Of course, that benefit is not always a given. Tax rates could increase, or your income needs could increase in retirement. Either way, you might find yourself paying more in taxes than you planned on earlier in life.

For me, the tax advantages do not outweigh the other problems/limitations of a 401k. Of course, much of this is very personal, as the company I work for chooses the plan administrator, and the administrator controls the investment options. Your options may or may not be significantly better.

Your employer may also offer a match to your contributions, which would be very hard to pass up as it essentially “free money” towards your retirement.

Having said all that, I chose to not participate in my employer’s 401k for a variety of reasons, but it largely comes down to freedom.

I prefer to invest in things that give me the most freedom – freedom of investment choice, freedom to tap my money if necessary, and freedom to have more control over taxable events now and in the future (sale of stock, withdrawals, etc.).

Roth IRA – An Alternative to the 401k

My wife and I both invest in a Roth IRA. Here, our contributions can always be withdrawn for any reason without penalty, which in effect makes this an extension of our emergency funds – not necessarily a dedicated emergency fund, but additional dollars we could withdraw if it really hits the fan.

The earnings will grow in our Roth IRA accounts and may be withdrawn tax free upon reaching retirement age (59 1/2). If we need money from the Roth before that, we can withdraw contributions without penalty.

Contributing to a Roth IRA also allows us to have more choice with our investments. Rather than being limited to a few mutual fund options with what I believe to be questionable allocations to particular segments, regions, etc, I can invest in something I feel reasonably sure will do well over the next three or four decades. I can speculate with some of my retirement money, or be ultra-conservative, whatever my appetite for risk happens to be at a particular life stage.

Outside of the Roth IRA I prefer to invest in taxable investments, again where I can control taxable events, income, withdrawals, etc. I’ve previously mentioned my strategy to build a portfolio of dividend growth stocks. I would like to eventually own real estate that produces rental income.

I also plan to tap investments before the government-scheduled retirement age of 59 1/2. I don’t know exactly when that will be, but I imagine I will stop working for full-time pay well before 60. I may work part-time, or start my own business, or change careers – who knows. But I’d like to be able to use some of my own money according to my own time table.

Potential Drawbacks to Stopping Your 401k

I am not advocating people stop contributing to their 401k without strong consideration, I’m just sharing my personal strategy. This is how I would allocate funds after getting out of debt:

1. Invest in a 401k up to an employer match. If no match, go to step 2a.
2a. Save a one-year emergency fund in all cash.
2b. Max out Roth IRA contributions.
3. Invest in taxable investments with a low turnover, including single stocks (don’t forget diversity), tax-advantaged mutual funds, hard assets (gold, silver, real estate), certain types of tax-friendly bonds or Treasuries, etc.

One of the benefits of a payroll deduction to a 401k is that the money is siphoned directly out of your paycheck and into your investment accounts. It’s like putting retirement savings on auto-pilot.

Those lacking the discipline to save on their own may benefit from the level of automation a 401k plan provides. I prefer to take a more hands-on approach with our investments, but that doesn’t mean everyone else does (or should).

I’m not one to put out a lot of disclaimers, but I would remind you that you should never do something, or not do something, with your money just because someone on a blog, or TV, or the radio, advocates it. Do your own homework. Talk with a professional. Make your own informed decision.

I’m interested to hear more from readers on this subject. Do you currently invest in a 401k?

Amber writes in with the following question regarding Roth IRA withdrawals:

“I currently owe about $10,000 in credit card debt and have nearly that amount in a Roth IRA I started a few years ago. I share your passion for being debt free and have considered withdrawing the money from my IRA account to pay off my debt. I figure once I’m debt free I can resume Roth IRA contributions and rebuild my account. Your thoughts on this strategy?”

Thanks for writing Amber. I appreciate your desire to become debt free – there is no feeling like it! However, withdrawing money from your Roth IRA to pay down debt could potentially be a bad move. Let’s discuss why.

Four Reasons Not to Tap Your Roth IRA to Pay Down Debts

You might have to pay a penalty if you withdraw from a Roth IRA. Although you can withdraw your contributions to a Roth IRA at any time and for any reason, you will be penalized if you withdraw earnings on your Roth IRA contributions unless the distribution of earnings is qualified.

A distribution is only qualified if you withdraw on or after the date you reach the age of 59 ½; if the withdrawal is made because you become disabled according to the IRS; if the withdrawal is used toward the purchase of a first home; or if the withdrawal left to your beneficiary in your will. The withdrawal of earnings must also be made five tax years or more after your first contribution.

