I received a lot of positive comments and messages from readers who read my article on financial moves to make with a $100,000 income and the feedback was: how can we prioritize investing and saving as our incomes grow to achieve financial freedom and build long term wealth.
So I wanted to take the opportunity to share steps I took in my own financial journey as I approached this milestone and provide ideas on what you could do in your own financial situation. It may have not be the perfect approach – mind you I was learning myself – but it worked for me, through the ups and downs. Your situation, priorities and goals may be different to mine, but I hope you still find some value and achieve great success.
The Basics – Three Buckets
I’ve already covered the three bucket approach in my prior article so I highly recommend you read that first.
My Journey
When I started my career in 2019, my employers either did not offer a 401k plan or lacked a good flexible 401k plan. So I turned to the Roth IRA – the first bucket, as I understood the power of compounding if I started early. Back then it was just $6000 for the year but I consistently added to my Roth IRA YoY until eventually, I had to start doing a backdoor Roth IRA.
Investing Philosophy
I simultaneously also started investing in the third bucket: my taxable brokerage account. I kept my COL (cost of living) really really low – enabling me to save/invest 75% of my take home pay. After I funded my emergency fund (3mo expenses) and Roth IRA, I pushed every dollar I could to building my taxable portfolio and that helped me build enough assets to comfortably buy my second car (article here) and sell the first one.
I got to experience COVID19 and the wild market movements it created in 2020 and 2021. This was also a time when my salary increased quickly as I created more impact in my role at work and I also started to learn more about options investing and importance of leverage.
Growth Mindset
Below is a chart highlighting how important investing helped me in building my wealth which in-turn helped me buy my first house at 25 with a 20% down payment (right decision for me at the time vs 3.5% or 5% down) thanks to my disciplined investing. Note: it is a standardized example and not based on actuals, where dividends are being reinvested:
| Parameters | Assumptions |
|---|---|
| Annual Growth Rate | 10% |
| Annual Dividend Yield | 2.5% |
| Annual Contribution | $22,000 |
| Annual Contribution Increase | 10% |
What I want to highlight, and this is especially important for those truly looking to build wealth (after maximizing Bucket 1 and 2), if you incrementally contribute more each year – you can see what an additional 10% can do for the growth of your overall portfolio in a 30 year horizon.
I started investing $22K in my first year and I have consistently contributed 10% or greater than the previous year each year I have been investing. There have been times when the returns were negative and times where returns have been positive – the 10% annual growth rate is just an example – but it proves, time in the market beats timing the market.
Asset Diversification
As my income grew the past few year – so have my contributions to my Roth IRA, 401K (100% Roth now) and taxable account. My first house from 2021 was eventually converted to a rental as I moved to another city and that has also provided diversity in my portfolio as it pays for itself – helping me build equity. I do not know if I’d personally buy a rental property today in 2024 with the astronomical interest rates – so the only guidance I can provide there is for you to do the math, build a cashflow/income statement to see if it is viable.
Mega Back Door Roth
The alternative is to explore an expansion to the 401k in Bucket 2: the after-tax contribution. Some 401K plans offer in-plan conversions which are also referred to as Mega Back Door Roth conversions – enabling you to automatically designate the after-tax contribution as Roth so you never have to pay taxes on gains in the future. You can also convert your employer match to Roth – something I have been doing as long as my AGI in that year stays below the 24% cut-off so that I do not get taxed 32% on my Roth conversion.
Conclusion
Whether one makes $110,000 or $190,000 – after a certain point, you will have an excess (money left over after covering essentials). How you choose to optimize your next $ so it works for long term vs you working for it, comes down to discipline, focus and purpose. I did not have access to every financial instrument from the start but I optimized my buckets per my need – adjusting them as my life evolved and accounting for new goals I set for myself.
This is a journey and I am on mine. Are you ready to start yours?