Steps To Grow Your Net Worth When You Don't Make A Six Figure Income

The following is a guest post from Danny Kofke, author of How to Survive (and Perhaps Thrive) on a Teacher's Salary.

It seems everywhere we look these days, we see something telling us how bad the economy is and how tough times are.  I agree that for some this is true but, from personal experience, you can still live a wealthy life on a moderate income.

My name is Danny Kofke and I am a school teacher and author of the book ""How to Survive (and Perhaps Thrive) on a Teacher's Salary". My wife, Tracy, is a former teacher and now stay-at-home mother to our two young daughters. Despite earning a moderate income, we have no debt except our mortgage, have a 12-month emergency fund, invest so that we are on track to retire with a sizable nest egg, and live a financially secure life on a teacher's salary.

Here are some steps Tracy and I took that have enabled my family to thrive on a teacher's salary:

Build Up An Emergency Fund

This was the key step for us.  I think this is important in case Murphy's Law comes knocking.  You never know when/if the transmission in your car will go or the air conditioning unit for your house breaks in the middle of August.  Tracy and I wanted at least $3,000 in this fund before moving on to the next step (we added more later on as we had less debt).  We wanted a couple months of living expenses in this fund in case an emergency - when I say emergency I don't mean a 50 inch plasma television either - happened.  This way we had the cash on hand and did not have to use credit cards to pay for an unplanned event.

Pay-Off Your Debt

After getting $3,000 in an emergency fund, Tracy and I started paying off the debt we had.  We paid-off our credit cards and car - we just had one car at this time.  I know some recommend paying off all your debt at this point but we kept Tracy's student loan and our mortgage because we wanted to move on to investing so we could use the magic of compound interest to our benefit.

We paid off our credit cards by taking the card with the smallest amount first and focused on getting rid of that.  I know some recommend paying off the card with the highest interest rate first but we wanted to build traction and see some results fast.  I think money problems are mostly emotional.  Most people know it is not wise to use credit cards but still do it because what they buy with them makes them feel good.  We knew if we saw immediate results in paying off our debt we would be much more likely to stick with it.  I think this is similar to someone trying to lose weight.  If you go on a diet and lose 3 pounds in week one and 2 pounds in week 2 you are more likely to stick to it.  However, if you don't lose any weight after a couple of weeks, you are more likely to start eating unhealthy again.  I feel that getting out of debt is somewhat like losing weight - once you get the ball rolling and see results you are motivated to continue getting rid of it.

Invest/Continue To Build Up Your Emergency Fund

At this point, Tracy and I started to invest in a Roth IRA.  We just started with $100 a month and have increased this as my salary has gone up.  $100 a month does not sound like much but, if a 25 year-old invested this amount every month for 40 years and earned a modest 7% a year, he/she would have over $262,000 at age 65!  I don't think this is enough to retire on but it is better than nothing.

In addition, at this point, Tracy and I steadily built our emergency fund up to one year's worth of living expenses.  This was before the recession so a lot of financial advisors were just suggesting 3-6 months of living expenses in this fund.  We knew that Tracy would be staying home for as long as possible - it is 5 years and counting now - and we wanted to make sure we had enough money to cover our expenses in case something crazy happened.  This fund has turned potential catastrophes ($700 car repairs, expensive doctor's visits) into inconveniences.  This might be too large amount for you, but this is what helps Tracy and I sleep soundly at night. 

When dealing with your finances, you have to remember that the person that cares the most about them is the one that looks back at you in the mirror each morning.  It is not some advisor down the road or someone on TV.  The steps Tracy and I have taken have given us a sense of financial peace and have enabled us to live a wealthy life on a teacher's salary.

Comments

[Emily]

I'm sorry but 100 bucks a month is kind of a joke. With inflation, you will need about 3-4 million in retirement (thats assuming your home is paid off, you will be taking after tax pay of about 40K today's dollars, and will be paying about $1,000 a month in health insurance in today's dollars). Granted I may be over estimtaing, but $250 K in 40 years is nothing. People need to save more agressively (about 20K a year) if they want to make it to retirement with enough to live on.