Clearly, most withdrawals of earnings to pay off debt are not qualified. A distribution that is not qualified will be subject to a ten percent additional tax penalty, and you must pay ordinary income taxes on the amount you withdraw. There are no taxes owed on qualified distributions from a Roth IRA.

You diminish the power of compounding interest if you withdraw from a Roth IRA. Even if your distribution is qualified, you will have a smaller balance after you withdraw. This makes for a lower amount of money that can be earning interest, diminishing your returns over time. Once you withdraw contributions from previous tax years, they cannot be reinvested. That opportunity to contribute for that period is gone, forever.

You might be unprepared for retirement if you withdraw from a Roth IRA. A Roth IRA is designed to help you pay for your living expenses when you can no longer work. Withdrawing money from it today may leave you with less money decades from now, increasing the odds of an impoverished retirement.

You may start a bad financial pattern if you withdraw from a Roth IRA. It will likely be easier to withdraw from your Roth IRA again in the future when you need some quick cash after you take your first early distribution. Withdrawing once may start a bad pattern that will keep you from hitting your retirement goals if you make a habit of tapping retirement contributions to pay for your current lifestyle.

All things being equal, it seems best to avoid withdrawing from a Roth IRA to pay off your credit cards and other consumer debts. If you have no other recourse, and your debt is inhibiting your ability to live today and plan for the future, then you might want to take a withdrawal.

If you decide to go this route, I strongly suggest you only remove contributions from your Roth IRA, not the earnings. Allow the earnings to continue to grow, and avoid paying taxes and penalties for withdrawing them early for a non-qualifying event.

Earlier this week, I read the thought-provoking post at Get Rich Slowly, What Is Retirement? J.D. wrote about a recent camping experience with a few buddies and shared some of their conversation on the subject of retirement. One of the friends pointed out that he already thought of J.D. as “retired,” since he left his corporate job a couple years ago and now worked on his blog full-time. While J.D. does enjoy some schedule freedom, he still “works” at his writing craft. It does make you rethink the definition of “retirement” though, doesn’t it?

Shifting Views on Retirement

When I was a kid, my personal view of retirement was skewed significantly by the fact my grandfather retired from the Marines at 47, my grandmother was mostly a homemaker (particularly in her later years), and my mom was a single mom working 50+ hours a week in corporate America with no retirement in sight.

As I got older, I had friends whose parents were teachers, nurses and factory workers who had dedicated most of their adult lives to a single employer and retired from their chosen occupation. It wasn’t long before I recognized that was becoming the exception.

As our economy shifts away from manufacturing (something I personally find very sad), and into service, I think people will be more likely to change jobs dozens of times in their lifetime. I’m a bit of an exception to the rule myself. I’m in my 30s, but have worked for only two employers in my adult life (with a bunch of part-time gigs at different companies before that).

How Does this Relate to Personal Finances?

With all this job-hopping, the emphasis on personal responsibility for your financial future cannot be emphasized enough. Add in the question of social security’s solvency, the disappearance of the corporate pension, and the possibility of state bankruptcies, and you can easily see we are walking a financial tightrope with no safety net.

Younger generations must be more engaged with their finances than the “set it and forget it” generations before them. It used to be acceptable to plow all your money into 401k mutual funds and company stock. Ever heard of Madoff, Enron, or those target-date retirement funds with overly-aggressive allocations for soon-to-be retirees?

Forty year-olds with five previous employers may be sitting on five different 401k plans with bad administrators cutting into their profits with costly administrative fees. Rolling all those 401ks into an IRA might make sense, but the process can be overwhelming. And there’s always the temptation to cash out when you leave an employer – something that looks appealing, but can easily cost you nearly 40% in taxes and early withdrawal penalties. Ouch!

I’m not against 401k plans, particularly those that offer a matching contribution from employers, but if I had to choose, I’d much rather invest in a Roth IRA. Roth IRAs offer more freedom in terms of investment elections, and they offer the advantage of tax-free growth on earnings (you can even withdraw your Roth IRA contributions any time, penalty-free, in a pinch). And because Roth IRAs may be opened and maintained independent of your employment status with a particular employer, they make a lot of sense for younger generations of workers likely to bounce around the employment world before needing retirement funds.

Do I Even Want to Retire?

