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5 Ways To Become A 401(k) Millionaire

5 Ways To Become A 401(k) Millionaire

The road to becoming a millionaire is closer than you think.

With a tax-advantaged retirement account and the power of compounding interest, you can become a 401(k) millionaire.

Here’s what you need to know.

1. Start investing early

Your company’s 401(k) should not be viewed as an optional benefit. Rather, your 401k is an essential wealth-building tool that can make you a millionaire.

Due to the power of compounding interest, the earlier you start investing, the better.

For some, that may be easier said than done.

However, if you haven’t started investing though a 401(k), it’s never too late to start.

Don’t use your past mistake as an excuse not to participate in the future.

Let’s take a look at an example to see the power of compounding interest.

We can use the Make Lemonade investment calculator to see how much a 25-year-old will have in a 401(k) plan at retirement based on annual contributions and investment rate of return.

If a 25-year-old investor invests $4,600 annually for 40 years in a 401(k) at a 7% annual return, that investor would have approximately $1.02 million at age 65.

In comparison, if a 35-year-old investor invests $10,000 annually for 30 years in a 401(k) at a 7% annual return, that investor would have approximately $1.02 million at age 65.

If you are older than 35, have not invested in a 401(k) and plan to retire at age 65, then you will need to invest more each year to try to hit the $1 million goal.

2. Contribute the maximum amount to your 401(k) annually

Pay yourself first.

Every dollar that you invest in your 401(k) is an investment in your future.

Each year, make sure to contribute the maximum amount to your 401(k).

Currently, you can contribute $18,000 per year to a 401(k).

In addition to your regular income, you can use bonuses and raises to help meet the 401(k) annual limit.

If you are 50 years-old or older, you can contribute $6,000 additional per year.

If you are not contributing the maximum amount each year, you should increase your contributions to reach your retirement goal of becoming a millionaire by the time you retire.

3. Take advantage of your employer match

If you work for an employer that offers a 401(k) employee match, this is a financial benefit that you cannot miss.

An employer match is free money.

What if you think you can’t contribute to your 401(k) because you have too many life expenses?

Answer: your expenses are too high.

Invest in your retirement first, then set your spending based on what you have left.

You also don’t have to choose between saving for retirement and paying off debt like a mortgage or student loan.

Do both.

Always make your required monthly debt payment, and contribute at least enough to your 401(k) to receive an employer match.

Apply any remaining funds to whichever is higher – your interest rate (pay down debt) or expected investment return (fund retirement).

4. Read the fine print

When you choose your 401(k) investments, don’t just throw darts at the board.

Read the fine print of each fund that is offered through your 401(k).

All funds are not created equally.

At a minimum, compare fund performance, management fees and expense ratio.

Index funds tend to have lower fees than actively-managed funds.

5. Leverage the power of compounding

The power of compounding is a powerful force that can propel you to 401(k) riches.

Here is an extreme example to show you how the power of compounding can help propel your portfolio.

What would you rather have:

    1. A penny that doubles in value every day for 30 days
  1. $5 million

Without blinking, most of us would choose $5 million.

However, you would rather have a penny that doubles in value every day for 30 days. Why?

After 30 days, your penny would have grown to $10.7 million.

Your portfolio won’t grow 100% each day for 30 periods, but this example demonstrates the positive impact that compounding can have on your retirement.

Final Thoughts: The Naysayers

Some people say that becoming a 401(k) millionaire is impossible or is a poor investment vehicle. Why?

“You can earn a higher return on other investments.”

“You won’t be with the same employer for 40 years.”

“You can’t access your money for 40 years.”

“Many employers do not offer an employer match.”

“It’s very hard to contribute the maximum amount to your 401(k) each year.”

All of these statements could be true based on your personal circumstances.

Besides a 401(k), there are plenty of other ways – and perhaps better ways – to become a millionaire, too.

For example, you can start a successful business or invest in venture capital deals.

Remember: a 401(k) is one way to become a millionaire. It’s not necessarily the only way, a guaranteed way or the best way.

However, these factors can increase your chance to become a 401(k) millionaire:

  1. Investment Amount: the more capital you invest, the more potential for growth (in a rising market environment)
  2. Time Horizon: the longer your time period, the more opportunity for growth
  3. Investment Return: the higher your investment return, the faster you can achieve meaningful wealth

Zack Friedman is a keynote speaker and Founder & CEO of Make Lemonade, a personal finance comparison site that helps you save money and live a better financial life.

