Want To Retire By 40? Here’s How Much You’ll Need To Save.

According to a recent Gallup poll, the age when people expect to retire is creeping up — from 62 in 2002 to 66 in 2022. If the mere thought of working that long makes you shudder, don’t worry; there’s hope. And it’s spelled F-I-R-E. 

Financial Independence, Retire Early (FIRE) is a philosophy that was popularized in the early 90s. It was then rediscovered by high-net-worth Millennials roughly a decade ago. 

The concept of FIRE is one of extreme frugality. Instead of the 10% to 15% in annual savings recommended by most financial planners, FIRE adherents save 50% to 75% of their yearly income. Here’s how these strategies compare:

Saving 10% annually, it takes nine years to save one year of living expenses.

Saving 50% annually, it takes one year to save one year of living expenses.

Saving 75% annually, it takes four months to save one year of living expenses.

The Rule of 25

The Rule of 25, a core tenet of FIRE, says you must save 25 times your annual expenses before you can consider retiring.

Monthly expenses X 12 = annual living expense X 25 = your target FIRE number

If your monthly expenses are $5,000, you multiply that by 12 to get an annual living expense of $60,000. Multiply that by 25, and you’ll have a target FIRE number of $1.5M. This is the number you’ll need to save in order to retire early. 

The 4% Rule

The 4% Rule is a recommended guideline for anyone saving for retirement. Financial experts say as part of a 30-year retirement plan, retirees can withdraw 4% of their savings in the first year and then adjust for inflation in future years as necessary.

Referencing the 75% savings formula above, it would take fewer than ten years to accumulate 25 times the average annual living expenses. So, if you’re in your 20s or early 30s, it’s entirely possible you could retire by 40.

The 3 types of FIRE

Because saving 75% of one’s salary can be too big a burden for some, there are three classifications of FIRE:

Fat FIRE is for a retirement where you won’t have to skimp. It’s for those 75% percenters who are making sacrifices today so they won’t have to make as many later in life. 

Lean FIRE is more of a minimalist approach. It’s for those who are able to save roughly 50% now in exchange for a modest yet satisfying life free from work. 

Barista FIRE is a bit of a hedge. It’s for someone who wants to retire from full-time work at a younger age but is OK having a part-time job with medical benefits (like those offered by Starbucks). Barista FIRE retirees can leave the workforce before they’ve banked a million dollars because they can count on roughly $30,000 in salary to help stretch their savings.

A word of caution

The reason most wait until their mid-to-late 60s to retire is entirely pragmatic: full Medicare and Social Security benefits aren’t available until ages 65 and 67, respectively. Those who retire as early as 40 will have to contend with the high cost of health care insurance and medical care. 

As a safeguard against this, Jeske — who’s clearly a pragmatist — advocates for saving 30 to 40 times your annual expenses (think a Rule of 30 or 40 vs. 25). For those with $60,000 in annual expenses, that could mean needing between $1.8M and $2.4M in savings before retirement is possible.

3 Ways To Start Investing In Your 20s — And 1 Big Reason To Start Right Now

Did you know those in their late 20s-to-30s have built up less wealth than previous generations had by the same age? The reason, cited in 2021 Boston College research, is student loan debt. Inflation, rising rents, and soaring medical expenses are also contributing factors, according to a multi-generational survey conducted by Deloitte in 2022.
It’s no wonder that roughly 47% of Gen Z and Millennials report they’re living paycheck-to-paycheck while approximately 30% say they don’t feel financially secure. 43% of Gen Z and 33% of Millennials say they’ve had to take a second job just to make ends meet.

Investing what you can, when you can

While massive debt and increasing expenses make it tough for younger generations to sock away 10-15% of their annual income, as financial planners recommend, it’s best to get in the habit of saving as much as your circumstances allow.

In the beginning, this may mean opening up an interest-bearing savings account where you can park funds until you need them. Bankrate.com says the average interest for most savings accounts is 0.13%. Though that won’t exactly grow wealth, it’s better than nothing for those who need to keep their money accessible in case of emergency.

As your financial footing becomes surer, you could consider making modest monthly contributions via an employer-sponsored 401(k), a personal IRA/Roth IRA, or a robo-advisor account. You could also hedge your bets, keep your funds liquid and make an annual contribution directly from your savings account — but not one so large that it’d wipe you out.

CNBC suggests you’ll eventually want to get to a point where you can set aside a minimum of $14/day, or $420/mo., to invest for retirement. But before you wonder if that’s enough to carry you through your golden years, let’s talk about compound interest. It’s the main reason you’ll want to start saving as early as possible.

Let’s use that $14/day example to illustrate how compounding works. If you’re able to put away $420/mo. and earn 5% interest, you might think you’d only save around $200,000 over a 40-year period. But in actuality, you’re earning interest on the money you’ve saved and the interest you’ve already earned. It’s like receiving interest on top of interest, which can exponentially grow your money. So if you put away $420/mo. for 40 years — with a return of 5% — you’ll have more than $620,000. That’s at least $420,000 in free money!

