I’m making a giant assumption here. I’m assuming you are contributing, or working toward contributing, $18,000 of your income per year to your long-term financial goals. And by long term financial goals, I mean retirement. And by retirement I mean post 59 1/2 years old. And by post 59 1/2 years old, I mean you’re already getting the senior discount at Wendy’s. My professional belief is that if you are earning north of $100,000 per year, you should almost definitely be setting aside $18,000/yr for the future. I’ll explain why on another day.
Today we’ll focus on where to put that. The factors will be fees, performance, and risk. I purposefully left out “complete control”, which is a factor some folks like to consider in the midst of this conversation. I think picking your individual investments is great, but I think it’s overrated. I can only speak for myself here, and this might be where I lose you forever, but personally, I just want to keep pace with the broad market indexes and focus on beating inflation. That’s me. Maybe you want to beat the market by 20 percent per year. You might also be the sort of person who drinks too much Red Bull, but I digress. Subway gives you complete control too, but that doesn’t mean you’ll find me in line barking orders at a sandwich artist.
Our attention needs to shift immediately to the role of a 401k or a Roth 401k, as they relate to this discussion. Both vehicles allow a person 49 years old or younger to put away $18,000 per year on a tax-advantaged basis, in the year 2017. Assuming your employer has a match, you’ll also have the luxury of the match deposits. For instance, if you make $100,00, you max out your 401k or Roth IRA, and your employer match is 4 percent, then you $22,000 will be deposited into your account over the course of the year. It’s very simple, clean, and maintenance free.
But. And yes, there are a few big buts. I cannot lie. And you other brothers can’t deny…
If your 401k investments are crazy expensive and have terrible performance, why would you throw good money after bad? You shouldn’t. If you can invest in better investment options on a tax sensitive basis, for much cheaper to it, or at least partially do it. Open a Roth or traditional IRA on the cheap, and fill it with low-cost ETFs. If you’re doing this on your own, with your own investment acumen and skills, fantastic. If you need a financial advisor to assist you along the way, it’s quite possible your fees will climb north of your 401k fees.
Of course, a big issue is that if you’re single, you can only contribute $5,500 (or $6,500 for 50 or older) to a Roth or Traditional IRA. What should you do with the rest? You should definitely hit the match on your 401k for starters. Back to our hypothetical $100,000 income. You put $4,000 into your 401k at work, the company matches that $4,000, and then you contribute $5,500 to a Roth or traditional IRA. You’ve set aside $9,500, and $13,500 goes into your investments because of the match. That’s not great compared to the $22,000 we were getting by maxing out the 401k. Sure, you could always then go back to the 401k and deposit the remaining $8,500. That’s a solid strategy. It’s a hair complicated, but solid.
Can a local financial advisor beat the performance of your 401k? Maybe. There are lots of factors. I can tell you more local advisors think they can do a better net job for you than the number of advisors who actually can. In my opinion, if you make $100,000 or more and your advisor is not finding a way for you to set aside $22,000 per year on a tax sensitive basis, then they’re doing you a disservice. You will NOT achieve a successful retirement outcome by simply maxing out your IRA. You just won’t. And “having access to your long-term savings along the way” is silly. A properly-funded emergency fund will prevent you from the need to withdraw from your retirement savings.
Also, don’t forget to add-in the advisor’s fees.
Don’t assume your fees and the performance of your 401k suck just because you watch Last Week Tonight with John Oliver. I’ve seen thousands of 401ks which have wonderful investment options with crazy low fees. Your goal is to get money, a lot of money, in your long-term savings accounts. If you don’t, you’ll be having a philosophical discussion about the best way to save for the future while eating ketchup soup you made after stealing ketchup from McDonalds.
Understanding the Buying Power of $18,000
Understanding the value of $18,000 requires considering the impact of inflation on its purchasing power over time. Inflation, the silent eroder of wealth, can significantly alter the buying power of your money. For instance, $18,000 in 1850 had the same buying power as a whopping $726,452.31 today, far exceeding the average prices over that period. Fast forward to 1990, and that same $18,000 is equivalent to $43,353.70 today. This stark difference is due to the cumulative price increase caused by inflation over the years. The historical buying power of $18,000 illustrates the need to adjust for inflation to understand its true value.
To put this into perspective, the average inflation rate between 1850 and today is 2.62%, while between 1990 and today, it’s 2.14%. These rates might seem small, but they have a compounding effect over time, gradually eroding the value of the dollar and reducing its purchasing power. The dollar decreases in value as inflation rises, making it essential to consider this when planning your long-term savings. According to the Bureau of Labor Statistics consumer price index, or labor statistics consumer price, these inflation rates highlight the importance of understanding how inflation impacts the value of your $18,000 in the future. Price index tracking began in 1635, providing a long historical context for these comparisons.
