Month: February 2021

  • How to Stop Comparing Yourself to Others Financially

    You wanna know one of the most common complaints I hear from friends, readers, and anyone else I talk to about personal finance?

    “I can’t help but look at my friends and feel like they’re doing better than I am.”

    People tend to feel that their friends are making more money, don’t have as much debt, or aren’t facing the same financial hurdles they are.

    And so they spend hours stuck in comparison, feeling jealous that they don’t have as much money or feeling less than for not being in a better place financially.

    All this comparison does is hold you back from reaching your goals and make you feel resentful when you don’t need to.

    Because here’s the thing: those people you’re comparing yourself to financially are comparing themselves to someone else — maybe even you.

    In this article, I’m sharing why you need to stop comparing your finances to other people’s and how you can finally do that.

     

    How to Stop Comparing Yourself to Others Financially

     

    Why you need to stop comparing your finances to other people’s

    YOU’RE ONLY SEEING THE HIGHLIGHT REEL

    When was the last time you posted something on social media about your financial struggles, the fight you had with your partner, or the bad day you had at work?

    I’m guessing it’s not likely. People don’t tend to share the hard stuff on their social media pages. Instead, they share the highlight reels. They share their absolute best days and favorite moments.

    And from those moments, you have no idea what someone’s life really looks like.

    It’s easy to look at someone who just went on your dream vacation and feel jealous that they could afford it and you can’t. But what you might not see is that they put the whole thing on a credit card, and it will take them years to pay it off.

    This is just one example, but it shows you that what someone posts on social media isn’t really a good indication of what’s going on behind the scenes.      

     

    COMPARISON SLOWS YOUR OWN PROGRESS

    Have you ever noticed how all-consuming it can be to compare yourself to others?

    Imagine you’re running in a race, and you keep looking around to see where you’re fellow runners are. You’re distracted and aren’t focused on the trail ahead of you. Not only are you running more slowly than you otherwise could, but you may also stumble since you aren’t looking where you’re going.

    The same applies to your finances.

    You notice that your peers aren’t struggling with the same student loan debt you are, and you spend all of your time thinking about it. Meanwhile, you aren’t spending time thinking about how to achieve your goals faster. So instead of helping get you to where you want to be, that comparison trap actually holds you back.

    Unless you have a very good reason for comparison (i.e., comparing your salary to others in your industry to make sure you’re being fairly compensated), it’s actually hurting you.

     

    COMPARISON LEADS TO MORE SPENDING

    Comparing your finances to other people’s can get really expensive really quickly.

    A survey from 2019 found that 48% of millennials had spent money they didn’t have and gone into debt to keep up with their friends.

    What’s crazy is that we’re going into debt to keep up with other people who are going into debt to keep up with us.

    Maybe you look at your friend and think, “I’m not sure I can afford this girl’s trip, but she makes about the same amount I do. So I guess if she can afford it, so can I.”

    And she’s looking back at you and thinking the exact. same. thing.

    Next time a friend suggests something that’s a little outside of your price range, ask if you can do a budget alternative instead. Instead of hitting happy hour for wine and charcuterie, ask if you can do a DIY version at your place. I’m willing to bet that other people would rather do the same thing.

     

    YOUR PRIORITIES AREN’T THE SAME AS EVERYONE ELSE’S

    It’s easy to feel jealous or resentful that you can’t afford the same things as everyone else. But have you ever really stopped to ask yourself if you want those same things?

    I used to feel jealous of people who could splurge on makeup and clothing. And at times I went over budget to have them for myself.

    But when I really thought about it, I realized that wasn’t me. I wear basically the same outfit every day, and I rarely wear makeup. When I do, the drugstore stuff is just fine.

    Another thing to consider is that their priority might be short-term satisfaction, while yours is long-term security and happiness.

    Sure, you could afford to go on more vacations or have a more expensive car payment. But at what cost?

    Spending more money on those things might hold you back from your long-term goals of retiring early, buying your dream home, or starting a business.

     

    EVERYONE HAS THEIR OWN BATTLES

    Just like you don’t really know what the ins and outs of someone else’s finances really look like, you don’t know what the rest of their life looks like either.

