Want to reach $100,000 in annual income? Or $200,000? Or more?
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For many Americans, these levels of annual income represent financial adulthood.
Remember, those dollar incomes don’t necessarily make you feel rich. But for many people they represent the coming of age, a sense of coming of age. They argue that you have what it takes to earn more income – real money.
$100,000 per year
So how do you get to that first level, that first $100,000? Financial adulthood is when you stop thinking you have enough money to pay for your everyday expenses—the next pizza, a new smartphone—and start thinking about protecting your wealth and growing your wealth.
Rob Williams, a financial planning expert there Charles Schwab (SCHW).
The exact dollar amount varies from person to person. But let’s say you start feeling like a financial adult when your income reaches $100,000. What’s next? “The important thing is, what steps help you cross that line,” Williams said.
Here are six such steps, along with advice from Schwab’s financial planning experts.
Step $ 100,000 per year and financial adults
Cut your expensive debt. Whether your income is $50,000, $100,000 or more, high interest debt is a killer. One of the most common types of high-interest debt is credit card debt. Credit cards have an average interest rate of 19.59%, according to the latest weekly data from CreditCards.com. A year ago, the average was 16.13%.
Eliminate that debt by paying your card balance on time each month to avoid interest and late fees. And shop around for a card with a lower rate than the one you currently have.
Increase your contributions to a retirement account. Increasingly, saving for retirement is your personal responsibility.
When you’re just starting out, you’ll have to take out fewer dollars each paycheck. “And participate enough to get the latest user game,” Williams said. “If you don’t, you’re turning down free money.”
And this season, the annual bonus you can give can be an additional source of income for the retirement fund, according to Williams.
Roth IRAs, Roth 401(k)s
Step up to a Roth style account. You get money left over after you pay taxes. Therefore, withdrawals, possibly years later in retirement, are tax and penalty free if you follow all the rules.
Say your retirement income rises to $200,000, up from $100,000 in 2023. If you’re in a higher tax bracket then, you don’t have to pay tax the money you earn from these withdrawals, says Williams. Plus, Congress may have raised tax rates at the same time — but your withdrawals won’t be protected.
To be eligible for tax- and penalty-free withdrawals, you must be at least 59-1/2 years old. In addition, the account must be open for at least five years.
An IRA can be a Roth method. The same goes for a 401(k) account, if your plan allows it.
You can make new contributions to a Roth IRA. But that’s only if your gross income (MAGI) is below certain limits. For example, married filers must have less than $214,000 in MAGI in 2022 or $228,000 in 2023.
If you don’t meet these requirements, you contribute to a traditional IRA – which has no income rules. The money is then rolled over into a Roth IRA. No income tax rules apply to conversions.
Just remember that there are income limits for withdrawing your traditional IRA contributions.
No income limits apply to Roth 401(k) accounts.
Emergency fund
Fund the emergency fund. Many people fear that we are heading into recession. And several large companies have already announced layoffs.
How big should an emergency savings account be? “We encourage setting aside enough money to cover three to six months of regular expenses,” Williams said. That’s up to $50,000 for people earning $100,000.
Check your budget. The idea is to identify unnecessary expenses, which you can cut. Is it worth it? This other IBD report explains how $2,000 saved by budgeting can turn into $69,000 in 20 years.
If budgeting for a year is too difficult, budget for a month or a month. “The end of the year is a good time to do it,” Williams said.
To find out how much you can cut costs, look at combining different insurance policies with a single provider. Also consider downgrading your club membership. Another trick: Ask your cable provider about discounts. If that’s true, tell your service provider that you’re considering cutting the cord entirely, replacing cable TV with streaming.
$100,000: Annual maintenance
Develop an investment plan. Do this every year. Whether you’ve hit $100,000 a year or more, make sure your investment game plan still reflects your goals, time frame and risk tolerance. Ask yourself if the investment you have chosen is still the best vehicle to build the balance you want at the time you want.
Need help? Compare the funds your portfolio has with one or more funds at your desired target date. Say you’re a 45-year-old man who plans to retire in 25 years. You are comfortable with aggressive investment strategies. How does your asset allocation compare to the target funds for high street investors?
The $219.5 million Schwab Target 2045 Fund (SWMRX) had 57% of its shareholders’ money at work in U.S. stocks as of September 30. It held 30% in foreign stocks, 7% in US bonds, nearly 3% in foreign bonds and nearly 3% in cash. The balance was in securities such as preferred stock and convertibles.
You can find funds whose funding is more aggressive (more stocks) or more conservative (more bonds). And you can find funds with more or less volatility, as measured by what Morningstar.com calls the top and bottom capture rates. Also, don’t forget to check the annual fee. They are very helpful.
Follow Paul Katzeff on Twitter in the @IBD_PKatzeff for personal finance advice and the best savings strategies.