Maximizing Your Savings
Maximizing your savings isn’t just about stashing money away; it’s about making sure your money grows faster than the average inflation rate. The average rate of inflation for selected Consumer Price Index (CPI) categories can illustrate how purchasing power has changed over time. Inflation can sneakily chip away at your savings, so you need to be proactive. Inflation erodes the value of your savings over time, making it crucial to invest wisely. One effective strategy is to invest your savings in a high-yield savings account or a low-risk investment that offers a higher interest rate than the average inflation rate. This way, your money not only grows but also keeps pace with inflation, maintaining its purchasing power.
For example, if you have $18,000 in savings, you might want to explore options that offer returns above the average inflation rate. Additionally, using online tools like an inflation calculator can help you determine the current value of your savings in today’s dollars. To calculate the inflation rate, you can use specific methodologies that incorporate the Consumer Price Index (CPI). This can guide you in making informed decisions about where to park your money to ensure it grows and retains its value over time. Referencing inflation data Alioth finance can provide historical inflation rates and their impacts on the value of money. When discussing data sources for inflation calculations, it is essential to consider official inflation data Alioth for accurate and reliable information.
Prioritizing Your Goals
When considering the value of $18,000, it’s essential to prioritize your financial goals. With an average inflation rate of 2.62% per year, the purchasing power of $18,000 can decrease significantly over time. To beat inflation, it’s crucial to invest your money wisely and make smart financial decisions. Here are some tips to help you prioritize your goals:
- Calculate your inflation rate: Use the inflation rate formula to determine the cumulative price increase of $18,000 over a specific period. This will give you a clearer picture of how much your money’s value might erode over time.
- Understand the buying power equivalence: Recognize that the value of $18,000 can vary widely depending on the time frame and location. For instance, $18,000 today won’t have the same purchasing power in 20 years, especially if the average inflation rate continues to rise.
- Set clear financial goals: Determine what you want to achieve with your $18,000. Whether it’s saving for a specific expense, investing in a business, or building an emergency fund, having clear goals will help you make informed decisions.
- Consider the consumer price index: Keep an eye on the official inflation data from reputable sources, such as the Bureau of Labor Statistics, to stay informed about the current inflation rate. This will help you adjust your financial strategies accordingly.
By following these steps, you can ensure that your $18,000 is working hard for you and not just sitting idle, losing value to inflation.
Investing Wisely
Investing wisely is all about understanding the market and the impact of inflation on your investments. When you invest $18,000, it’s essential to consider the average inflation rate and the cumulative price increase to ensure your investments keep pace with inflation. For instance, the inflation rate for $18,000 over significant historical periods, such as since 1850 and 1990, shows dramatic differences in value over time. One effective strategy is to diversify your portfolio. By spreading your investments across a mix of low-risk and high-risk assets, you can balance potential returns and risks, ensuring your money grows steadily over time.
Another smart approach is dollar-cost averaging, which involves investing a fixed amount regularly, regardless of market conditions. This strategy can help mitigate the impact of market volatility and ensure your investments grow consistently. Detailed calculations for inflation rates can be found at https www.officialdata.org us inflation, which provides data illustrating how inflation impacts purchasing power by referencing specific years. Additionally, referencing statistics from the Bureau of Labor Statistics consumer price index can illustrate significant changes in purchasing power over time. By investing wisely and considering the effects of inflation, you can maximize your returns and maintain the purchasing power of your money, securing a more stable financial future.
Additional Considerations
When evaluating the value of $18,000, there are several additional factors to consider:
- Price index tracking: The Bureau of Labor Statistics has been tracking the consumer price index since 1635, providing valuable insights into the purchasing power of $18,000 over time. This historical data can help you understand long-term trends and make better financial decisions.
- Inflation data: Websites like Alioth Finance provide official inflation data, allowing you to calculate the inflation rate and understand the cumulative price increase of $18,000. This information is crucial for making informed investment choices.
- Labor statistics: The consumer price index is a crucial metric for understanding the average inflation rate and its impact on the value of $18,000. By following inflation rate formula and official inflation data, you can better predict how your money’s value will change.
- Not all categories are equal: Different categories of goods and services have varying inflation rates. For example, healthcare costs might rise faster than the average inflation rate, while technology prices might decrease. It’s essential to consider the specific items you plan to purchase with your $18,000.
- Varying inflation rates: Inflation rates can vary widely depending on the location, time frame, and other factors. Staying informed and adapting your financial decisions accordingly will help you maintain the purchasing power of your money.
By considering these factors and prioritizing your financial goals, you can make the most of your $18,000 and ensure that its value is not eroded by inflation. Remember, the key to beating inflation is staying informed and making smart, proactive financial decisions.
