Saturday, January 06, 2007

Get Rich or Die Teaching

Nobody teaches in order to become wealthy. However, I believe that teaching can potentially provide a comfortable lifestyle in retirement. After exhaustive research (namely, subscribing to Money magazine for a year), I have composed a list to help new teachers plan for a healthy financial life now and in their golden years.

1. Look at the interest rates
If you have old student loans or credit card debt with an interest rate over 7%, your first financial goal should be to pay this down. Money should always be applied to where the interest rate is highest, so if the interest you are paying on loans is small, it is wiser to put your money in a money market fund like, an online savings account which pays 4.5% interest.

2. Pack your parachute
Unfortunately, some expenses arise unexpectedly, like a visit to the ER, a car crash, or having to pay bail (we've all been there). This is why it is important to have an emergency fund- at least 3 months living expenses socked away in a safe money market fund or savings account. If you don't have an emergency fund stashed away, you could be forced to put new expenses on credit cards, and interest payments will keep you in financial distress long after you've made bail and skipped the country.

3. Retire Rich
If you do not have high-interest debts and you have a comfortable emergency fund, congratulations--you are doing better than most people in their twenties. Now is the time to start preparing for retirement. Yes, it may seem far away, but the longer you put off starting an independent retirement account (IRA), the less control you will have over the date you retire.

If your employer offers matching funds in a 401(K), contribute to that first. If you are a teacher and your employer doesn't offer matching funds, it is even more important to start your own IRA. I suggest getting a Roth IRA, which accumulates interest tax-free provided you don't dip into it until you are 60. T. Rowe Price, Vanguard, and Fidelity all offer target retirement date mutual funds that you can invest your Roth IRA funds in. As you get older, your investments get more conservative to ensure you will retire with a healthy nest egg. If you contribute $300 a month from age 25 until age 65, you will have over $1.1 million. Contribute $400 a month and that figure leaps to $1.5 million.

Don't forget to make contributions to your district's pension plan if you intend on retiring after a career of teaching. A pension can be an integral piece of your retirement income, and teachers are lucky to be in one of the few professions that still offer pensions.

4. Wall Street vs. Main Street
If you are like most people, one day you will purchase a house. If this is something you plan to do in the next five years, start saving for a down payment now. If you don't have at least 10% of costs saved for a down payment when you purchase a home, you may be forced to pay a higher interest rate to get a loan. This could cost you tens of thousands of dollars. If home buying is in your near future, put your money in a secure savings account; again, I recommend

If you do not plan on buying house in the next five years, and you have already fulfilled steps 1-3, then put that extra money to work for you. Invest it in mutual funds and try to keep a diversified portfolio (no single stock should comprise more than 15% of your portfolio). Stocks are riskier than savings accounts, but they typically come out much better in the long run.

The truth is you will probably never get rich teaching. The good news, though, is that if you manage your money responsibly, it is possible to enjoy a modest lifestyle and a very comfortable retirement.


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