Back to the post from J.D; is he really retired if he still works several hours a day? I don’t think so. Has J.D. chartered a course of more personal freedom, rather than being chained to a desk eight hours a day, five days a week? Absolutely.

Perhaps we should change our definition of retirement. Or, maybe we should just expand our definition of self-employed. Were it not for a need to earn additional income, I’d say a full-time writer is mostly financially independent. That is, they no longer need to work for money to cover basic life expenses.

I believe most of us will enter a stage of semi-retirement when we get a little older. We’ll live off a combination of savings and part-time earnings, and be able to afford it by getting out of credit card debt and paying off the mortgage well before exiting full-time employment. Couple that with a frugal existence, and it wouldn’t take all that much to enjoy a lifestyle of more personal freedom.

Imagine getting to travel when most people are working. Imagine spending more time with your kids and grandkids – perhaps even homeschooling them if that is something that interests you. Imagine taking up a new hobby during the day, or volunteering more of your time. It’s all achievable, but not without some sacrifice up front.

I remind my kids, and any other young person I meet, to avoid making the big financial mistakes early on. If you do, you’ll have limitless opportunities to enjoy the next few decades of your life, while your peers will be paying for their mistakes.

Post by Frugal Dad

In the last series post we discussed ways to reach early retirement through a combination of taxable investments and retirement contributions that may be withdrawn before traditional retirement age. This post picks up where the other left off; we’ve now reached that golden age of 59 1/2 and may begin withdrawing from our traditional retirement plans.

Should we invest in both a Roth IRA and a 401(k)? Should I count on social security income, and if so, should we elect to receive early payments? What alternative investments can we make to fund retirement?

Forget Everything You Thought You Knew About Retirement

Our strategy for retirement is different from the more traditional idea of working somewhere 40 years, retiring, and drawing social security for the next two or three decades (hopefully). Our plans for retirement have been influenced by a shift in some of the long-held financial beliefs.

Things like a guaranteed 8% return in the markets may be soon be a distant memory. Sure, some years will be good and some bad, just as it always has. However, I suspect there will be more volatility and negative financial news than anyone my age remembers. So our plans have been molded by life experiences, the political climate, and even larger economic trends that have developed in our lifetimes. Our investments will be more conservative, and we will always lean to being “cash heavy,” because we value preparedness over the chance of hitting it big.

Maximize Roth IRA Contributions

Each year, my wife and I will contribute the maximum amount to a Roth IRA. I’m a big fan of the Roth IRA, for several reasons. First, the earnings in a Roth IRA grow tax free, and since you are using after-tax dollars, contributions can be withdrawn at any time, for any reason (making the Roth sort of a 2nd pseudo-emergency fund).

The Roth IRA also has no mandatory distribution age, meaning if you hit 59 1/2 and don’t want to tap your Roth IRA balance, you don’t have to. Traditional IRAs require distributions at age 70 1/2, meaning you could be forced to reduce the amount you leave to heirs thanks to mandatory distributions.

With about 27 years until we reach that 59 1/2 years-old threshold, my wife and I could save a large amount in our Roth IRAs, assuming we don’t tap contributions early to fund early retirement (something I mentioned as possibility in the last series post). Assuming a 6% average return on our $10,000 yearly investment, we would have nearly $700,000 in Roth IRA savings in 27 years.

Maximize 401(k) Contributions

In Adam’s recent post asking whether or not he should save for retirement or pay off debt, it seemed the consensus in the comments was Adam should contribute through his employer’s match, but use any remaining funds to reduce his debts. I agree; there is nothing like “free” money in the form of matching contributions.

However, there is a larger question here. After becoming debt free, should one continue to increase 401(k) contributions to the maximum yearly amount (currently $16,500), or should they invest that money elsewhere in a more diversified mix of asset classes (paid-for real estate, business ventures, etc.)? I don’t believe there is a right or wrong answer here. but it seems to me that if all you can afford to do is stretch to max out your 401(k), you may do better to spread that money around a bit. On the flip side, if you can afford to save above and beyond the yearly maximum, then you should first fund all tax-advantaged accounts, such as a 401(k).

What did we decide? After much deliberation, we decided to slash a few budget items and go after the max 401(k) contributions, recognizing we may not be able to do this every year going forward. Fortunately, we are now debt free, and through my blogging pursuits, we have what amounts to a second income. I recognize this does not work for everyone, and it certainly didn’t work for us until just recently. In fact, I haven’t even contributed to a 401(k) in the last few years while we whittled away debts and built emergency savings.