Amazon Banks On Its $3 Billion Loan Club

Amazon Banks On Its $3 Billion Loan Club

Over the past year, in particular, it seems that Amazon is untouchable.

Credit cards. Prime Day. Cloud computing. TV shows. Bookstores.

Now, as Wall Street focuses on Amazon’s announced acquisition of Whole Foods, there is another component of the Amazon empire that may start to garner more attention.

Amazon’s lending business.

Over the past year, Amazon Lending has made more than $1 billion in small business loans to sellers on its marketplace.

Since 2011, when Amazon launched its lending business, Amazon has made more than $3 billion in small business loans to more then 20,000 Amazon sellers in the U.S., United Kingdom and Japan.

“We created Amazon Lending to make it simple for up-and-coming small businesses to efficiently get a business loan, because we know that an infusion of capital at the right moment can put a small business on the path to even greater success,” said Peeyush Nahar, vice president for Amazon Marketplace, in a statement. “Small businesses are in our DNA. Amazon is providing capital to small businesses to help them expand inventory and operations at a critical period of their growth. We understand that a small loan can go a long way.”

How Amazon Lending Works

On an invitation-only basis, Amazon offers short-term business loans from $1,000 – $750,000 to micro, small and medium-sized businesses that sell products on the Amazon platform. Amazon does not disclose interest rates, but they tend to be lower than credit cards.

Merchants can be approved for a loan within 24 hours, and tend to use the loan proceeds for inventory financing and business expansion.

Unlike traditional lenders that may have lengthy loan applications that require all types of documents, Amazon uses internal algorithms to invite sellers to the program based on the popularity of their products, inventory cycles and other factors.

Loans are typically repayable in less than one year, and borrowers use sales generated on the marketplace to repay Amazon in fixed monthly payments, which are deducted from the borrower’s Amazon account. There are no origination fees or prepayment penalties.

According to Amazon, more than 50 percent of the small businesses that Amazon lends to take a second loan from Amazon.

Amazing Lending: How Amazon Benefits

Among others, this business provides several benefits to Amazon:

  • Amazon earns interest income from lending to merchants
  • Third party sellers can sell more products, which adds to more commissions for Amazon (since Amazon takes a portion of merchant sales)
  • Amazon earns extra revenue by charging sellers who want Amazon to provide storage, packing and delivery services
  • Amazon can mitigate credit risk by accessing its own real-time data on seller businesses and customer reviews

Will Amazon Look More Like A Bank?

Although a relatively smart part of its business today, will Amazon scale its credit business and look more like a bank?

According to a survey of 32,715 people in 18 countries conducted by consulting firm Accenture, 31% of respondents would switch to Google, Amazon or Facebook for banking, if these companies offered financial services.

In a separate report, CB Insights found that Amazon has 86 percent customer satisfaction. This compared to Citi (82 percent), Capital One (80 percent), “all banks” (80 percent), TD Bank (79 percent) and Bank of America and Chase (each 75 percent).

The financial crisis led many traditional banks to curtail small business lending, which gave rise to alternative sources of capital from both FinTech and marketplace lenders such as OnDeck, Kabbage, Lending Club and Prosper.

Companies such as PayPal and Square use data from their payment businesses to offer credit options to merchants who may not have access to traditional forms of lending. Collectively, Square and PayPal have loaned billion of dollars to merchants on their respective platforms.

Issues For Consideration: Expansion Into Banking

The potential for further expansion into financial services raises several questions, among others:

  • The banking business is high touch. Can Amazon continue to replicate its business model built on “customer obsession” in financial services?
  • Whole Foods will represent a major entry into a bricks and mortar business. If Amazon expands its lending business to other financial products, would Amazon consider bricks and mortar bank branches?
  • Do Amazon merchants want to diversify their dependence on Amazon and seek alternative sources of financing, or do they prefer a one-stop shop for selling, lending, inventory management, packing and delivery?

Keep an eye on Amazon Lending. This synergistic business may play an increasing role for Amazon in years to come.

Zack Friedman is a keynote speaker and Founder & CEO of Make Lemonade, a personal finance comparison site that helps you save money and live a better financial life.

What To Do If You Win The Lottery

What To Do If You Win The Lottery

If you win the next Powerball drawing, you could walk away with $650 million.

It’s easy to imagine how you might spend all that money.

Before you start spending your impending fortune, however, it’s important to ask yourself one question.

What do you actually do if you win the lottery?

Here’s what you need to know and how to execute your lottery financial game plan:

1. Sign the back of your lottery ticket

It sounds so simple, but it is the easiest step to take for granted.

