This week, we are observing the Fourth
of July. But at some point in your life,
you'll want to celebrate another type of
Independence Day, Financial Independence
Day. When will it occur? It's up to you.
Here are a few suggestions for speeding
it along:
-
Feed those retirement plans. The
most important thing you can do to
hasten your Financial Independence
Day is to continually save and
invest for retirement. Take full
advantage of your 401(k) or other
employer-sponsored retirement plan.
Your earnings have the potential to
grow on a tax-deferred basis and you
can create an investment mix that
reflects your risk tolerance, time
horizon and retirement goals. Also,
even if you have a 401(k), you may
be eligible to invest in a
traditional or Roth IRA. A
traditional IRA has the potential to
grow tax-deferred, while a Roth IRA
has the potential to grow tax free,
provided you've had your account at
least five years and you don't start
taking withdrawals until you are at
least 59-1/2. And you can fund your
IRA with a wide range of
investments, such as stocks, bonds
and certificates of deposit (CDs).
-
Don't let your debts get out of
hand. You probably can't avoid all
debts, and some of them, such as a
mortgage, at least offer the
possibility of tax write-offs. But
the larger your debt payments, the
less money you'll have to invest, so
do what you can to live within your
means.
-
Prepare for emergencies. If you face
some unexpectedly large medical
bills, or if you need a new car or a
major appliance, will you have the
money available? If not, you may
have to dip into your investments -
and that can slow your progress
toward your eventual financial
freedom. To avoid this problem,
build an emergency fund containing
six to 12 months' worth of living
expenses. Put the money in a liquid
vehicle - one with a lesser risk of
loss of principal.
-
Be a "tax-smart" investor. Taxes can
eat into your investment returns, so
you'll want to become a "tax-smart"
investor. As we've already
mentioned, your 401(k) and IRA offer
tax advantages, so you'll want to
contribute as much as you can afford
to both these vehicles. Beyond that,
perhaps the most important step you
can take is to follow a
"buy-and-hold" strategy. By
purchasing stocks, and holding them
for many years, you'll put off
capital gains taxes until you sell.
This technique also can help you
hold down commissions and give your
stocks a chance to appreciate.
Another tax-advantaged move that
could benefit you - particularly if
you're in one of the higher tax
brackets - is to invest in municipal
bonds. Your interest payments will
be free from federal taxes; if the
municipality that issues the bond is
in your state, your interest
payments also may be exempt from
state and local taxes. (However,
some municipal bonds are subject to
the alternative minimum tax, so do
your research before you invest.)
By making the right moves,
you can someday reach your own personal
Financial Independence Day. So put it on
your calendar of the future - and then
do what it takes to reach that happy
date. |
