Tuesday, July 6, 2010

Tiers of Investing: Tier 1

How many people do you know who have a 401k or IRA? Almost everyone right?! Would it surprise you to learn that I do not have either of these accounts. I don't even take advantage of the matching through my employer. The reason why I choose not to contribute to either of these accounts is NOT because I financially am incapable. It is because just like in construction there is a certain order in which you must build, in investing there is a proper order in which you should invest. Investing out of order is like building out of order. No one would start building the walls to their house before the foundation is built. At the same time no one would move into their house before the roof is built. Can you imagine what that would be like. Yet every day millions of Americans build their investment walls with no foundation and move into their investment house without a roof. Then financial storms rain on their nice things inside, and financial earthquakes come and knock down their financial house. Then they are left wondering what happened.

Tier 1: Savings

The first place someone should invest is in themselves. You should always pay yourself first. Even if you have some debt, pay yourself and then your debtors. It is important that you stay out of debt, but without any savings unexpected expenses will come along and create debt or exasperate debt you already have. Especially if you are working to eliminate credit card debt, and you have cut up all your credit cards. If you don't have any personal savings and your car breaks down you can put yourself in quite the bind. A good amount to shoot for is 3-6 months of your expenses. The following are tips to help you save the way you should:

1. Create a budget (shoot for 50% needs, 30% wants, 20% savings, but everyone is different)
2. Save 10-20% depending on circumstances (i.e. debt & other obligations)
3. Make it automatic (automatic transfers)
4. Treat it like a bill

The other question is where to put your savings. Good savings must be liquid, safe and consistent. What ever you do, do not put your savings into a normal savings account. My savings account at Wells Fargo pays .01% each month which means I earn an APR of about .12%. That's nothing. However there are online banks like ING that pay almost CD rates. Right now their savings account is paying an APR of 1.1%. That's almost 10 times Wells Fargo! (Email me @ ben@richestmaninzion.com and I'll give you a link for a $25 bonus with a new account. I will not add your email to any mailing list or share it with anyone). There are other options. I help a lot of my clients set up automatic savings plans that pay 4-5% annually. You can email me if you want more details on that as well.


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