Despite the advent of technology, you still need to sign the back of a winning lottery ticket.

Why? Like a check, a lottery ticket is considered a bearer instrument.

Whoever signs the winning lottery ticket and presents a valid photo ID can claim the lottery prize.

So, sign your ticket right after you purchase it so you protect yourself in case you lose your winning ticket.

2. Choose a one-time, lump-sum payment or installment payments

You have 60 days from the day you present your winning ticket to determine how you want to receive your prize.

You have two choices when you win the lottery: you can receive a one-time, lump-sum payment or 30 installments over 29 years.

If you choose the lump-sum payment, you will receive your prize winnings upfront, and immediately will owe income tax on the full amount.

If you choose the installment plan in the form of an annuity, each installment payment will be taxed.

Which should you choose?

It depends in your personal preference.

Financially, a dollar today is worth more than a dollar tomorrow. If you choose the lump-sum payment, you have the peace of mind of receiving all the funds today and can invest the proceeds to earn a financial return.

However, if you prefer to set an allowance for yourself to help control spending, an annuity payment plan can help instill fiscal discipline.

You should compare the after-tax proceeds and your intended investment return (lump-sum payment) with the after-tax annuity payments and intended investment return (installment payments).

Overall, you will want to consider the time value of money — that is, how much you can earn under each scenario comparing the timing of the payments that you receive.

3. Assemble your financial and legal wolfpack

If you win the lottery, you may need help managing your new fortune.

It is critical to have a team of trusted advisors to help you manage an array of investment, accounting, tax and legal issues.

Expect to be approached by just about every type of advisor who wants to lend a helping hand.

Invest the time to make careful selections about who you want in your inner circle. Not all advisors are created equally, so you will want to vet personally each new advisor you retain.

Don’t outsource this function. It’s your money, and you need to protect it.

You should interview each prospective candidate, and make sure he or she understands your goals.

Make sure to check their credentials to ensure they are properly licensed.

Advice is not always free so make sure to understand their fee arrangements before you retain them.

Most importantly, hire a team that tells you “no.”

The last thing you want is a team that says “yes” to every time you want to spend money on large purposes.

It’s your call how you spend your money, but it’s helpful to have a team that gives you honest advice even if it’s not what you want to hear.

4. Don’t abandon your budget

Wait, you just won hundreds of million of dollars. Why would you still need a budget?

Financial discipline doesn’t go away when you become a millionaire.

You may have more money, but that doesn’t mean the same principles of personal finance do not apply.

With more financial resources, there may be more things to purchase.

That’s why budgeting is even more essential.

Develop an action plan that accounts for your monthly and annual spending. Categorize your major expenses. Understand your income sources.

One strategy to instill financial discipline is to live off your income, not your prize winnings.

Therefore, you can preserve principal.

5. Take care of your heirs with an estate plan

If you have an existing estate plan, now is the time to update it.

If you have never put one together, now is the time to create one.

When you win the lottery, or have any major life change, it’s essential to ensure that your estate plan reflects your new reality.

With an estate plan, you will want to protect your estate, institute tax planning and consider how to provide for your heirs.

6. Say goodbye to your debt

It’s time to go debt-free.

If you want complete peace of mind, pay off your mortgage, student loans, credit cards, personal loans and anyone else to whom you owe money.

That’s the easiest path to financial freedom.

But before you do that, evaluate your current financial obligations and future needs.

Not all debt is bad, however.

For example, you may have a low interest rate loan that makes financial sense if you can invest other assets in higher yielding investments.

Therefore, consider your debt in light of your larger financial plan.

7. Choose charities that are important to you

The lottery can help change your life.

You also have the power to change the life of others.

There are countless charitable causes in which you can have a meaningful impact.

Choose the charitable causes that are most important to you, and work with your advisors to choose the most reputable charities to support.

Your advisors can also help you develop a charitable trust or other tax-efficient vehicle to give back.

Powerball Lottery Q&A

How do you play Powerball?

Choose five numbers from 1 to 69 and one Powerball number from 1 to 26. You can also select Quik Pik and the numbers will be selected automatically for you.

Where can I play Powerball?

The Multi-State Lottery Association administers Powerball across 44 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands

How much does it cost to play Powerball?

Each ticket costs $2.

Is there a limit to the number of tickets I can purchase?


What are the odds on winning the Powerball jackpot?

The odds of winning the Powerball jackpot are about 1 in 292 million.

What are the odds of being struck by lightening?

