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No matter what your occupation or salary, the key to financial
independence is summed up in these three words: pay yourself
first.
Think for a moment--who's the first person to get your paycheck?
The answer, of course, is the United States Government. On
average, the typical American worker pays about 28.5% in federal
taxes.
Use a Pre-Tax Retirement Account
One of the best ways to pay yourself first is to reduce the
amount you have to pay everyone else. How? By paying less
in taxes. One of the most effective legal ways to minimize
the above-mentioned taxes is to use a pre-tax retirement account.
Examples of pre-tax retirement accounts include:
1) A 401(k)
plan at work
2) A 403(b)
plan (non-profit version of a 401(k) plan)
3) A deductible IRA
4) A SEP
IRA account (if you are self-employed)
Visit our retirement planning leaf to learn more about different
Types
of Retirement Accounts.
How much should you pay yourself?
Financial planners usually suggest that saving 10% of your
pre-tax earnings will be enough for retirement. However, women's
retirements typically last 20% longer than men's. So, women
should be saving at least 12% of their pre-tax earnings.
At first, the concept of saving 12% of your income may sound
like an overwhelming figure, but it's not as hard as you might
think. If you can't imagine saving 12% of your income, try
6% or starting out with just 1%.
If you start with 1%, increase the figure 1% a month for
a year. By the end of the year, you'll be saving 12% of your
income without noticing much of a difference.
4 Things To Do Right Now Regarding Your 401(k) Plan
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Sign up for your plan.
If you are not using your 401(k) plan at work, sign
up immediately. If you are unsure whether or not your
company has a retirement plan, ask your benefits person.
According to recent polls, 40% of women who are eligible
for retirement accounts at work do not participate in
them.
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Max out the plan.
It's not enough to sign up for your plan. Put away the
maximum allowed. Most women and men make the mistake
of only putting the percentage that their company matches.
This is a huge mistake. Call your benefits person today
and find out what percentage you are contributing to
the plan. Remember, MsMoney.com recommends that you
contribute 12% of your pre-tax income.
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Make sure the money in your plan is working for
you.
Too often, women invest too conservatively in their
retirement accounts. Take the time to review your investment
alternatives. Ask your benefits person if you can meet
with the 401(k) plan administrator to discuss the investments
that would be most appropriate for your situation. To
learn more about how to invest, determine Your
Risk Profile.
When an investment firm puts a 401(k) plan in place,
they promise to service the participants of the plan
with financial education and guidance at no additional
cost. This is free guidance--take advantage of it.
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Open your statements.
Make sure you are regularly reviewing the performance
of your plan. Too many people file their quarterly retirement
account statements without reading them.
Open your statement. If you have questions on how to
read the statement, ask the company that manages the
plan. To understand the power of your savings, use our
Value of Additional
Savings Tool.
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Step
1: Pay Yourself First