[Anthony]

@Emily: Danny stated that they "started with $100 a month." This was a point to motivate saving, not to say that they will only ever save $100 a month. It's not explicitly stated, but I'm sure that they increased savings as time went on.

[Curtis]

I think the point is that $250k in 40 years is better than $0 in 40 years. Ideally, one would max out their contributions as early as possible, which means depositing $5,000 on Jan. 1 (or more accurately, the maximum contribution allowed for that year on the first business day of the year...), thus giving it the maximum amount of compounding time.

[BillV]

Anthony; You correct. And actually it is explicitly stated that they increased their savings.

>

[BillV]

Sorry, that's you are correct.
" We just started with $100 a month and have increased this as my salary has gone up.."

[Emily]

I just think its important for people to understand the actually realities of what is needed in retirement. I think its great to save any amount, but we all need to understand how much we should be saving and keep that goal in mind. Sorry for being harsh, I had a bad week :-(

[Crystal]

@Emily
If he gets paid around what my husband gets paid as a middle school teacher, 20k a year in savings is unrealistic. That would be a little less than 1/2 his salary BEFORE taxes. He would be living on the remaining 20k a year with a family of 4 and a mortgage...I don't see that as a realistic expectation with a mortgage payment.

He started with $100 and increased it along with his salary. If he continues to increase his savings every year and really starts socking it away once the mortgage is paid off, I think they are well on their way to a solid retirement. He may also be receiving a pension from teaching, which will help supplement their retirement as well.

[FMF]

Emily --

Here's wishing you a better week this week!!!!!! ;-)

[Crystal]

@Emily
Hope you have a great Monday! Well, as great as a Monday can be... :)

Side note, the first review of this book on Amazon.com was not favorable. The reviewer gave it 1 star. According to the review, most of the book is about how they survived when both spouses were working as teachers, they had additional income streams, and they borrowed from "grandma". The reviewer stated that only the end of the book seems to concentrate on actual tips on surviving on one teacher's salary.

The next review was 5 stars and stated that the tips in the book would help your family. The reviewer also enjoyed the style it was written in.

As a wife of a teacher, I would not enjoy trying to live and retire on my husband's salary alone. I could not imagine trying to stretch it to cover children as well...

[Eugene Krabs]

Emily, I don't think you are wrong, just one side to the truth. Hope you have a better day as well.

As for the emergency fund, I had an interesting experience earlier this year. Long story short, our contract got bought out by another company, and so, even though I stayed at the same job, I changed employers.

My old employer had no limits to employer matching, but my new employer does (but made up for it with a higher match). So, for several months, I decided to race against the clock by placing... 85% of my paycheck into my old 401(k). I still had to have a little bit left in order to pay for insurance and all that.

In order words, even though I was employed, I was living as though I didn't have a job. For four long months, I was living solely on savings alone.

And what did I learn? That my emergency fund was quite inadequate. I thought it would be good for up to at least 6 months, but I used it all up by the end of those 4 months. Why?

Good question, I'm glad you asked! :D The reason was that, in a normal situation, my income took care normal expenses while my emergency fund took care of abnormal ones. Nothing wrong there.

However, when I was living only on savings, the emergency fund had to take care of not only the normal expenses, but also abnormal as well!

That's what went wrong! You see, I only calculated normal expenses being covered! I didn't account for things like replacing my tires after a severe flat.

I don't know if this is a common mistake or if I'm the only idiot that did that, but that experience made me realize that my emergency funding had to be much bigger than I thought to accomodate not just normal expenses, but unforseen ones that I would use in an emergency as well.

So, that's my long-winded way of saying that it would be ideal for everyone to aim for one year's worth of emergency fund, but not be surprised if you end up using that up in only six months.

[Crystal]

Thanks Eugene! I hadn't thought about it like that before...

