Wednesday, we discussed. Thursday, financial expert David Bach, author of "Start Late, Finish Rich," offers advice on what to do with your money.
The first step, he says, is one that most people will relish -- throw out your budget. That's right! Don't even try to stick to that budget you created in a fit of self-improvement.
"If you're starting late and you begin your catch-up process with a budget, you may never get truly started," Bach writes in his book. "If budgeting worked, then everyone would be doing it and we'd all be rich."
Frankly, as long as you're saving a certain portion of your salary, it doesn't really matter what you do with the rest. So, the key is making your saving automatic by "paying yourself first." In other words, pay yourself before you pay the mortgage, the credit card company or even your taxes. And make sure it happens automatically each month so you don't have a chance to put that retirement money toward new shoes or golf clubs.
The government pays itself automatically each time you get paid. Taxes are taken out of your salary before you even get your check. You should arrange for money to be taken from your salary and put into a retirement account before you ever get to see it. Most employers make this easy through a 401(k) plan. Sign up and you're well on your way to retirement.
Bach offers this advice to anyone who wants to finish rich. But, if you're starting late, you need to pay yourself faster. In other words, you need to commit to having a greater chunk of money automatically taken out of your paycheck.
"I've always believed that to be fair to yourself and your future, you should Pay Yourself First, at least one hour's worth of income every day," Bach writes. "(Another way to put this is to say that you should Pay Yourself First 12.5 percent of your gross income, but an hour a day is easier to remember.)
"... If you're over 40 and looking to retire at 65, paying yourself first just one hour's worth of income every day isn't going to be enough ...As a late starter, your goal should be to work the first and last hour for yourself. In other words, you should strive to pay yourself first two hours' worth of income every day.
"Now, I know what you're going to say. 'Two hours! Are you crazy? That's a quarter of my gross income! How can I possibly save that much?'
"Hey, don't shoot the messenger," Bach continues. "Nobody said starting late would be easy. And I'm not saying that you should start out trying to pay yourself first that much. But in a perfect world, that is where you'd like to end up."
Bach emphasized this final point by writing, "It's like just trying to get on base. You don't have to swing for the fences every time."
Most people today only save about 4 percent of their income. That means they are only working 22 minutes a day for themselves. If you're serious about finishing rich, you need to change this behavior. By making small, incremental improvements to your savings, you can win big.
As Bach wrote, people who are starting late should try to work up to saving two hours a day for themselves - that's 25 percent.
Once you've decided to Pay Yourself First, how do you make this money work for you? Where should you put it?
"The answer is simple," Bach writes. "If the world is complicated and crazy, you create an investment plan that is simple and sane. In short, you create an incredibly boring investment plan."
Bach calls his easy, boring investment plan the Perfect Pie Approach. He recommends putting one third of your retirement money in stocks, one third in bonds and one third in real estate. He says it doesn't matter how old you are, this plan is proven to work. It diversifies your money and will double your money every five to seven years. And, it keeps you from taking too much risk.
Bach says a lot of people who try to catch up on savings attempt to get rich quick and instead wind up being broke forever. Get-rich-quick schemes simply don't work. Slow and steady wins the race, thus, the Perfect Pie Approach.
The idea of owning stocks and bonds is not new to most people. However, the idea that you should own an equal amount of real estate is less familiar.
Ask your parents, your grandparents, anyone, Bach said, and they'll tell you that real estate is the best investment they ever made. You really can't go wrong by investing in real estate, he continued. Everyone needs a place to live and all businesses have to be based somewhere. Real estate consistently offers high returns on the dollar.
If you own a home, the equity you hold is included in this section of the pie. If your house is worth $250,000 and you've paid down $150,000, then you have about $100,000 in the real estate section of your pie. If this is one third - or more - of your total assets, you're all set. If not, you need to fatten this section of your pie.
The surest way to get rich, Bach said, is to buy another home or two and rent them out. However, many people may not have the money or desire to go this route. The easiest thing to do is not to buy another home!
Instead, invest your money in a REIT - Real Estate Investment Trust - Index Fund. Basically, this is a mutual fund that invests in real estate instead of stocks.
Bach calls REITs the PERFECT start-late investment. Consider the following:
- REITs have outperformed the stock market over the past 25 years.
- REITs offer huge dividends - up to 10 percent.
- REITs are an easy way to own real estate.
Spending less and saving more are great ways to jumpstart a retirement fund. But to really turbocharge your savings, you also need to earn more. Friday, Bach will explain his four-step plan for getting a raise.