10 Steps to Reaching Financial Freedom as an IT Professional

I often watch and listen to investment shows like Mad Money, Dave Ramsey, Suze Orman, etc. One of the key things to do is get out of debt first. If you have credit card debts or any car loans or anything besides your mortgage, you will want to pay that off before anything. I really like Dave Ramsey’s Debt Snowball method, where you pay off the smallest bills first to get some gratification then move on to the next until all your debts are paid off. Of course, you’ll have to try and minimize your spend at the same time. Now that you’re debt-free, what should you do with your money?

Dave Ramsey’s Total Money Makeover Baby Steps:
  1. $1000 in Savings
  2. Debt snowball / debt- free except for home, pay off car
  3.  Save 6 month of salary as savings
  4. 15% to retirement savings, Roth, 401K
  5. Save for kids college – Coverdell ESA, 529 Plan
  6. Pay off home

10 Steps to Reaching Financial Freedom as an IT Professional

Step 1: Invest in Your 401(k)
If your employer offers a 401(k), you’ll like want to max that out every year. $18,000 is your maximum contribution, but did you know you and your employer can contribute up to a maximum of $53,000 per year to your 401(k)? So, that’s:

$18,000 (your contribution) + employer contribution + any after-tax contribution (if your plan allows) = $53,000 total.

I would recommend maxing out the $18,000 contribution that are either taken out before taxes or after taxes (Roth 401K). Should you choose Traditional vs Roth is another question you will have to decide. For younger folks, Roth may be best. For people closer to Retirement, Traditional may be best. It all depends on which Tax Bracket you think you will be in when you retire.

Some plans allow you to contribute after-tax dollars to your 401K. I would only contribute after-tax dollars after the $18,000 and also contributing to other accounts below. The goal is to try to save at least 15% for retirement savings.

Step 2: Invest in Roth IRA or Backdoor Roth (Roth Conversions)
IRA (Individual Retirement Account) is an account you can open on your own and you can contribute up to $5,500 total per year. There are Traditional and Roth IRA. Unfortunately, with Roth IRA (invest with after-tax contribution, money grows tax-free!) there is an income limit, which if you are in IT you may be hitting the limit. In that case, you can however contribute to a Traditional IRA then immediately convert to a Roth IRA.  Before attempting a Backdoor Roth (Roth Conversion, and this is totally legal and spelled out by the IRS recently), be careful not to have any money in a tax deferred IRA in your name. If you do, you’ll be subject to taxes when making your conversion per the pro-rata rule. For more information on Backdoor Roth, take a look at this article.

Step 3: Definitely Participate in ESPP – It’s FREE MONEY!
Employee Stock Purchase Plan (ESPP). Your employer may allow you to put a certain percentage of your paycheck towards ESPP, usually with a 15% discount. Typically, you’re buying the shares at 15% discount so it’s a win-win situation. You will want to max this out as much as possible.

Step 4: Saving in HSA
Health Savings Account (HSA), The benefit of saving in HSA is that it goes in pre-tax, grows pre-tax, but qualified distributions for medical expenses are not taxed. You can contribute (2019) $3,500/yr for Singles and (2019) $7,000/yr for married couples. You can even invest the extra funds in your HSA in mutual funds anything over $1,000. Just be sure to calculate the annual limit by dividing the number of paycheck you get per year. For example, ($7,000 – Employer Contribution) / 24 paychecks.

Step 5: Own Your Own Home
Owning your home is not only gratifying, but also may be a great investment vehicle. There’s more people in the world, but earth is not growing. To be able to afford a home, you should of course try and save 20% as your down payment. Once you purchase a home with mortgage, you can also deduct mortgage interests on your taxes. If you have a second vacation home, that can even qualify for mortgage interests deduction. So, owning a home is a great benefit. While the deduction limit pertaining to mortgage interest drops to $750,000 of debt with the recent tax changes, it remains $1 million for homes purchased before Dec. 15 of 2017. Property, state and local income taxes face a combined $10,000 deduction limit. I do recommend using Redfin as a alternative to traditional broker. If you are a homebuyer, they will share with you the 3% commission a traditional broker usually makes.