    Everyone has their own battles. Yours might be financial, and someone else’s may not.

    But the person you’re feeling jealous of might be facing something that you have no idea about, whether it’s an unhappy relationship, an illness in the family, or something else altogether. In fact, they might be looking at your life and feeling jealous because you aren’t dealing with the same struggle.

     

    How to stop comparing your finances

    It’s not easy to stop comparing yourself to others, especially when we see so much of other people’s lives on social media. But with a little work and practice, you can change your mindset and stop falling into that comparison trap.

     

    PUT YOUR GOALS FRONT AND CENTER

    For every minute you spend thinking about someone else’s financial situation, that’s one less minute you spend thinking about your own. And the time you don’t spend thinking about your own goals just pushes back the date of when you’ll finally reach them.

    If you want to change your financial situation, put your goals front and center. You can do this by:

    • Sitting down and setting specific and actionable goals
    • Write your goals down somewhere that you’ll see them each day
    • Carve out time in your calendar every week to work on your goals
    • When your mind starts to focus on other people’s finances, sit down and do something to move you one step closer to your goals, even if it’s as simple as updating your budget

     

    CHANGE YOUR MINDSET AROUND MONEY

    How does money make you feel?

    For many people, the answer is anxious, angry, stressed, resentful, depressed, and so much more. And it’s easy to feel that way when you think about all the things going wrong, or all the financial struggles holding you back.

    But what if you changed the way you thought about money?

    For example, let’s say you’re working on paying off debt. And each month, when you make that debt payment, you feel all sorts of negative feelings.

    You feel angry at past you for getting into debt in the first place. You feel resentful at the system where college is so expensive and people have to go into debt to get a degree. You feel embarrassed for letting your debt situation get so out of control.

    But what if you decided to think something else?

    Rather than focusing on the things your debt doesn’t allow you to do, think about the things it did. Instead of focusing on how your student loan payment sucks, think about how that debt allowed you to attend your dream school that you would never have been able to pay for with cash.

    Think about how your credit card debt, while perhaps ill-advised, allowed you to go on the best vacation you’ve ever had or leave an abusive relationship.

    Think about how your last car broke down unexpectedly, and you’re so grateful you were able to get a loan to buy a new one.

    It’s not going to be easy to change these thoughts. You’re actually going to have to work at it. But if you continue to remind yourself of these thoughts each time the negative ones come up, you can finally start to change your mindset around money.

     

    PRACTICE GRATITUDE FOR WHAT YOU HAVE

    Listen, I know that just about every self-improvement article you’ll ever read is going to tell you to practice gratitude, but there’s a good reason for that.

    Especially when it comes to your finances, showing gratitude for the things you already have is one of the best ways to reduce comparison and feel really happy with where you are.

    It’s easy to feel frustrated or resentful about the six-figures of student loan debt my husband and I had when we got married. And it’s really easy to look at the people in our lives who aren’t struggling with the same thing and feel a bit jealous.

    But when I really pay attention to the great things in my life, I’m not jealous at all.

    I have an amazing husband, a dog who we love, and we get to travel the country in our RV. Debt or no debt, I wouldn’t trade my life for anyone else’s.

     

    REDUCE YOUR TIME ON SOCIAL MEDIA

    I find that social media is one of the biggest culprits when it comes to comparison.

    When you see others posting their highlight reels online, it’s easy to wonder why they seem to be doing better than you. Maybe they’ve gone on an amazing trip, have a wardrobe that’s out of your price range, or are buying a house when you can barely afford your student loan bill.

    If you didn’t see those things on social media, you wouldn’t know most of them are happening. I’m all for keeping up with close friends and family on social media. But do you really need to know what the people you went to high school with are spending their money on?

    I certainly don’t expect you to fully give up social media. But you can either unfriend or unfollow people who are just causing you to compare, or you can simply spend less time on social media. It could do wonders for your mental health.

     

    Final Thoughts

    Comparison is one of the worst feelings because it constantly makes you feel as if you’re doing something wrong or aren’t enough. But it’s not true.

