I'm a debt-free millionaire coaching women to financial independence.
Prior to amplifying your investment contributions, it's crucial to comprehend how these investments slot into your holistic financial health.
Here are five pivotal steps, encapsulated by the acronym CRUSH, to reassess your investment strategy. These steps guided me to become a debt-free millionaire in my 30s.
A survey performed by Chase shows that 55% of Americans with recurring payments are unaware of the precise amount automatically debited from their accounts every month. Consider the following scenarios that I often notice with my financial education students:
- Merging investment accounts such as outdated 401(k)s into a single retirement account;
- Transferring old 401(k)s into your current 401(k) for convenience;
- Evaluating the expense ratios and fees of your investment accounts;
- Terminating brokerage accounts if they are not being fully exploited to their IRS limits; and
- Retrieving forgotten investment accounts.
I frequently observe students utilizing brokerage accounts to invest in identical assets they could strategically allocate in a Roth IRA and save more on taxes.
By trimming down accounts, focusing on those that remain becomes less complicated, simplifying the process of increasing your investment contributions.
Your FIRE (Financial Independence, Retire Early) number is deduced from two retirement strategies typically adopted by financial planners: the 25x Rule and the 4% Rule.
The initial calculation can be daunting as the number will likely be in the millions, even for those leading a modest lifestyle in the United States.
The FIRE approach requires having 25 times your yearly expenses in investments, with only 4% of the total withdrawn each year. Even as you take out your living expenses, the investments continue to replenish through compound interest or increasing in worth or dividends.
This figure serves to provide you with an objective and identify the gap you need to overcome between your current and desired states.
Throughout my time as a financial educator since 2020, I've found that most students cannot answer this question: What is your net worth?
Your net worth is your total assets minus your total liabilities, including credit card debt, car loans, mortgages, student loans, and other debts. Teaching all students to track their finances in one system, like Mint, circumvents the tedious task of maintaining manual spreadsheets.
The fundamental idea of your new investment plan is to reduce the gap between your FIRE number and your current net worth.
The awareness of my financial standing was a catalyst, and it enabled me to incrementally increase my total net worth.
To accelerate your investments, determine your investment amount each month in advance, and prioritize it in your budget.
A 2022 survey of Americans by Credit.com shows that 27% of Americans don't think they need a budget, and 24% believe they won't stick to it.
I assumed leftover money to be beneficial until I learned about the zero-based budget. Many theoretically allocate extra funds toward their investments after taking care of their expenses. However, this approach often leaves you without leftover cash by the end of the month.
A consistent monthly budget can optimally direct your liquidity to maximize annual 401K and IRA contributions. A good budgeting solution should leave you with no leftover money, as every dollar is purposefully allocated.
In my experience as a financial coach, people often refrain from investing due to not a lack of knowledge but a fear of financial loss. This fear is rational, as it's often derived from past traumatizing financial experiences, like:
- Losses in prior investments;
- Job lay-offs;
- A challenging divorce;
- A financially stressful health emergency; and
- Financial limitations growing up.
I started attending therapy consistently at the same time I embarked on my FIRE journey, which I believe is the best investment into my financial future.
Investments naturally carry risks, and I only became more aggressive in my investments when I felt emotionally and mentally ready to handle potential losses. Discussing my past money-related anxieties with a licensed therapist helped me overcome these fears and take on higher risks over time.
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