FIscal Fridays: Some random stuff I've been thinking about

So I've been pretty terrible with the Fiscal Fridays posts lately. To be honest, there hasn't been much going on. Per Dave Ramsey's "Debt Snowball" instructions, I've been making triple payments on my smallest debt (the loan I took from my dad in college). And now, I'm nearly done making payments--I have about one and a half left. That's about a year and a half earlier than the original repayment plan we set up, which feels pretty amazing. That alone is a year and a half less that I will spend in debt; and when I start making supersized payments on my other loans, I'll reduce my "debt timeline" even more. That feels really amazing.

And because this post would be really terrible if all I did was a not-so-humble brag, I'm going to abruptly change the subject now and talk about taxes for a moment. I got two of my needed tax forms so far: The two W-2s from the two full-time jobs I worked this year; I still need two 1099-MISCs for my freelance work, plus another form or two regarding my retirement plans. And a random, blog-worthy Tax Tidbit (I enjoy alliteration far too frequently) popped into my head. So...

Emma's Tax Tidbit #1:
You can reduce your taxable income--that is, pay taxes on less money than you actually make in a year--by paying into certain programs.

For me, paying into a retirement plan and an employer-sponsored health plan landed me the reduction. So I paid X amount--let's make this easy, I'll say I paid $10--into a 401(k) for the first few months of the year, at my first job. Then, I paid $30 into a 457(b), which is kind of like a 401(k) but for public-sector employees. By doing so, I lowered my taxable income by $40 total. So if I made $100 in 2012, I would now only have to pay taxes on $60 worth. Something similar happened for the first time this year for me because I paid for employer-sponsored health coverage. I don't think that has to do with the Affordable Care Act/Obamacare...but because it was only on the return for the second job I had this year, it might have to do with working in the public sector. I'm going to try to find out (re: ask my dad/Google it) and will get back to y'all there.

Basically, anything you can do to reduce your taxable income is good, because it means you pay less taxes. And that's the really cool thing about the incentive, I think--it's for stuff you should be doing anyway. Like saving for retirement. I don't care how old you are. I don't care if you're flipping burgers for your first job. If your company offers a retirement plan, like a 401(k), pay into it. Even if it's only five or ten bucks a paycheck. The younger you are when you start, the more interest will compound to give you a major nest egg for later. In fact, a person who starts $200 a month when she is 30 cannot catch up to the amount that she would have gotten by retirement age if she had started saving just $100 a month when she was 20.

Also. It's just occurred to me that I should probably list a disclaimer. I am not a financial adviser or a CPA. I have no formal education in finance, or taxes. I only have my own personal thirst for knowledge on how to make my money work for me, not the other way around. I will say that I do a bit of reading on the subject, and I take a LOT of advice from my dad, who probably could get a job as a financial adviser if he really wanted to. He's very smart. Anyway, point is: While I try to be as specific and accurate as possible on these topics, I might on occasion make a mistake. Please don't hate me if you take my advice without researching it for yourself, as it's applied to your situation, and then something bad happens. KThanks :)

Fiscal Fridays: Long-Term Savings

Today I'm talking about saving for retirement. I know what you're thinking; I thought the same thing myself for quite some time. "I'm only in my early/mid-20s. There will be plenty of time to save for retirement later. Now, I want to focus my money on other things." Cue the "you're wrong" buzzer. I didn't realize it until I had a few in-depth discussions with my dad and my aunt, who are both quite well-informed on retirement savings.

It's easy to feel like retirement is a long way away; it is. Personally, I'm looking at 40 years of waiting, at least. So why do we young people need to worry about it now?


If you want this to be your future, you better start planning now. (Image via Wikimedia Commons)
Say Person A starts saving $2,000 a year in a 401(k) or IRA account (more on what those are in a minute) when she is 25 years old. And say Person B starts saving $4,000 a year when she's 35 years old. If they both save the same amount each year until they are 65, who will have more money?

If you guessed B, well, think again. Not only will the person who started saving younger have more money, she will have more than twice as much; assuming 7% interest rate per year (the average rate on these types of accounts), Person A winds up with more than $419,000. Person B? Not quite $200,000. In fact, Person B will never catch up to Person A. Ever.

How does that work, you ask? The answer is about compound interest. I'll be the first to admit that math really isn't my thing, but compound interest is relatively simple. It just means that your interest is calculated both on the capital investment (what you are physically putting into the account) and on any interest you've already earned. What this means for us 20-somethings: It is imperative that we start saving for retirement now, if we want to retire at a decent age and have enough money to live off of.

I promised more info on 401(k) vs. IRA accounts. Unfortunately, I can't go into a lot of detail because I'm not terribly informed myself, but this is what I do know: a 401(k) is company-sponsored; some companies even match your contribution (it's like free money! that you can't touch for 40 years!) but in this economy, many companies are not matching contributions. That's okay. An IRA stands for Individual Retirement Account, which means you don't need your workplace to sponsor it. Anyone can open one. There are different types of IRAs, and more differences between them and 401(k)s (like how much money you can withdraw, when you can withdraw it and the penalties associated with early withdrawal), but honestly I don't know too much about all that. Sorry :(

So. Lesson for the day, I suppose. I had a 401(k) started when I began working for my current publication. When my pub got sold to a local media giant, my 401(k) got closed and converted to an IRA. I wanted to liquidate that fund and start my retirement savings fresh with my new 401(k) with my new company. After all, the IRA only has about $1,100 in it. I could certainly use that money to pay down some of my debt, or bulk up my savings account. Even after penalties and taxes, I would have gotten about $700. Seems like a good deal, right?

Before making a decision, I consulted my financial guru father. And you know something? He told me that money is only worth $1,100 now. But in 40 years, assuming an average 7% interest rate, that money will be worth more than $15,000. He added that it's common, with job changes and company buyouts and the like, for people to have more than one retirement savings account. Apparently, one of my aunts has five. That was enough to convince me to leave the money in my savings account, even if it means I have to work a little harder and longer to pay down my debt. How's that for a responsible fiscal decision?

So, in summary, you should be saving for retirement. Now. Since I'm no financial expert, go talk to the folks at your bank or a dedicated retirement savings company (I was using Principal before; can't remember the name of my new company) about opening an IRA, or talk to your workplace's HR person about the company's 401(k) options. Get informed, then get saving!

Have a financial topic you'd like me to discuss? Email me at verbal.melange at gmail dot com.