    By overcoming that comparison trap, you’ll have more time and energy to focus on your own finances, and you’ll reach your goals that much faster.

  • 6 Easy Ways to Automate Your Finances

    Have you ever added up how much time you spend each month on your finances? Or, separate from the time you spend working on your finances, how much time you spend stressing about your finances?

    When I first decided to change my financial situation, it felt like hours per week. Hours per week, and I never seemed to make any progress. And the more time I spend without progress, the more the stress would eat into every other part of my life.

    Finally, I found one trick that saved me time, reduced my stress, and finally started making a difference: automating my finances.

    Money doesn’t have to be hard. In fact, sometimes the easiest solution is also the one that makes the biggest difference in your finances. In this article, I’m sharing why it’s important to automate your finances and six easy ways to get started.

     

    6 Easy Ways to Automate Your Finances

     

    Why it’s important to automate your finances

    I truly believe that automating your finances is one of the simplest and most effective ways to take your finances to the next level.

    There are a few reasons I think it’s the best way to go:

    1. Automating your finances saves you time. Chances are, you spend more time on your finances each month than you think. There’s paying bills, checking your account to see how much money you have left, and so much more. The more you automate, the more time you save.
    2. Automating your finances saves you money. Have you ever forgotten to pay a bill on time and gotten stuck with a late payment penalty? Or maybe you didn’t realize how much money you had spent, and so your bank stuck you with an overdraft fee? You can avoid these things when you automate your finances.
    3. Automating your finances saves your credit. Anytime you miss a monthly payment, it could have a negative impact on your credit score. And your credit score is what determines if you can get loans and credit cards to help with future goals.
    4. Automating your finances helps you reach goals you may otherwise not. I didn’t start really saving money for my goals until I automated my finances. Whether you’re saving for a house, paying off debt, or something else, automating your finances will help you get there.
    5. Automating your finances reduces stress. For some people, managing their money is a huge source of stress. Imagine if you could eliminate the things that bring you so much stress, like paying bills each month or worrying about where your money went.

     

    How to automate finances

    Ready to start automating your finances? Here are the six easy ways anyone can automate. The best part is that each only takes a few minutes to set up, but altogether, they’ll save you tons of time each month.

     

    1. SET UP AUTOMATIC BILL PAY

    If you’re brand new to automating your finances, setting up automatic bill pay is the perfect place to start. It only takes a few minutes to set up and it will save you time each and every month.

    I think just about every company allows its customers to set up automatic payments at this point. Some even offer a discount when you use autopay.

    Using automatic bill pay has two big benefits. First, it saves you time each month since you don’t have to sit down and manually pay each of your bills.

    The other benefit is that it could potentially save you money and save your credit score.

    Things fall through the cracks — it happens to everyone! And unfortunately, sometimes, the thing that falls through the cracks is paying a bill on time.

    When you’re late on a bill, you’re often stuck with a late payment penalty and a ding on your credit report. By setting up autopay, you never have to worry about that again.

     

    2. AUTOMATE YOUR SAVINGS

    I’m not kidding when I say that automating my savings was one of the most important changes I made in my finances.

    Every month, I’d tell myself that I would save whatever money I had left at the end of the month. But somehow, there was never anything left when the end of the month rolled around.

    I finally set up an automatic transfer from my checking account to my savings account the day after I got paid each month. I never had to think about it, and I honestly barely noticed having less money in my checking account, and yet my savings was growing.

    You can use these automatic transfers for so many purposes.

    If you’re still saving up your emergency fund, you can transfer money to a high-yield savings account each month.

    Once you’ve got your emergency savings fully funded, you can use your automatic transfers to save for other big goals.

    Read More: How to Build Your Emergency Fund & How Much to Save

     

    3. TRACK YOUR SPENDING WITH A BUDGET APP

    Many people I talk to find the idea of tracking every expense exhausting. For those people, I recommend signing up for a budgeting app that does it for you.

    With most budgeting apps, you can connect your budget to your bank accounts and credit cards, and it automatically pulls in all of your spending. You can also set it up to automatically categorize your spending, so it’s easy to see how much you’ve spent in each category.

