“Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations. You have to pay attention to money, but it shouldn’t be about the money.” –Tim O’Reilly
Last year I started tracking all of our monthly expenses against our income to put a number on how much we had leftover to save. Considering that we’ve tried to curb unnecessary and excessive spending since Stephanie quit her job in 2014 and went back to school in 2015, I was still shocked to discover our total cost of living at the end of 2016. After taxes, 29% goes to the mortgage and related expenses while another 38% supports our lifestyle, which leaves 33% to save. We are fortunate to be able to save a third of our net income for retirement—a rate I’ve deliberately worked to increase over the last 3 years—but when measured against the “financial independence” yardstick, not-so-early retirement sits over 20 years away. Update: I revised the percentages and the graph below using more accurate values available after I did our taxes—and it shaved 3 years off of my working life.
That said, early retirement is not my goal. I’m not sure what my goal is. Periodic retirement? Work hard for a handful of years, step away, and then return—unconstrained by prior comforts, habits, and expectations. When viewed from that perspective, those unfathomable 20 years start to look more attractive: a series of several jobs (seeking that ever-elusive purpose), punctuated by sabbaticals of adventure and self-discovery.
So you just got a new job, or maybe your first job ever, and one of the benefits is a 401(k) retirement plan. You’ve been trying to come up to speed, but now you’re being asked to make a bunch of complicated investment decisions that will have an impact at the end of your career—before it’s even begun. Here are 4 simple steps to get you started:
Ten years ago I embarked on my retirement savings journey by opening a Roth IRA. The research I did at the time gave me the conviction to make post-tax contributions in the present—to avoid paying taxes on the projected earnings 35-40 years in the future (while also hedging against the risk of higher taxes). It seemed like a no-brainer. Later, when I had access to a Roth 401(k) at work, I followed suit and contributed even more, rolling that balance over to my Roth IRA between jobs.
But it turns out that I fundamentally misunderstood how our progressive tax system works. In short I’ve been paying the full marginal tax rate on my contributions (25-28% Federal + 9.3% CA), but if I had put that money in a Traditional 401(k) instead, I could have avoided paying those taxes, and I would very likely have paid little to no effective tax on any future distributions (depending on my cost of living in retirement).
The New York Times recently published an article entitled, How Should You Manage Your Money? And Keep It Short by Ron Lieber. In it, he asked several personal finance experts to summarize their “best ideas” in the space of an index card (inspired by one such internet-famous card and the book it spawned). I enjoy these sorts of pithy financial recommendations, but what really caught my eye was this call to action alongside the article:
What Would Your Card Look Like? Please make your own card with a few simple tips (or just one, or a sketch) and upload a photo of it here. We’ll display some of our favorites in the coming days.
I didn’t think I had anything to add beyond Scott Adams’ 9-point financial plan (which got me started on this path 10 years ago), but I did wonder whether others might benefit from keeping a yearly log of their financial decisions and plans, as I do on my blog. So I distilled Adams’ list down to what I thought were the 4 most important pieces of advice, and then added my own. Here it is:
I always expect, after recounting my financial chores from the past year, that the next will be simple and uninteresting. That all I will have to write in 12 months is, “I worked a lot and saved a little.” Instead, it seems, each year I confront new challenges, learn the details of increasingly complex financial acronyms, and continue to fine-tune my savings strategy. This, my tenth such dispatch, is no different. (You can read my first here.)
![Justin Watt's index card financial advice: Pay off your credit cards [every month]; Save 6 months worth of expenses as an emergency fund; Fund your 401(k) and/or IRA [to the max] and invest in index funds with expense ratios below 0.1%; Get term life insurance---if you have a family to support; Once a year (early January) write a letter to yourself describing the financial decisions you made in the past year and the financial plans you have for the coming year---before writing, read each of your previous letters](/images/index-card-financial-advice-by-justin-watt.jpg)