One Step that Leads to Wealth

Lifehacker shares a post from Budgets are Sexy (a site I love, BTW) that guarantees you'll become wealthy if you just take one of these simple steps:

1. Max out your ROTH IRA every year ($5,500)
2. Max out your 401(k) every year ($17,500)
3. Max out BOTH your IRA and your 401(k) every year! ($23,000)
4. Pay off your entire mortgage and save the future payments

And here's the thinking behind this:

You do any of those on rotation year in and year out, and I guarantee you'll reach financial freedom in 20-30-40 years from now. All depending on your expenses, and lifestyle, yada yada… (And if you're not in a position to invest large amount of money every month/year, at least start with SOMETHING. Even just $100 or $200 a month can do enough to snowball you towards your goals faster!)

I agree and disagree. I agree in the sense that if you do almost anything that allows you to invest several thousand dollars each year for 40 years, you'll be wealthy at the end of those four decades. I disagree (a bit) because it's not that simple. There are several steps most people would have to take to get even close to saving $23k a year, especially considering the average household earns about $50k a year.

And while I appreciate the simplicity of the advice, I prefer multiple steps toward wealth. Saving/investing plus growing your income plus  keeping your cost of living low and so forth.

What's your take on the list? Good or bad?

Comments

[Graystoke]

Ever since I graduated and started my first job, I contributed to a 401K, some of the companies I worked for matched but many did not. I didn't contribute the max for several years and when I got married I had my wife max out as well. Every time we changed companies we consolidated the 401K into a Roll-over IRA. Between the 2 of us we have a sizable next egg. We also contribute to a IRA as well .. I think that is VERY good advice.

In terms of paying off your mortgage, I don't think that is quite as good an option, especially with the current interest rates. I did the math with paying off the mortgage then saving the payments into an investment account and the numbers didn't work in my favor. With the tax break but more importantly the current investment gains I have, it made sense to keep my 2.75 15 year mortgage for as long as possible!

[Jeffrey]

Remember that J. Money does not usually write in depth (as he says on his About post).

He has gone from $58,769.65 to $447,240.46 in 6 years. He says that this is because he started maxing out his 401k (bullet point #2), and then maxing out both his retirement accounts (bullet point #3). So he is like you in this much: He has done it and can say it works.

I think 1, 2, and 3 are helpful. 4 is debatable at best given the math, but it appeals to people who find retirement accounts "boring".

If this list gets anyone to start saving, it is worthwhile.

If a follow-up post goes into more depth, that would be better.

[Young Limey]

I agree 1-3 are large pieces of the puzzle (at least for my spouse and me). If you and your spouse can both do these that's $46k in savings each year, plus a company match you are over $50k. You won't be able to get there overnight, but over time it's possible.

I would also add to invest in low cost index fund(s) over time, that match the S&P (like the ETF 'VOO' for example). Stay invested through ups and downs etc.

[Matt]

#3 and #4 have been the biggest impact for me.

Ever since paying off the mortgage in 2012 it has freed up that cash for investing and no longer a liability in the retirement equation.

Doing #4 has also made it easier to do #3 without pain.

[J. Money]

Well hello there, good sir :)

Jeffrey hit my thoughts perfectly - If this just gets someone to stop and pay attention for a hot second, my work is done. Although hopefully they then *pull the trigger*

I think the problem with most people is it's all so complicated in their heads and "money management" requires budgeting and investing, saving, insurance, and on and on and on. Which, of course, it does, but if they at least get excited with the *one* rule of just maxing out a retirement account, it'll get them moving on to the other areas in life. Once I saw my $$ growing I became addicted!

And you'll see $5,500 up there too - not just $23k. Yes, that's ideal, but a lot of people can strive for $5.5k if they really care enough. I never mention it's easy!

Thanks for sharing the link with your audience :)

[Jon]

Hard to imagine a scenario where someone saves $23,000 for 40 years and doesn't end up wealthy. Hell, even with no return whatsoever, that's $920,000. Even a percent or two after inflation gets that over a million, and while a million ain't what it used to be, it's certainly enough to be financially independent.

[Sarah]

Of course, a person investing that money over the 2003-2008 period, rather than over a period that featured a huge run-up in the S&P, would almost certainly not have ended up with those results. Because, yeah, it is more complicated than that. Anything that persuades people that there *is* such a thing as a (legal) get-rich-quick scheme is harmful.