    I wrote a few blog posts to help you find the perfect budgeting app for you:

     

    4. SET UP EXTRA DEBT PAYMENTS

    If you’re working on paying off high amounts of debt, you know how long it can take. And the best way to speed up is to make extra debt payments using either the debt snowball or debt avalanche. 

    When you set up an automatic payment, you’re committing to putting extra money toward your debt each month. And that commitment is what’s going to get you debt-free ahead of schedule.

    You can do this two ways. First, you can set up an extra payment each month. Or you can just automate your normal monthly payment but schedule a payment that’s larger than your minimum required amount.

     

    5. AUTOMATE RETIREMENT CONTRIBUTIONS

    I’m almost certain that if my first employer after college hadn’t required me to put 7% of my paycheck into a retirement account each month, I wouldn’t have saved for retirement at all. 

    Honestly, it just seemed so far away, and like I had years until I had to worry about it.

    Now, almost a decade later, I can’t tell you how grateful I am that my employer required automatic retirement contributions.

    If your employer offers a 401(k) plan, by far, the easiest way to automate your retirement savings is to have your employer take money out pre-tax and put it into your account. If you’re lucky, they might even offer to match a portion of it.

    If your employer doesn’t offer a retirement plan — or you’re self-employed so you are your employer — you’ve still got plenty of options.

    For those with an employer who doesn’t offer a 401(k), I recommend setting up an individual retirement account (IRA) and setting up automatic monthly transfers.

    If you’re self-employed, even if you just run the business alongside your full-time job, you’ve got even more options. I wrote an entire guide about how to save for retirement when you’re self-employed.

    Not sure how much to save? There are plenty of online retirement calculators to figure out how much you should save each month to have enough for retirement — I recommend Personal Capital’s Retirement Planner.

     

    6. SET UP FREE CREDIT MONITORING

    Your credit score is one of the most important numbers in your overall financial picture. And anything that goes onto your credit report is likely to impact that score in either a positive or negative way.

    Far too many people don’t find out about negative marks on their credit report until they apply for a loan and the bank breaks the bad news to them.

    There are plenty of services — some of them even free — that automatically monitor your credit for you. I use Credit Karma, and one of my credit cards also offers this service for free for having their credit card.

    If a negative mark shows up, you’ll know about it right away.

    Read More: 7 Hacks to Boost Your Credit Score Quickly

     

    Final Thoughts

    Automating your finances is one of the simplest and yet most effective ways to take your finances to the next level. You can start slow by setting up automatic bill pay.

    Once you’ve checked off everything on this list, you’ll notice how much less time you spend worrying about your finances each month.

  • 12 Smart Ways to Use Your Tax Return (and 3 Things to Avoid)

    Tax season is always bittersweet. You dread collecting all of your tax forms and going through the actual labor of preparing your tax return. But it often ends with a tax refund, which is something to get excited about.

    I remember how excited I was to get my tax refunds in my early twenties. But looking back, I couldn’t tell you a single thing I did with that money. My guess is that I squandered most of it on unplanned and unneeded expenses.

    In retrospect, I really wish I’d used that money more wisely, perhaps to pay off debt or fund one of my big goals.

    In this article, I’m sharing 12 ways to use your tax return wisely, as well as three things to avoid doing with that money.

     

    There are affiliate links in this post, meaning I may make a small commission at no additional cost to you. For more information, see my full disclosure policy here.

     

    12 things to do with your tax return

    1. BUILD YOUR EMERGENCY FUND

    If you don’t currently have an emergency fund, building one should be your first priority when you get a tax return.

    People often underestimate just how important an emergency fund is. Almost 25% of Americans have no emergency savings at all, and only 41% of Americans would be able to cover a $1,000 emergency with savings.

    Unfortunately, these expenses will inevitably come up. You never know when your car will break down, or you’ll have an unexpected medical bill. And without an emergency fund, people usually have to resort to debt.

    The pandemic also showed us just how important an emergency fund is. Millions of Americans lost their jobs without having savings to fall back on.

