when it’s appropriate to use your spouse’s Social Security benefits.

Plus, I had the chance to stick around after Money 911 to do a Live Web Chat on Today.com. Thank you to everyone that joined me, there were so many AMAZING questions today.  If you missed the chat make sure to read the archive HERE  to see if I answered a question that could help you.

Here’s one of the questions from the Live Chat this morning. (Click HERE for the Full Q&A!)

Jennifer asked:

“My husband and I are 30 and because we were in graduate school most of our 20s, we are just starting to save money. At what point in life does it make sense to get a financial planner? How much should a financial planner cost?”

David replied:

“I think the sooner you get a financial planner the better. With that said, you should read up on investing before your hire one so you know what questions to ask and you are prepared better to screen a good advisor from a bad advisor. Read Smart Couples Finish Rich, before you hire a financial advisor. In this book I also layout how to hire and how to pay a financial advisor. The cost to do a basic financial plan is around $500 to $5,000 depending on how detailed it is. Then there are costs to work with the financial advisor. Most advisors today charge a flat fee on assets of around 1%. You can also hire financial advisors by the hour. Hope that helps you get started! Lastly before you hire a financial advisor check out their background online by visiting the NASD website and make sure there are not any complaints or legal issues with the advisor.”

Hope this helped!

Live Rich,
David Bach

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NBC’s Today Show – Money 911 – January 18, 2012

If you missed me on this morning’s NBC’s Today Show, Money 911 segment, make sure to watch it above, we answered questions about paying down debt, government grants, your FICO score, and most importantly borrowing from your 401k.

I have been seeing more and more questions about borrowing from a 401k these past few months on my Facebook page, on Money 911 and during Live Chats. So I thought it would beneficial to give you all a quick lesson on the topic and expand on my answer from Money 911 this morning. Watch the video I did and let me know if you found the information helpful by commenting below!

 

Live Rich,
David Bach

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NBC’s Today Show – Money 911 – January 4, 2012 – Plus My Tip to Earn 3% in 2012

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Can you believe it? Today was my 100th segment on NBC’s Today Show! If you missed me this morning on Money 911 make sure to check it out now! We answered questions about investing, emergncy funds, credit scores and using your 401k plan for home improvements. 

Plus dont’ miss the special video I did below, where I share how YOU can earn 3% on your money in 2012! 



 

Enjoy!

Live Rich,
David Bach

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Is ROTH 401(k) Better Than A Traditional Plan?

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Check out the latest video I did for Today.com!

Question: I just started my job about a month ago and we have the option of a traditional 401(K) and a ROTH 401(K). I am 22 years old, have a long career ahead of me and don’t have huge amount of expenses. Which would you suggest?

My Advice:
- Your goal is to max out the retirement account
- You can use a traditional 401(k) and get a tax deduction
- Or have no tax deduction upfront with ROTH 401(k) Plan – (but remember you will have to pay taxes when you take the money out later.)
- I suggest, put half into each of the plans

Hope this helps!

Live Rich,

David Bach

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NBC’s Today Show – Money 911 – December 14, 2011

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Hi friends,

If you missed me this morning on NBC’s TODAY show “Money 911” segment make sure to watch this clip. Learn my recommendation for how to invest and budget after getting a hike in pay!

Also, I wanted to take a second and say a quick hello and Happy Holidays to all of you! Check out my quick message to you!


 

Live Rich,

David Bach

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