Self help author Bob Proctor said:
If you’re thinking of debt, that’s what you’re going to attract.
It is true, if you spent all your time thinking about how much debt you are in, you may feel helpless and lose the fortitude to move forward in relieving yourself of debt. The irony is, thinking of saving (the opposite of taking on more debt), may be just what you need.
Debt and spending is closely tied to savings, the more you do of one, the less you have left over for the other. The more savings you have, the less you often need or want to borrow. Since you’re paying out interest by borrowing, and therefore likely not getting interest by saving, you’re burning your financial fuse on both ends.
When your debt servicing chews into not just your checking account but also your savings for retirement, you have a bigger issue to consider. An Individual Retirement Account allows you to set aside money for your later years which has multiple benefits and only a few risks.
When you put money into your IRA, obviously, you are not spending it. You collect interest on the money saved which will compound over time. See one of the many online calculators or read about the rule of 72 to get a feel for how compounding can help turn a few thousand dollars into many thousands of dollars over time. In addition to the interest aspect, in funding your IRA you also get a tax benefit since, by design, any money put into the account represents a tax deduction.
Instead of being taxed on the money you put in now, you are taxed on that money when you begin to use it many years later. The idea being that later in life you will likely be in a much lower tax bracket and therefore will pay a much smaller amount than you would if you pay taxes on it now during your working years. Here is a link to historical tax rates if you’re curious how our current rates compare to those of the generations before us. While the logic to sock money away now tax-free to pull it out later as taxable income is good advice for many, it doesn’t make sense for everyone. Luckily, there are now a plethora of retirement account options available to you.
One variation, for example, is the popular Roth IRA. You pay taxes on each dollar you put into the account as you would normal income, but federal regulations allow tax-free withdrawals as long as the contributions remain in the account for five years and you are at least 59½. There are many financial planners these days preaching that you should put a part of your portfolio in pre-tax and part in after-tax retirement accounts so you can balance your tax situation when you start making withdrawls.
Another common savings instrument is the 401k. 401k accounts allow employers to put money that is tax-deferred into accounts on the employees behalf. You pay no income tax on the money until it is withdrawn. The same risks apply as far as taxes go to the IRA account specifics detailed above.
For folks who have diffcult with the willpower needed to save, 401k are often a useful tool because the withdrawls are usually just pulled straight out of the earner’s paycheck.
The point of this article isn’t necessarily to offer advice to which type of account is best for you, but to recommend making contributions to some type of retirement account. If you get your mind off ‘debt’ and onto ’savings’, your positive mental attitude may have a seriously positive impact on your financial health down the line.