    Not sure how much to save? I generally recommend saving at least one month of expenses while paying off debt and at least 3-6 months of expenses once you’re debt free.

    Read More: How to Build an Emergency Fund & How Much to Save

     

    2. PAY OFF DEBT

    Paying off debt can feel impossible at times. You make your monthly payments but somehow never seem to make any progress.

    Extra income injections like tax returns are an excellent way to pay down your debt faster. If you have high-interest debt like credit cards or personal loans, that’s a great place to start. If you don’t have high-interest debt, you can put your tax return toward student loans, a car loan, or your mortgage.

    Depending on how big your tax return is, you might be able to make a big dent in your balance. And even if it’s just a small amount, it’ll reduce the amount you pay in interest over the long run and help you become debt free more quickly.

    Read More: Debt Snowball vs. Debt Avalanche: Which Debt Payoff Strategy is Right for You?

     

    3. FUND A FINANCIAL GOAL

    Your tax return can be a great way to pay for a financial goal you’ve been dreaming of, like a big vacation or home renovations.

    Your tax return can help you reach your goals even faster. And if you don’t have much wiggle room in your budget, your tax return might be just what you need to reach that goal that didn’t seem possible.

    Read More: The Best Money Goals to Set in 2023

     

    4. GET ONE MONTH AHEAD ON YOUR BUDGET

    Most people spend their money as (or even before) they earn it. For example, many people struggle to balance the timing of their bills with their paychecks to make sure they have enough in their bank accounts. Others use their credit card for everything and then pay it off the next time they get paid.

    While this might work for some people, it often means spending money you don’t have. Plus, you’re living paycheck to paycheck, and a single late paycheck could result in having to pay your bills late.

    The best solution to this is to get one month ahead in your budget. So instead of using your paycheck for this month to pay this month’s bills, you’ll actually use it to pay next month’s bills. 

    Here’s a full guide to help you get one month ahead on your budget.

     

    5. START A BUSINESS

    Starting a business was one of the best decisions I’ve ever made. It provided extra income while I was working at my government job. And ultimately, I made enough money to quit my job and run my business full-time.

    I was pretty lucky in that my business required almost no start-up costs. I paid for the cost of a website domain and a few other small things, and I was ready to go.

    But looking back, there’s a lot more I could have done in terms of education and coaching. And many people start businesses that require more start-up costs. 

    If you’ve been thinking about starting a business, commit to using your tax return this year to get it up and running. You won’t regret it!

     

    6. ADVANCE YOUR CAREER

    There are so many opportunities today to advance your career through continuing education, training, or additional certifications. Unfortunately, those things cost money, and many employers can’t foot the bill.

    If you’re getting a tax return this year and don’t have other plans for it, consider what steps you could take to further your career or help you get the credentials you need to change careers. 

     

    7. FUND AN HSA

    Healthcare costs have been increasing steadily over the years, and many families just can’t cover them.

    Unfortunately, medical bills have become the primary reason for bankruptcies. And it’s not just people without health insurance. High deductibles and poor coverage mean that many people with health insurance still end up with huge out-of-pocket costs. 

    Luckily, there’s a great option to help you save for future medical expenses.

    A health saving account (HSA) is available to anyone with a high-deductible health plan. It has triple tax advantages. First, contributions are tax-deductible. Next, you can invest the money and it grows tax-free. Finally, you can spend the money tax-free on qualified medical expenses.

    If you have a high-deductible health plan, I highly recommend opening an HSA!

     

    8. DONATE TO CHARITY

    One of the great things about tax returns is that it’s often money you forget you have coming. You aren’t counting on it to pay any bills, meaning it’s just a bonus.

    If you aren’t relying on your tax returns to help pay your bills, build an emergency fund, or pay off debt, I encourage you to consider donating at least part of it to charity.

    There are so many people struggling in our communities, and it’s only become worse since the pandemic began. Chances are, there are many people in your area struggling to pay their rent or buy groceries.

    There are a lot of great organizations out there helping people to make ends meet and keep food on the table. And let’s not forget the organizations helping save animals, research prevalent diseases, and fight climate change. Whatever it is you’re passionate about, there’s an organization working on it that could use your help.

