Simplified Personal Finances can Boost Savings, Ring in Financial Freedom

by Shri V. Srikanth

Published on this site: February 16th, 2006 - See more articles from this month

In a report filed on January 30, 2006, Associated Press said that the savings rate for the average American has dipped to its lowest levels since the depths of the depression in 1933.

Other reports on the subject indicate that a large number of employees continue to ignore the 401(k) plan as a retirement savings vehicle in-spite of increasing incentives from the employer.

It has also been found that other plans such as Traditional IRA & Roth IRA suffer a similar lack of participatory zeal, even though some of them offer some excellent benefits.

The reasons for this lack of savings range from:

1. I don't understand them
   
   
2. I don't know have enough money
   
   
3. I have no clue about investing
   
   
4. The future is not a concern yet
   
   Employers on their part, in an attempt to improve participation rates, have hit upon at least one technique that works well:
   
   Default the employee into the 401(k) or other similar plans, and have the employee have to make an active choice to not participate.
   
   This simple change has resulted in an increase in participation rates to the 85%-90% levels for those firms.
   
   A simple truth about savings and money emerges from this:
   
   We do not want to, or like to, think about money, savings and investing!
   
   If one pays attention to this thought, what it is shouting out for is:
   
   Keep it extremely simple, for I do not want to think about it.
   
   Simplifying personal finances, and making it automatic, is the best hope for each of us to get into the saving and investing mode.
   
   As the first step in simplification, you can:

1. Make sure all savings are automatically deducted from your paycheck.
   
   
2. Choose one savings vehicle, say, the 401(k) plan, and begin contributing up to the amount that is matched by the employer (the free money!)
   
   
3. Get help for investing
   
   Just taking these three steps will significantly improve the future outlook for retirement for each of us. Keep it simple. But it gets better.
   
   Foundation for Financial Freedom
   
   A basic discipline towards personal finance goes a long way towards building a nest-egg. But taking only a few extra simple steps can launch you towards total financial freedom:

1. First, put money away into 401(k) to get the free employer match
   
   
2. Maximize Roth IRA contributions
   
   
3. Take the help of investment newsletters to learn how to outperform the market
   
   
4. Let your money grow through compounding
   
   The above steps can begin building your nest egg, and combined with:

• Frugal living
  
  
• Paying off Debts &
  
  
• Buying a reasonably sized house
  
  and doing related common sense activities, one can visualize a golden retirement in say 25-30 years.
  
  Which is great as this will add hugely to your wealth and that of the country! A few more steps could shave 60% of your time to freedom though!
  
  Financial Freedom In Ten Years!
  
  Of course this path of the slow and steady is a turn-off to many! You may like to get to that financially independent state quickly!
  
  And while overnight success stories are rare, those achieving financial independence in a decade or less are not so uncommon.
  
  These individuals:

1. Increase their savings rate into the 30%+ range
   
   
2. Maximize portfolio returns with the help of financial advisors or expert investment newsletters into the 20%+ range
   
   
3. Take every tax advantage available (including capital gains tax, dividend tax, tax-deferred plans)
   
   
4. Develop extra income sources through own side-business that diversifies their income stream and reduces income risk
   
   
5. Always work hard at their primary career to increase their value at their company, and thus pull in substantial income from it
   
   Following these simple steps will build a substantial net-worth for you, using which you will be able to free yourselves from job dependence in a short-time (sometimes as quickly as seven years from the time you start with earnest).
   
   Many Roads to Financial Freedom
   
   The above listed pathway is not the only pathway to richness. There are those who solely concentrate on building their business, and there are others whose business is investing or real-estate and so forth.
   
   While these roads are open to you, it might be far less disruptive to benefit from the compounding of incremental improvements in

1. Income
   
   
2. Personal Finance &
   
   
3. Investing
   
   and ride towards financial freedom in under a decade!

While there are many good websites that talk about the individual pieces of this puzzle, at Character & Wealth (and I am biased here, but I think with good reason), a complete picture is presented with the necessary tools and community support to achieve the goal of total financial freedom in under ten years.

Shri V. Srikanth is a member and author of several articles at Character & Wealth, an online community dedicated to bringing total financial freedom to its members in under ten years. You can contact Shri at [email protected], http://www.characterandwealth.com