Day 3: Building Wealth

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Young Money Plans

Let's talk about financial independence.

A common reason to save money is to retire comfortably. Retirement isn't something to take for granted. Nearly two-thirds of Americans in their forties have less than $100,000 in retirement savings and 28% of those in their sixties have less than $50,000.

Why are we talking about this in our twenties?

Because financial independence ≠ chilling in a senior home at age 70. Financial independence means you are free to do what you want, and that can start at any age.

Planning for Retirement = Financial Freedom

I know, it's a weird logic. But once you know you will be financially safe no matter what happens, you are free to take more risks and adventures. You won't be living paycheck to paycheck or worried about next month's rent. You can focus on longer-term goals.

To get started, we recommend saving in tax-advantaged accounts such as an IRA or 401(k). These accounts have tax benefits created by the U.S. government to encourage and support retirement.

Financial Terms to Know

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Employer 401(k) - The most common employer-sponsored retirement plan. The U.S. tax system allows you to invest a part of your annual salary up to an annual limit ($19,500 for 2020). Some companies choose to match your contributions, which equates to free additional money for retirement. Take advantage! Early withdrawal before age 59 ½ will require you to pay taxes and incur a 10% fee (there are exceptions).

Roth IRA (Individual Retirement Account) - A U.S. government provided account funded with your after-tax dollars, but the withdrawal will be tax free. These types of accounts are great if you believe your taxes will be higher when you retire.

Traditional IRA - An account that allows individuals to contribute pre-tax dollars, but is taxed when you withdraw your money out.

Still confused? No worries, we made a decision tree for you 😇

IRA & 401(k) Basics

The Logistics

You'll need to pick a broker to open an account. Popular options include Vanguard, Fidelity, and E Trade, which all have low-fee index fund options to get started. You can always switch later.

Keep in mind that when you put money into these accounts, you still have to choose an investment type too. Don’t make the mistake of letting your money just sit in the account, because then your money won't grow.

We believe that index funds tracking the broader S&P Index are the most beginner friendly, but you should pick your own investments, think on a longer term horizon (no day-trading please) and remember to diversify!

That’s plenty of heavy lifting for now. Props for putting in the hustle.

Questions?

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