     

    9. CONTRIBUTE TO YOUR RETIREMENT ACCOUNT

    Many people underestimate the importance of saving for retirement. When it’s decades away, it’s hard to see it as an immediate need. But the thing is, your money has more time to grow the earlier you start saving!

    If you aren’t currently saving for retirement, consider starting now. And even if you’re already contributing to a 401(k) through your employer, you can set up an individual retirement account to help you save even more.

     

    10. SAVE FOR COLLEGE

    College costs have grown like crazy. In 2021, the average student at a four-year in-state public university spends more than $25,000 per year. And if you’ve got small kids at home, costs might be even higher by the time they head off to college.

    There are several good options to help to save for your child’s college education. First, a 529 plan is a tax-advantaged account specifically designed to help you save and invest for college. Another option is a custodial account, which parents can open on behalf of their children to save and invest.

     

    11. INVEST THROUGH A TAXABLE BROKERAGE ACCOUNT

    If you already have a fully-funded emergency fund, have paid off your debt, and contribute regularly to a retirement account, you might consider using your tax return to invest through a taxable brokerage account.

    I don’t recommend doing this until you’ve got your financial house in order otherwise and are already on track to hit your retirement goals. But if you can check those boxes, investing can be a great way to grow your wealth and help you to reach other financial goals.

    Not sure how to get started? My current favorite investing book is Broke Millennial Takes on Investing by Erin Lowry.

     

    12. ADJUST YOUR WITHHOLDINGS

    Some people love getting a huge refund every year. They see it as free money they can spend or use to fund their goals.

    But here’s the thing — it’s not free money. It’s money you worked hard for that was unnecessarily taken out of your paycheck. Money that could have earned interest in a savings account or that you could have used to cover expenses throughout the year.

    Unless you’re dead set on receiving a refund each year, consider adjusting your withholdings to have less money taken out of your checks. Just make sure you have a plan for that money, so you aren’t mindlessly spending it throughout the year. 

     

    What not to do with your tax return

    1. USE IT TO GO FURTHER INTO DEBT

    Here’s an all-too-common scenario: Someone gets a tax return and decides to use it to upgrade their computer or another high-value item. Their tax return isn’t big enough to cover the cost of the entire computer, so they put the rest on a credit card.

    Now you’ve taken your tax return and somehow used it to get into even more debt.

    I’m all for using your tax return to put toward big items you’ve been saving for. Just make sure you have enough to buy them outright rather than going into debt to buy them. The only exceptions to this would be using your tax return to help fund a car or house downpayment. 

     

    2. SPEND IT ON UNPLANNED PURCHASES

    When I was in my early twenties, I would be so excited every year when I received my tax return. I though of it as free money that I could spend on whatever I wanted.

    But instead of intentionally putting it toward my financial goals, I’d spend it mindlessly on clothing, take out, and other things I didn’t plan for and didn’t really need.

    It’s okay to spend your tax return on whatever is important to you, just be intentional about it and have a plan for that money!

     

    3. PUT IT IN A LOW-INTEREST SAVINGS OR CHECKING ACCOUNT 

    Whatever you do, be intentional about what you do with your tax return. Without a plan, that money could end up sitting in a traditional check or savings account, not earning you anything. If you want to keep the money in savings, transfer it to a high-yield savings account so you can earn more interest than you would through your traditional bank savings account.

     

    Final Thoughts

    I know how exciting it can be to get a tax return and think of all the things you can spend it on. I also remember the analysis paralysis I felt when I wasn’t sure what the best use of that money was. I hope this post helps you decide how best to use your tax return this year!

  • How to Save for Retirement When You’re Self-Employed

    When I started my career after college, retirement was the last thing on my mind. I was 22, and it hardly seemed important. Luckily my employer (the state government) required that I contribute to my retirement account — otherwise, I probably wouldn’t have!

    As I learned more about finance, I began to see the importance of saving and investing early.

    By my late twenties, I was contemplating quitting my job to run my own business. One of the biggest things holding me back was the fear of being on my own to save for retirement.