If we could find a way to continue maxing out 401(k) contributions until retirement age, we would have $1.1 million, assuming a 6% return. Add in Roth IRA contributions and growth, and we’re approaching $2 million. Of course, as I mentioned in my last post, this is not likely to happen because I want to move away from full-time employment in the next 12-15 years. If we kept up our goal of maxing 401(k) for just 15 years, we could still build a 401(k) nest egg of just over $400,000, and another $250,000 in Roth IRAs. Not bad at all.

Will We Receive a Return On Our Investment In Social Security?

In a word, no. I don’t believe we will. Put another way; don’t count on it. I personally believe social security as we know it today will not exist in another 15-20 years. It can’t, mathematically, as soon there will be many more people receiving benefits than paying in. That sort of upside down pyramid doesn’t work – just ask anyone associated with a failed Ponzi scheme.

Now, I am not as radically anti-social security as some. I just like the idea of controlling my own investment dollar, because I’m confident I can earn more than the U.S. government can. Enough of that, I’m not out to make a political statement. I am simply trying to reinforce the idea that people in their 20’s and 30’s should not expect to be able to live on social security in retirement.

If we do receive some form of payment from social security, just consider it a bonus, but certainly don’t count on it for financial survival. If the program is still solvent when I reach the age eligible to receive early payments, I’ll likely sign up. After all, nothing is guaranteed – neither my health or the continued viability of the program. Unfortunately, several people close to me paid in their whole lives and never received any benefits, or received very limited benefits through disability before dying young.

Alternative Investments for Retirement

In addition to the traditional types of investments I’ve listed here (and in earlier series posts), we are also interested in things like paid-for real estate. Specifically, we’d like to pay off our own home well before contemplating an early retirement. I have always thought living mortgage-debt free must be the ultimate in financial freedom.

Just imagine no credit card debt, no car payments, and no mortgage payments. Imagine the options available to someone in that position. Imagine the freedom they must feel with the only income requirement to earn enough to cover basic living expenses, and save for future ones. That’s it.

In addition to real estate, I will always have a side hustle or two going, and in the future may elect to invest more money to grow a current hustle, or develop a new one, without introducing too much risk into our lives. I started Frugal Dad over two years ago on less than $50, so it might be tough start something even more frugal!

In the final post in this series, we’ll look at one last topic: giving. Yes, part of our saving strategy is to give a lot away. I’ll share a few ideas I have on the subject, and as usual, try to put some specific numbers to our giving goals going forward.

Post by Frugal Dad

Any post about saving for early retirement should first define the author’s meaning of “early” and “retirement.” Combined, these words are typically understood to mean walking away from paid employment earlier than the traditional retirement age. I guess I agree with that broad definition, but I’d like to take the definition a little further before getting into the actual numbers.

What Does Early Retirement Mean To Me?

The older I get, the more my definition of retirement changes. When I was young, I envisioned retirement as a time of leisure, where older people traveled to exotic locations, took cruises, and when they weren’t traveling, played golf, went fishing, and generally enjoyed a life of leisure.

Of course, now that I’m older, I recognize this is not how the average retiree’s years are spent. Unfortunately, thanks to the Great Recession of 2008, many soon-to-be retirees saw half of their retirement saving disappear. This has lead many retirees to hang on to their jobs, or return to other types of jobs (often times lower paying) than the careers they had for most of their adult lives. This is a sad reality for many, and a cautionary tale for the rest of us.

For me, early retirement is all about options. Living without the worry of needing to work a traditional 8-5 job frees up many opportunities for more worthwhile ways to spend time. For us, that means doing some travel and doing more things with our time to make a difference in the lives of others, particularly young people. We married young, had kids young, and skipped over the period in our lives where we would be able to do these types of things, so we’d like to recapture a bit of that after the corporate grind is completed.

Saving For Each Phase of Retirement

Uncle Sam has dictated retirement for many people to mean age 59 1/2 (the age you can tap most retirement accounts without penalty), or 62 (if you plan on receiving early benefits from social security). Personally, I use neither of these age milestones as a guide, and plan to save in such a manner that I can experience freedom from paid, full-time employment long before reaching 59 1/2.

To identify the types of savings we’ll need to have in place to meet our own milestones, it’s best to work backwards from the next upcoming event. In this case, let’s start with early retirement at 47 years-old, some 15 years away.

