Thursday, September 21, 2006

Using Other People's Money to Save

In real estate and business, using “other people’s money” (OPM) is a considered a smart way to acquire property or fund your business. The concept of using OPM can also be applied to saving. Here are some OPM strategies that I like to apply to saving:

Your Employer’s Money
Many employers match 401K contributions up to 2%. That’s 2% free money. Always contribute at least the amount your employer is willing to match.

The Government’s Money
Even if your employer doesn’t match your 401K contribution, the government doesn’t tax any money that is contributed. This results in the government covering 15-30% of your 401K contribution, depending on your tax bracket. And you don’t pay taxes on your earnings until you withdraw.

If you qualify for and contribute to a deductible IRA, the government is paying 10-25% of your of your contribution.

For non-deductible and Roth IRAs, earnings are tax free. The benefit of 10-25% additional savings being compounded 10-30 years can be big. In addition, qualified withdrawals from a Roth IRA are tax free.

Gifts or Inheritances
Gifts and inheritances are 100% OPM and is an unexpected windfall. If it is put into savings, it will be a gift (or inheritance) that keeps on giving.

This is not financial advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC

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