[Jonathan]

Sarah - I'm not sure anyone would argue that the suggestions here are "get rich quick" schemes given the 20/30/40 year timelines. I also can't think how anyone would argue that any of those suggestions are harmful to the average person.

[Old Limey]

1) ROTH IRAs were not available in 1960 when I started my first job in the USA at age 26. Stayed 32 years with the #1 defense contractor as an aerospace engineer.

2) I maxed out my 401K contributions from 1960 to 1992 until I retired at 58.

3) Converted 401K to an IRA in Jan 1993 but couldn't contribute because our only income was our fairly small pensions, and later on social security.

4) Paid off all debts upon retirement at end of '92. Investments $320K in mutual funds at start of '93.

Upon retirement I learned how to practice market timing and fund selection, with never a losing year. Rode the DOT.COM bubble up, bailed out close to the top in March 2000 with investments then at $3.37M and largely in junk bond funds.

Investments today, $7.68M primarily in muni bonds, corporate bonds and CDs with about $800K in two income funds.

[Steve]

I think putting $100k/year into a taxable equity investment and buying one investment property with all cash every year would even be better than his proposed steps...

In other words...yes...these steps gloss over the hard part...spending that much less than you earn every year...

[Old Limey]

Steve:
One guy I used to hike with regularly concentrated his wealth into buying rental properties. This worked well for him when he was a young man but by the time I got to know him he was in his seventies and he was still managing them all single handed. It seemed like he was having one problem after another with his tenants and he did all of the repairs himself. I was surprised just how negligent some renters are in looking after the property, particularly those with teenagers. By the time he would find out that there was a problem with a bathroom, the damage was already done and he had to spend days crawling around underneath, replacing flooring and floor joists. He had other tenants that were in arrears with their rent and then did a disappearing act and left the state.

My conclusion was that it's essential to find a really good property manager if you have multiple rentals, particularly as you get old.

[Erik]

@Old Limey - there is a big difference between hiring a property manager and doing all the work yourself. We have had 4 house for ten years. At first I would try to fix a leaky toilet before calling a plumber but I quickly realized this was a bad plan.

We manage our 4 properties but other than finding good tenants we don't do any of the other work ourselves. Just like a property manager calls a plumber, we do as well. There isn't that much month to month maintenance on properties. One call every other month to a plumber or an AC contractor is usual.

Turning over a house and finding new tenants is a big pain. That is probably 20-40 hours worth of work. For this reason I never do six month leases and my tenants average over 2 years. If you break that down by year and add in the occasional call I'd say around 15-20 hours a year per property is a good estimate. For 4 houses that is 60-80 hours a year. I'd say that isn't too much of a time investment but certainly not completely hands free.

[getagrip]

I did a lot of things wrong when I was fist on my own and then for many years after being married, but the best thing I ever did was save consistently, in retirement and college funds, and leave it alone. Once I got a better handle on things and on eliminating debt, that made an even bigger difference.

So the advice has merit, and I've shared this in a similar form with my kids. They are aware of compound interest, starting savings when young and not touching it, etc. But as usually the problem isn't the head bobbing claim of understanding, its the actual follow through with real actions. I just keep reinforcing the ideas, but all you can do is lead the horse to water...

[M-19]

@Old Limey

You have mentioned many many times that you learned how to time the market and have turned $350K into $7 Million as a result. You have mentioned that this had something to do with some software that you bought through a wall street journal ad ( and later actually wrote companion software for).

However-- you never , to my knowledge have told us how we can get the education, software or expertise that you obtained.

Is the software still available? Is there a way you can recommend books or seminars that will allow the rest of us to learn what you have learned?

Would you be willing to educate the rest of us by writing a post or two on this blog ( if FMF agrees?)

Thank you in advance

[Old Limey]

@M19
The product that I use is put out by a company in Baton Rouge,LA called Investor's FastTrack. The software that I use is called FT4Web and I have been using it since 1993 when I retired.

Now that I am a bond investor I don't have need for any market timing so I use it in a very, very limited way. It offers data for most of the available Funds, ETFs, and Market indexes and it takes a lot of time and work to get up to speed with it.

I am afraid I am not willing to start educating others in its use, however the company provides telephone support for subscribers and potential customers.

[Anonymous]

Haha, love the site! But yes every single reply to a topic Old Limey never fails to mention his accomplishments again and again and again.