Step 6: Mega Backdoor Roth
Combining the concept of 1 and 2, we have the Mega Backdoor Roth. The Mega Backdoor Roth is a strategy that could possibly allow you to make an additional $36,500 in Roth IRA contributions each year. Take a look here and at this article for more details.

Step 7: Invest in Stocks/Mutual Funds – Save 50% of your Income
Not all of us are expert in investing. I do recommend at a minimum purchase some mutual funds. Index funds and Growth funds are very easy to start off with. Vanguard and Fidelity both have very good funds. The goal is to keep the expenses/fees low when purchasing these funds. Betterment and Wealthfront are two that will invest for you and make suggestions on portfolio allocation. If you are really adventurous and want a no-fee investment portfolio, then check out Robinhood. With Robinhood, you can trade commission-free on stocks and options.

Try to invest/save 50% of your income, and have 3-6 months of emergency fund in a Savings account. For Savings Account, take a look at this list of recommended banks. I personally have my Savings Account with Discover, but there are many options here. If you save 50% of your income, you should be all set for retirement.

Step 8: College Savings / Life Insurance
If you have dependents, they will likely go to college hopefully. After you have invested in your own retirement, now it is time to set aside some money for the kids. You can take advantage of the Coverdell Education Savings Account (Coverdell ESA). Coverdell ESA contributions are not tax deductible, but, like a Roth IRA, amounts deposited in the accounts grow tax-free until withdrawn. In addition to college expenses, certain K-12 purchases are also considered qualified when using a Coverdell ESA. There is a small contribution limit of $2,000 per year. Beyond that, you can contribute to a 529 Plan. You are not limited to your own State’s plans, so shop around. Here’s a list for you to consider.

You will likely want to buy life insurance. Never-Ever look at a Whole Life Insurance. There is just simply way too much fees and you shouldn’t use life insurance as an investment vehicle. Term Life Insurance is what everyone should look at, but Whole Life is where the insurance agents will make lots of money from you. Typically, you’ll want at least 5X your salary for your Term Life Insurance. This way your spouse and kids will be taken care of in case something happens. I recommend purchasing Life Insurance via a broker like SelectQuote. Depending on your health and whether or not you smoke, you should get some pretty reasonable plans.

Step 9: Checking Account & Credit Cards / Credit Scores
For Checking Account, I highly recommend the Schwab High Yield Investor Checking account. You do have to open a brokerage account when opening a checking account with them, but you can keep your brokerage account at $0 if you wish. Their ATM card is the best I have ever had with ATM-fee reimbursement so I can go to any machine I want and they will reimburse me at the end of the month for any transaction fees AND there is no foreign transaction fees neither. So, I can go to anywhere in the world and use any ATM without ever incurring a fee. This is a great deal.

I’ll be honest I used to hate credit cards, but now I love it. This is where Dave Ramsey and I differ. He recommends cutting up all credit cards, which makes sense since you don’t want any debt. However, if you can pay off your balance every month there really is no harm in having credit cards. In fact, you can earn rewards with these credit cards. Yes, some premium credit cards will have an annual fee, but sometimes it may be worth it depending on the benefits you gain from it. I won’t make any recommendations here for credit cards, because there are simply too many. Just be careful. You MUST pay off the balance every month. Otherwise, you should NOT have any credit cards.

To check your credit score, I recommend Credit Karma. They have a very detailed web portal and mobile app. You can see your credit scores updates usually on a per week basis. More than the credit score, you will actually see all the accounts and history along with some recommendations.

Step 10: Track Your Accounts / Net Worth
I find that the more I look at my accounts, the more I want to save. There are 2 tools that I use to track my accounts. Both have web portals of Mobile apps available. One is Mint. I have been using them for many years to keep track of transactions and budgeting. The other is Personal Capital, where it is similar to Mint but have a few differences. Both are very good and informative.

Disclaimer: I will not and cannot be held liable for any actions you take as a result of anything you read here. I do not provide financial advice and I am not a qualified financial advisor. All information found here, including any ideas, opinions, views, commentaries, suggestions, expressed or implied herein, are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. Thank you!