About 1 in 700,000.

If there is no winner and the jackpot increases, what are the odds of winning the next Powerball jackpot?

The odds always remain the same at about 1 in 292 million, and do not change based on the dollar size of the Powerball jackpot.

Is this the largest Powerball jackpot in U.S. history?

No, this is the second largest Powerball jackpot in U.S. history. The largest Powerball jackpot in U.S. history was about $1.6 billion in January 2016, which was split among three winning tickets.

Zack Friedman is a keynote speaker and Founder & CEO of Make Lemonade, a personal finance comparison site that helps you save money and live a better financial life.

5 Investment Strategies To Win Like Soros and Icahn

5 Investment Strategies To Win Like Soros and Icahn

George Soros. Carl Icahn. Dan Loeb. Steve Cohen. Stan Druckenmiller.

Titans of the hedge fund investment world.

Soros brought down the Bank of England. Icahn won big on Herbalife. Dan Loeb forced change at Yahoo.

The secret to their success?

Here are five investment lessons from these legendary hedge fund investors that you can apply to your investment portfolio today:

1. Develop an investment thesis

An investment thesis is the underlying reason why you are investing in a stock. With the exception of momentum traders and quants, most hedge fund investors develop an investment thesis before they deploy capital. For example, the investment thesis can mean the stock is undervalued and underappreciated by investors or there may be a catalyst such as a potential take-out acquisition on the horizon.

Hedge fund investors conduct rigorous fundamental research, build financial models and identify catalysts that will propel the current share price toward their target share price. They don’t invest blindly based on stock tips from a broker or a news article. Rather, they invest in sectors and companies they understand and where they have done their homework.

Warren Buffett, although not a hedge fund investor, only invests in companies he understands. If he can’t understand the business model, he passes on the investment opportunity.

Key Takeaway: Only invest in companies you understand. Develop a thesis of why you are investing. Do your homework and understand the numbers behind the company’s products and services. 

2. Risk-Reward

In a bull market, it’s easy to expect that a company’s share price will rise 10%. However, hedge fund investors don’t think of investments as a unidirectional bet. Rather, each investment has a risk-reward ratio. If an investor is long a stock, the reward is the probability that the share price will rise, and the risk is the probability that the share price will fall. Share prices rise and fall for several reasons, including financial performance, company or industry news, competitor dynamics, analyst ratings and other factors.

Before you invest, assess the probability of the risk-reward of each investment. You can develop the reward-risk ratio by reading analyst research, reviewing the company’s public filings and management presentations, or developing your own financial projections.

For example, if you think that there is a 50% probability that a share price could rise or fall, that’s probably a poor investment choice. Since the reward-risk ratio is 1:1, it’s no different than flipping a coin.

Key Takeaway:  Look for investment opportunities where the reward-risk ratio is at least 3:1, meaning the upside potential is three times greater than the downside potential of the company’s share price.


Chairman of Icahn Enterprises Carl Icahn participates in a panel discussion at the New York Times 2015 DealBook Conference at the Whitney Museum of American Art on November 3, 2015 in New York City. (Photo by Neilson Barnard/Getty Images for New York Times)

3. Concentrated Bets

You’ve probably  been advised repeatedly that you should maintain a diversified portfolio to protect against one company adversely impacting the rest of your investments. For many investors, particularly those who are risk adverse, investment diversification is their best bet. An index fund or ETF that invests in the broader stock market, such as the S&P 500, can provide ample diversification.

While it depends on the hedge fund, some hedge fund investors maintain a concentrated portfolio of 10-15 stocks. Why? These investors have strong conviction in their investments, supported by financial analysis and independent research.

Key Takeaway: Understand and assess your risk tolerance. Concentrated bets have the potential for outsized investment returns – up or down.

4. Hedge your bets

Like its name suggests, hedge funds typically are not 100% long the stock market. Rather, they employ some form of financial protection to guard against share price declines due to market or company-specific events. Depending on market factors, some hedge funds are 80% long (and 20% short) while other hedge funds are market neutral (meaning they are neither market long or market short).

Hedge funds use all types of hedging strategies. Some include:

  • Buying a put option to protect against a long position
  • Shorting a competitor of the stock they are long
  • Longing an industry leader and shorting an industry laggard
  • Longing an undervalued stock and shorting an overvalued stock

Key Takeaway: Protect your investments with some form of a hedge. Before shorting a stock or using options, however, check with your investment advisor and be sure you understand all the inherent risks associated with these strategies.