Phase I: Early Retirement on Taxable (and Tax Free) Savings

Over the next 15 years my wife and I plan to maximize both our Roth IRA accounts, and my 401(k) through my employer. Using the current maximum contribution levels for Roth IRAs, this would provide $150,000 in contributions. Remember, Roth IRA contributions may be withdrawn at any time, without tax or penalty. Assuming we plan to live on about $50,000 a year, this would only last 3 years, barely getting us to 50 years-old.

A better plan would be to use taxable savings to bridge the 12-year gap between 47 and 59 1/2 (the age we can begin to withdraw from retirement accounts).  We’d only need about $600,000 in savings outside of retirement accounts to pull this off. Only. I laughed at myself after writing that.

Pretty tough to carve out $600k in savings in the next 15 years (even earning a modest 6.5%) while maxing out retirement accounts, funding college savings, and meeting our previously mentioned short-to-medium range savings goals. Not like we have an extra $25,000 a year sitting around to invest.

So the numbers appear unattainable, but the exercise was still worthwhile. It provides us with some real feedback for the variables we set, and we can now tweak those inputs to determine the impact. For instance, if we delayed early retirement just three years to age 50, we’d have another $30,000 in Roth IRA contributions. Our taxable nest egg required to fund the gap from 50 to 59 1/2 would drop to $500,000, and since we’d have a little longer to save, we would only have to divert $1,200 a month to taxable savings. The $1,200 a month figure sounds eerily similar to an average mortgage payment, doesn’t it?

When you break the numbers down this way, two things become apparent. First, early retirement is not just a pipe dream, if you are a disciplined saver and avoid debt. Second, I sure wish I had started this plan 10 years ago!

Up next – Retirement Savings Phase II: Drawing from the Nest Egg

Post by Frugal Dad

Now that it is 2010 I am psyched to make even more contributions to our Roth, but wondered if I should wait until the end of the tax year, make monthly contributions, or try to plunk down all the money up front. Turns out this is a costly decision.

Putting aside thoughts on market timing, and market predictions for 2010, it seemed like socking away the maximum contribution early in the year was the way to go. Of course, this meant trying to come up with $5,000 after already depleting some savings to fund last year’s Roth.

Just as I was feeling nervous about moving another $5,000 from my cash reserves, I was reminded of my own advice: max out Roth IRA contributions because they can be withdrawn later without penalty. That’s right! Assuming I had not lost my entire investment in the Roth account, I could simply withdraw a portion of the $5,000 contribution later in the year in an emergency.

The Impact of Delaying Roth IRA Contributions One Year

So what’s the advantage of tying up my savings so early in the year? Using Dinkytown.net, I ran a couple calculations with the following assumptions:

Let’s assume I turn 30 years-old On January 1, 2010, I invest $5,000 in a Roth IRA earning an 8% return. I continue to invest $5,000 on my birthday (January 1st) for the next 35 years. My original $175,000 in Roth IRA contributions would grow to $930,511.

If I delayed that first contribution until my 31st birthday, I’d only have $856,584. This is essentially the same result you’d get by waiting to contribute until the end of the year. And while it is nothing to sneeze at, you would lose about $74,000 in compounding growth by waiting a year to get started.

This certainly underscores the important of starting early. It also reinforces my plan to encourage our kids to open Roth IRAs as teenagers when they begin earning an income – even if we have to help them fund the account up to their income. Imagine what the numbers would look like if you started saving at 17 years old!

If you are concerned about earning too much money, contribute now and adjust later. It is possible to avoid penalties if you take corrective action by the due date for making Roth IRA contributions for that particular tax year (typically April 15th or the day you file your return, whichever occurs earlier, but not counting extensions, etc.).

I Have No Savings – Should I Borrow To Make Roth Contributions?

After being in debt for so long, I am very reluctant to borrow again. However, borrowing $5,000 at a very low interest rate (or even free if you can catch a zero-percent balance transfer) might make sense considering the amount of compounding growth you give up over an investing lifetime. Personally, I would not borrow the money, and look for another way to fund the contribution – a side hustle, selling something valuable, but not sentimental, etc.

Whatever you decide to do, do it quickly, as hundreds of dollars are sliding by for every day you put off funding a Roth IRA.

Post by Frugal Dad

Let’s say you are still working to build a fully-funded emergency fund, but only have one month of expenses. You manage to scrape up a few thousand dollars to save near the end of the year (a bonus, an inheritance, whatever), and would like to open a Roth IRA. If you are like I was, the thought of locking that money away in a retirement account terrified me. What if I have a big emergency two months after I open my Roth, and before my emergency fund is fully funded?