[Terry]

I'm still waiting for How to Survive (and Perhaps Thrive) on a Minimum Wage Income.

There would be a big market for it.

[Terry]

I've wondered for a long time, what happens to burger flippers who have nothing saved when they can no longer work?

Emily's comment just kinda jolted me.

[FMF]

Terry --

You're walking a very fine line. You've been warned before and my patience is waning. This will be your last warning.

[J in FL]

Is "Terry" the same "Minimum Wage" from back in the day?

[FMF]

J in FL --

I believe so.

[kitty]

"Is "Terry" the same "Minimum Wage" from back in the day?"
I think so.
Terry - it is kind of obvious, right? If you don't have anything saved you get welfare and medicaid and an apartment in subsidized housing. If there is no subsidized housing for seniors in your area, you move where there is one. Since it's obvious, why ask about it? Not every advice applies to everyone.

On a second though, maybe you should write a book "How to survive on minimum wage". This may become a bestseller and you'll solve your problems. Or you could try reality TV. Try out for "Are you smarter than a fifth grader", for example.

[billyjobob]

I don't have an "emergency fund". I always have at least a couple of thousand in the bank. And I have mutual funds that are not in a retirement account that total well over 100k. So really do I need an emergency fund? I mean if I lost my job tomorrow, I'd have plenty enough to pay the bills for a few weeks. And if i needed more I would simply start pulling a little out of the funds I am invested in. The emergency fund thing seems to me would only be needed for someone who has no investments at all. Am I right...or do I need an emergency fund?

[Crystal]

Marriage can help increase net worth, especially for two people that each make a salary that would be hard to thrive on by oneself.

I make $35,000 a year before taxes. My teacher husband makes $43,000 a year before taxes. Separately, we probably wouldn't own our own homes yet or have much retirement savings. Together, we thrive.

Terry, are you marriage material? I wouldn't want to judge you based only on your comments on this site...

[Beastlike]

Funny, I remember Min. Wage!

Hey, what do you guys think of this?

Recently, my wife and I have been putting most of our emergency fund (savings) towards our house principle since we took out a HELOC for 50k. Our goal is to pay off the home in the next 2 years and then have the wife stay home w/ the future kids. I figure I'm better off paying down the house instead of letting the reserve get 2% interest and I'm still safe because of the HELOC. Agree?

[aaktx]

It is disappointing to me that teachers have difficulty making a living wage. I believe that there are pensions for these folks provided by the government which may offset some of the retirement woes. Still it is hard to have 3 to 4 million dollars at retirement. This number is based on rosy assumptions that your index/mutual funds return an annual 9-10 percent per annum.

[corporate refugee]

@Beastlike: NO you are not safe! The holder/issuer of your HELOC can cut your access at any time for pretty much any reason or no reason. For example, if they think home values in your area are dropping too much, they will limit their potential losses by capping you at what you have already borrowed.

I would NOT depend on the availability of that credit line for an emergency.

[John Doe]

@billyjobob: Early withdrawal penalty.

OK, that's cop-out. Assume all of your money's in Roth accounts. I believe that if you deposit your money in a Roth account today, after you pay taxes on them you still have to wait 5 years before taking them out.

Also, when you take money out of investments, it's not just that money, it's also all those potential earnings. Taking money out of investments is like taking a loan against yourself.

[Beastlike]

Makes sense... Thanks Corporate Refugee....

[Julie]

@John Doe,

At any time, at any age, you can take out any of the principal (NOT the accrued interest) that you yourself put into a ROTH (not money from a traditional IRA conversion, for example.) This principal does not have to have been in the ROTH for 5 years. After 59 1/2, you can make a qualified distribution of principal & interest, but that is what needs to have been in the ROTH for at least 5 years.

For more details:
http://www.money-zine.com/Financial-Planning/Retirement/Roth-IRA-5-Year-Rule/

[corporate refugee]

No problem, Beastlike! They were doing that to lots of folks in our general area earlier this year -- wouldn't want to see you get caught up in something like that!