No-brainer strategy #1: contribute to an employer-sponsored 401(k)

Speaking of free money, the 401(k) offered as part of your benefits package may come with employer matching. In 2022, Investopedia found that the most common employer match is 50 cents on the dollar, up to 6%. Now that you know about the power of compound interest, it’s easy to understand the impact that an extra 6% can have. 

Even if your company doesn't offer matching, 401(k)s are a terrific investment vehicle for those getting started. They really don’t require much market knowledge as you have the option to select a target retirement age. With target-date funds, an asset manager will make risk decisions for you and automatically rebalance the fund to be more conservative the closer you get to receiving a disbursement. 

No brainer-strategy #2: open an IRA or a Roth IRA

Another retirement savings vehicle is an Individual Retirement Account (IRA). With a traditional IRA — or a traditional 401(k) — you won’t have to pay taxes on whatever you contribute until you start making withdrawals. Many financial planners recommend a Roth IRA where contributions are taxed up-front because you’d likely pay a higher tax rate later in life. If you anticipate being a high earner throughout your career, a Roth IRA is the smart choice.

No brainer-strategy #3: use a robo advisor

Wealthfront, Betterment, Acorns, and Allio aren’t explicitly for retirement savings, but each can be used for such. You don’t get the tax benefits of a 401(k) or an IRA, but you can always withdraw funds at any time without penalty — something that could come in handy during a job loss, home purchase, or another big life event. 

These companies offer various investments: stocks, bonds, ETFs, and perhaps crypto. Some investors will want to do the heavy research required to pick out individual stocks, bonds, ETFs, or cryptocurrencies. Still, others will enjoy the breeziness of going with the custom portfolio a robo-advisor has carefully assembled.

Out of all of these strategies, there’s really no bad way to invest. Honestly, the worst thing you can do is nothing at all.

7 Ways To Get Your Credit Card Debt Under Control

If you have credit card debt, you’re not alone. Credit reporting agency Experian says 61% of Americans have credit cards, and the average balance is $6,194. With inflation and interest rates rising, now’s the time to do something about your debt.

The Federal Reserve Bank of New York recently found credit card balances were seven percent higher in the second quarter of 2022 vs. the same period last year. To add insult to injury, the average annual percentage rate (APR) is currently above 18% — and it won’t be coming down anytime soon. 

What to do if you’re trying to pay off one card

Pay more than your monthly minimum The biggest mistake most people make is paying no more than they’re required. While you might think paying the monthly minimum will chip away at your debt, much of that payment covers the interest. To pay down what you charged, search your statement for a comparison chart that shows how much interest you’ll avoid if you make larger payments. That chart will also tell you how paying more than the minimum will take your balance to zero faster.

Curb your spending Nothing enables impulse purchases like a credit card. Instead of continuing to rack up debt, start paying for everything with cash. You’ll find the act of handing over bills will make you question whether you need what you’re about to buy. The cash-only model can also prevent frivolous spending because you have to plan purchases to have enough cash on you. 

Tighten your budget When you have your credit card statement out to see how you can avoid unnecessary interest, check if your spending is organized by category. This can help you determine what you’re spending on essentials and non-essentials. If your statement doesn’t offer these insights, a service like Mint.com can categorize your total spending every month and send you email alerts. Having these breakdowns on a report can be eye-opening and might just scare you into being a more stingy spender.

Lock your credit card Don’t trust yourself not to use your credit card as you pay down debt? You can always request your account be locked or frozen. This won’t just help you be more disciplined; it can also help your credit score in a couple of ways: you’ll keep your credit utilization ratio low (no debt being added), and you’ll add to your account age (the longer it's open, the more you benefit).

How you should approach debts on multiple cards

Target one card at a time There are two repayment strategies you could employ to attack the balances on multiple cards. Before you decide which approach is best for you, check the statements for all your cards and note the balances and the interest rates on those balances.

The avalanche method (focusing on the highest interest rate first)

Aggressively paying down the debt that’s costing you the most to carry is a no-brainer. The trick is not to lose sight of your ultimate goal: eliminating all of your debt. High-interest cards with large balances can seemingly take forever to pay off, so it’s common to lose motivation. Adopting the snowball method could be a better choice if you know you need quick wins to stay on track. 

The snowball method (starting with the smallest debt first)

While many financial planners advise against this approach, the psychological advantage of knocking out smaller debts first could provide the momentum needed to wipe out all of your balances. With this approach, you’ll move from a $532 balance to a $1,474 balance to a $4,188 balance. Whichever debt repayment strategy you choose, you’ll need to make the minimum payment on all your cards while making a higher payment on your target card.

Explore a balance transfer or loan If you don’t want to risk paying a higher interest rate while working through your credit card balances, another way to pay down those cards is to seek out a single option that offers a lower interest rate.