    I spent months researching, learning everything I could about the best way to save for retirement when I was self-employed. And today, I feel confident that I’ll be able to retire comfortably — and probably earlier than if I had stayed at my government job.

    In this article, I’m sharing that knowledge with you and talking about how to save for retirement when you’re self-employed.

     

    How to Save for Retirement When You’re Self-Employed

     

    Saving for retirement when you’re self-employed

    The unfortunate truth is that most people aren’t saving enough for retirement. Data from the Federal Reserve shows that only about 36% of Americans think they’re on track with retirement savings.

    The numbers get even bleaker when you look at self-employed individuals. Data from Pew shows that only about 13% of solopreneurs contribute to a retirement plan. For some workers, it’s that they simply know what options are available to them. And then there’s the fact that when you’re self-employed, you don’t have an employer to contribute to your account as people with more traditional jobs often do.

    With this article, I’m hoping to help people understand what options are available to them so they can finally start preparing for retirement.

     

    Saving vs. investing for retirement

    Before I dive into the retirement plans for self-employed individuals, I first want to make a quick clarification.

    When we talk about retirement, we typically use the phrase “save for retirement.” In reality, you should actually be investing for retirement.

    When you invest, your money grows. And each year, your earnings compound — that means that your earnings also begin to earn money. Over time, you have more and more money earning money, meaning it grows faster and faster.

    Let’s look at a quick example. Imagine you saved $200 per month from ages 25 to 65. Instead of investing the money, you put it into a bank account where it doesn’t earn anything. By the time you’re 65, you’d have $96,000.

    But what if you put that same $200 into the stock market? Using the Securities and Exchange Commission’s estimate for average annual stock market returns, you would reach age 65 with more than $1 million.

     

    Retirement plans for self-employed people

    SEP IRA

    A Simplified Employee Pension (SEP) IRA is a type of retirement account specifically designed for self-employed individuals. SEP IRA contributions are tax-deferred, which means your contributions are tax-deductible, and then you pay income on the money you withdraw during retirement.

    Using a SEP IRA, entrepreneurs can contribute up to 25% of their annual income each year, with a maximum contribution of $61,000 per year as of 2022.

    A SEP IRA is perfect for solopreneurs, but there are special rules for people with full-time employees. If you have a full-time employee, you must contribute to their account at the same percentage you contribute to your own.

    A SEP IRA is what I personally use for my business!

     

    SIMPLE IRA

    A Savings Incentive Match Plan for Employees (SIMPLE) IRA is another type of retirement account designed for small businesses. With this type of account, you can contribute up to $14,000 per year as of 2022. Like the SEP IRA, your contributions are tax-deductible. If you have employees, you must also contribute a small percentage to each of their accounts.

     

    SOLO 401(k)

    A Solo 401(k), also known as an Individual 401(k), is another way that entrepreneurs can save for retirement. Like the SEP IRA, participants can contribute up to $61,000 per year as of 2022. Contributions are also tax-deductible.

    The big difference distinction with the Solo 401(k) that separates it from the SEP IRA is that you can contribute as both the business and an individual. First, as an employee in your business, you can contribute up to $20,500 up to 100% of your income. Then your business can also contribute up to 25% of your income, with a maximum combined contribution of $61,000.

     

    TRADITIONAL OR ROTH IRA

    The three plans I described above are specifically designed for self-employed individuals. They’re the best option if you work for yourself because they have high contribution limits — especially for the SEP IRA and Solo 401(k).

    But another option is to set up a traditional or Roth IRA. These accounts are available to anyone, not just self-employed people. They also have significantly lower contribution limits at just $6,000 per year.

    The one benefit to using this type of account (perhaps alongside one of the options above) is that you can contribute to a Roth IRA. With a Roth IRA, you contribute with post-tax dollars, meaning there’s no tax deduction. But then the money grows tax-free, and you don’t pay taxes on it during retirement. The other self-employed IRAs don’t have a Roth option.

    If you choose to open a Roth IRA, I would open it in addition to another self-employed retirement plan.