Never fear. If you do have a big emergency soon after contributing to your Roth you can simply withdraw your contributions without penalty. The rules here are different from other tax-deferred retirement savings plans because the money you invest in a Roth has already been taxed. However, the earnings in your Roth IRA have not been taxed, and therefore must be left untouched, unless you meet one of a few exceptions for withdrawing earnings tax and penalty free. Here’s the language from the IRS.gov website, Publication 590, related to making early withdrawals of your contributions from a Roth IRA:

Are Distributions Taxable?

You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s).

So there you have it; straight from the horses mouth. Withdrawals of regular contributions made to your Roth IRA are not counted towards your gross income. Does knowing you can withdraw Roth IRA contributions early without penalty make you more likely to max out your Roth IRA contribution for the current tax year? It did for us. For the first time in our married lives we maxed out my Roth IRA contribution (currently $5,000), as well as my wife’s spousal IRA (another $5,000).

In the event of an emergency larger than our emergency fund could handle, that $10,000 would be available to us (assuming the market doesn’t tank again). And that is something to consider. I would not suggest using a Roth IRA as your only source of emergency funds, because chances are your investments inside the Roth are exposed to more risk than traditional emergency fund savings.

However, Roth IRA funds could certain supplement your emergency savings, or some other savings goal, such as parking money to be used for a down payment on a first home (by the way, this is one of the qualifying events for which you can withdraw Roth IRA earnings tax free, assuming the account is over five years old).

With compound interest being such a close personal finance ally, the sooner you start investing in retirement funds, the better. Remember, you cannot go back and invest in a Roth IRA for previous tax years. It’s now or never. So go ahead and set aside some money in a Roth, and try your best not to withdraw those contributions. But remember they are there if you absolutely need them.

Post by Frugal Dad

No, I’m not going to list some new vocabulary words for you to use when your account goes down by 20%. Sorry to disappoint.

Instead, I’m going to share with you five 4-letter words that should be in everyone’s vernacular when it comes to their money and finances.

Take a look at the list and see if you are using these important 4-letter words!

1. Save

This should be a common word used in your household.

How much are we going to save and where are we going to save it are extremely important questions to be asking yourself regularly.

What this recent economic downturn taught us is the importance of having some savings built up in case a major crisis hits (i.e. job loss etc.).

The average savings rate has gone up to about 5% according to the Bureau of Economic Analysis.

This is a good trend especially when you look at the chart to see where the savings rate has been in the last several years – but there’s still major headway that could be made. Make sure that “save” is a regular word you’re using.

2. Give

Giving is a key part of being a good humanitarian.

You’ve heard the old saying, “It’s better to give than to receive”. Why is that? Because when we’re less consumed with ourselves and more concerned for the welfare of others it benefits them and brings us more joy!

The most miserable people in the world are generally the ones who are self-absorbed misers.

There are countless numbers of poor, weak and downtrodden folks who are waiting for us to be a Good Samaritan.

Whether you give money to the homeless, volunteer in a soup kitchen, give to organizations that provide relief for the under-privileged – you should find something that you are actively giving your time and money to.

3. Risk

Risk is a four-letter word that gets used often, but many times in the wrong way. What I mean is that most people often assume they are a riskier investor than they really are.

It seems like people love risk in a bull market and can’t stand it in a bear market.

It’s important to review how much risk you are willing to take so that you can create a well-diversified portfolio that should generate more consistent returns with less volatility.

4. Roth

If you qualify for a Roth IRA, this is one four-letter word you don’t want to ignore.

What exactly is a Roth IRA? Basically it’s an Individual Retirement Account with after-tax contributions and tax-free withdrawals.

Given where tax rates are currently (low) compared to where they’re going to be in the future (high), it makes sense to check this type of account out now and put it to good use.

5. Debt-Free

OK you got me, that’s two four-letter words put together, but the point is learning to use these words together will help you get on track for your financial goals so much more quickly.

Resolving to be debt-free is a decision you won’t regret. Sure, it’ll take some discipline, hard work and a lot of sacrifice, but it’ll be so worth it in the end.

How do you become debt-free? First you need to make a decision to go for it. Secondly, put a plan in place to cut back on expenses, increase income if possible and use as much discretionary cash flow as you can to start knocking out your debt!

There you have it. Five four-letter words that are OK to say in front of your kids and even better to implement in your personal finance journey!

Post by Frugal Dad