Move your balances to a card with a low-interest rate (or no interest rate)

Keep in mind you can sometimes incur a one-time fee of 3-5% of your total debt, so you’ll want to do the math to see if it’s in your favor. If the card has 0% interest for a limited time, you’ll want to pay off the balance before the introductory period ends — or you may find yourself again stuck with a rate you don’t like. Either way, before you commit, you should read the fine print to see if any balance transfer limits could thwart your plan. Also, maxing out your balance transfer card could adversely impact your credit score. 

Take advantage of a home equity line of credit (HELOC)

If you’re a homeowner, you may be able to borrow from your home’s equity to pay off your cards. HELOCs generally offer favorable interest rates, but you may have to pay closing costs. It’ll be in your best interests to carefully review the terms before you sign any paperwork.

Apply for a personal loan

Like a HELOC, a personal loan can provide you with the means to eliminate your credit card debt and make just a single monthly payment. Some lenders may charge fees, but many have flexible repayment timelines. Since you’re trying to eliminate debt quickly at the lowest interest rate possible, you’ll probably want to select the shortest repayment window and pay more than the monthly minimum (as suggested in the chart above). You’ll also want to ensure the loan you’re considering will cover your entire debt. 

Use windfalls to pay down debt Another way to reach a zero balance speedily is to use raises, bonuses or other gains to chip away at your debt. While you may be tempted to splurge, pay down your debt first. Then you can use the interest you’ve avoided paying to get yourself a little something. 

It’s OK to ask for help

Nonprofit credit counseling organizations can provide additional guidance should you require it. They’ll evaluate your debt and income and formulate a sensible repayment plan. Many can also use their clout to secure lower interest rates and, in the event of significant debt, a reasonable settlement. Sometimes a settlement can hurt your credit score, so talk with your counselor before deciding to move forward. Most credit counseling organizations will charge a fee, but certain conditions may earn you free services or a discounted rate.

5 Things To Keep In Mind When Saving For A Car

The average new car loan amount is up $4,703 from last year, and used car loans have increased by $4,487, according to credit reporting company Experian. Thanks to inflation and scarcity, it now takes more money to purchase a vehicle than at any other time in recent history. This means careful planning is required to save what you’ll need.

Calculating your downpayment and monthly costs

To determine if you can afford the car, truck, or SUV of your dreams, visit local dealer websites to see what it costs to buy a vehicle with your preferred features. Then you can input that price into an auto loan calculator. You’ll find one on most bank websites and sites like NerdWallet and Bankrate. You should assume a 20% down payment on a new car and a 10% down payment on a used vehicle. Experian found the average monthly payment for a new car in Q2 ‘22 is $667, while the average monthly payment for a used car is $515. 

Many financial experts recommend shopping around for auto financing as you would a vehicle. Talk with your bank, visit sites like LendingTree, and explore what’s available from a credit union if you have access to one. The latter traditionally offers very competitive loans. Once you’ve done your homework, ask a dealer if they can provide a better rate. 

Budgeting for a vehicle 

The 50/30/20 method is a great way to ensure you’re not stretching your budget too far. If you’re unfamiliar with 50/30/20, those are the percentages you should allocate to needs, wants, and savings/debt repayment.

To determine where the monthly expense of a vehicle should come from, ask yourself this question: do you have a reliable car right now? If the answer is no, you obviously need something better. If the answer is yes, you merely want something nicer. Will the 30 - 50% of your monthly earnings allow you to carry an auto loan for the vehicle you’re eyeing? And can the 20% you’re saving help you accrue a down payment in a reasonable amount of time? Or should you, perhaps, reset your expectations?

Remember, in addition to a down payment, you’ll need to cover the upfront costs of tax, title, registration, and other fees. You’ll also have ongoing monthly, quarterly, and annual expenses (gasoline, maintenance, and insurance). 

Getting your spending under control

Once you’ve figured out your monthly 50/30/20, it’s easy to take a closer look at your expenses and decide what you can cut or keep. Going through debit or credit card statements can help you identify frivolous purchases and recurring charges you can eliminate. Signing up to receive email alerts from the money management site Mint can also help you see just where your money is going. Saving up for a down payment, and being able to make the monthly payments, may require you to make some difficult choices. You might have to say goodbye to streaming services, nights out, or vacations. 

Setting up a separate savings account

The advantage of saving for a down payment in an account that doesn’t have a debit card is you won’t touch what you’ve set aside. Many banks allow you to set up automatic deposits, so you can set it and forget it until you’ve reached your goal. Allio has a feature that allows you to save specifically for a car. And with our macro investment portfolio, you could earn more than the 0.13% interest you’d receive from a typical savings account. 

Selling or trading in your current vehicle

If you currently have a vehicle in good working order, this could help you reduce the amount you’ll need to save for a down payment. Use the valuation tools on the Kelley Blue Book and Edmunds websites to help determine the current worth of your automobile. 

In most cases, you’re likely to make more money if you sell your vehicle directly to a private party. Before you go this route, however, it may be worth chatting with dealers. Given the shortage of used cars in today’s marketplace, they may be willing to pay you more for your trade-in to increase their lot’s inventory.