     

    Where to open your self-employed retirement plan

    Not only are there plenty of different types of self-employed retirement plans, but you also have plenty of options for where to open your plan.

    This might be confusing, so let me explain it in a simpler way. Think of your brokerage firm (meaning where you open your account) as a piece of land. The specific type of retirement plan you choose (SEP IRA, Solo 401(k), etc.) is the house you put on the land. And the individual investments you invest your money into is the furniture you fill the house with.

    When choosing a brokerage firm, you have two primary options. If you want to be a hands-on investor, you can choose a traditional brokerage firm like Vanguard, Schwab, or Fidelity. You choose what to invest in, and typically pay very low fees.

    A popular option for retirement savings is a target-date fund, which is a type of mutual fund that corresponds with your retirement year. For example, if you planned to retire in 2050, you would find a target-date fund associated with the year 2050.

    Target-date funds have a fund manager who changes the asset allocation as time passes to ensure it’s appropriate for the time horizon. As 2050 nears, the fund manager will decrease the number of high-risk investments in the fund and increase the number of low-risk investments.

    If you prefer a more hands-off approach, you can use a robo-advisor. Your robo-advisor will ask a few questions about your age, investment goals, and more and then choose your investments on your behalf. The fees are a bit higher, but it takes way less time and research on your part. My favorite robo-advisor is Betterment.

     

    How much to save for retirement when you’re self-employed

    One of the most challenging parts of saving for retirement is figuring out how much you need to save. After all, you have no idea how much money you’ll need or how much you’ll money will grow in the stock market.

    Luckily, there’s a took to make it easier for you.

    Personal Capital has a retirement calculator that can help you estimate how much you should save each month to retire comfortably. It uses information such as your age, current savings, desired retirement age, and spending habits to predict how much you’ll need. And using average stock market returns, it will give you an estimate of how much you should save monthly to get there.

    What I love about the calculator is that you can adjust different factors to see how that changes things. You can increase your decrease your desired retirement age or the amount you want to spend each year while retired to see how that influences the amount you need to save.

     

    Retirement saving tips for self-employed people

    DON’T WAIT UNTIL YOU’RE DEBT-FREE

    Before I dive into the steps to take to start saving for retirement, I first want to address the question of whether you should start investing while you still have debt.

    Some personal finance leaders (okay, one personal finance leader) say that you should wait until you’re debt-free to start investing for retirement. This couldn’t be further from the truth.

    Remember above where we talked about compound interest and how it helps to take the amount you invest and grow it into way more?

    Well, compounding only happens when your money is in the market for many years. And unfortunately, many people are paying off debt well into their 30s, 30s, 50s, and even later.

    If you want until your debt is gone to start saving, your money doesn’t have time to grow.

    As a general rule, compare the interest rate on your debt to the average return of the stock market (10%, according to the Securities and Exchange Commission). If your debt interest rate is higher than that, pay it off first. If it’s lower, you can invest at the same time because your investments will be growing faster than your debt.

     

    SET UP AUTOMATIC MONTHLY CONTRIBUTIONS

    It’s easy to tell yourself that you’ll set aside money each month for retirement. But more often than not, something comes up that stops you from doing so. 

    The best way to make sure you’re saving consistently is to make it automatic. Decide how much you want to save each month to hit your goal, and then set up an automatic monthly contribution in that amount.

    It’ll automatically come out of your bank account each month, so you never have to think about it, and you won’t have a chance to talk yourself out of it.

     

    DEDUCT YOUR CONTRIBUTIONS

    Retirement accounts come with tax advantages that you should be aware of. Most retirement accounts have tax-deductible contributions. You can deduct everything put into the account throughout the year, which reduces your taxable income and, therefore, your tax liability. 

    The one exception to this is if you’re contributing to a Roth account. In that case, you contribute with post-tax income and the tax advantage comes when you withdraw the money during retirement.

     

    Final Thoughts

    Retirement savings is something many people don’t really think about when they dream of leaving their jobs to become self-employed.

    When you’re just getting started, it can feel overwhelming and confusing. But it becomes a lot easier as you go. And you’ll thank yourself later when you can retire and enjoy your later years!