5. Cut Investment Losses

No investor is perfect. The best investors are often wrong, despite all the research and financial analysis. However, when they are wrong, they know when to cut their losses. Yes, you may sell the stock and the share price could then rebound. But instituting discipline in your investment process will save you money in the long-run.

Key Takeaway: Develop your own threshold to sell a stock when its share price falls. One rule of thumb is a 10%-15% decline below your purchase price. You may have a threshold that is higher or lower, but choose a loss rate that works best for your investment needs and stick with it.

 Zack Friedman is a former hedge fund investor and the founder of Make Lemonade, a personal finance platform which also offers free and unbiased advice to over 40 million borrowers to manage, repay and save money on their student loans. Follow Zack on Twitter and read his columns in Forbes.

How Warren Buffett Made $12 Billion In One Year

How Warren Buffett Made $12 Billion In One Year

Warren Buffett made $12 billion in 2016 and reclaimed his position as the second richest person in the world, according to Forbes’ billionaire rankings.

How did he do it?

There are three primary reasons behind his investment performance, which helped increase his net worth to $74 billion.

1. The Election

Although Buffett supported Hillary Clinton during the 2016 election, and even provided free trolley rides for voters to travel to the precincts, it was Donald Trump’s victory that helped propel a broad stock market rally. Buffett’s Berkshire Hathaway, which has gained 11.5% since election day on November 8, captured nearly half its share price increase in the two days after the election.

But, the broader stock market rally doesn’t explain the whole story. Buffett’s underlying stock picks may provide guidance for your investment portfolio selections heading into 2017.

2. Bank Stocks

Buffett has been a long-time fan of banks and other financial services companies, including Wells Fargo, American Express, Bank of America, Goldman Sachs and others. Let’s look at Bank of America as an example. In 2011, Buffett invested $5 billion in Bank of America in exchange for $5 billion of preferred stock and warrants to purchase 700 million shares of Bank of America stock at an exercise price of $7.14 per share. At the time, Bank of America traded at about a 50% discount to tangible book value. Today, Bank of America’s share price is $22.45 and trades at about a 30% premium to tangible book.

Why have financial stocks as a sector risen almost 17% since the election?


President-elect Trump’s agenda to deregulate the banking industry, lower taxes and increase infrastructure spending are all positives for bank stocks. Further, if the Federal Reserve continues to raise interest rates in 2017 (following its rate increase this month), banks will earn more net interest income, which increases earnings. Since the financial crisis, banks have been focused on expense reduction and maintaining adequate regulatory capital. This led to a curtailment of certain lending activities and a retraction in risk taking. Under a pro-growth Trump presidency, particularly one with less regulation, banks could look to redeploy excess capital and augment lending.

Heading into 2017, per the latest public filings as of September 30, 2016, Buffett’s top 5 bank and financial services holdings include: Wells Fargo, American Express, U.S. Bancorp, Moody’s and Goldman Sachs.

3. Airline Stocks

Buffett also disclosed this quarter that Berkshire invested in three airlines: American Airlines, Delta Airlines and United Continental Holdings. CNBC confirmed in November that Berkshire also holds a position in Southwest Airlines.

An investment in the airline sector is a rarity for Buffett, who has historically shunned airline stocks due to significant capital requirements and low investment returns. Not to mention that since 2000, dozens of airlines have filed for bankruptcy protection, including American, Delta and United. Buffett initially lost money in a $358 million preferred investment in USAir in 1989 (the value dropped to $89.5 million by 1995), although his investment later recovered and proved profitable.

That said, Berkshire has invested in the aviation sector, including holdings in NetJets (which sells fractional ownership in private jets), Precision Castparts (an aerospace parts manufacturer) and FlightSafety (a pilot training company).

A bet on airlines may signal Buffett’s belief that airlines stocks are poised for a performance turnaround in 2017 after a relatively flat 2016 before rising about 15% post-election.

The consolidation in the airlines sector – United and Continental, American and U.S. Airways and Delta and Northwestern – has reduced the number of carriers and helped bring more financial stability to the sector. Consolidation has also helped mute airline capacity expansion, which historically hurt airline profits.

If Buffett believes that economic growth will outpace airline capacity, airlines may stand to benefit.

To learn more about investing, Make Lemonade offers investing tips, tools and hacks to improve your bottom line.

Zack Friedman is the founder of Make Lemonade , a personal finance platform which offers free and unbiased advice to over 40 million borrowers to manage, repay and save money on their student loans. Follow Zack on Twitter and read his colu mns in Forbes.


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