This came up in the presidential thread and it seemed like something worth discussing. @Mugsley
had some good insights and I'm hoping others can chime in and get some good info going. I'm going to throw some super basic stuff into this OP and then hopefully expand it over time. Below is some basic collective knowledge from the thread - it is primarily US-based, but I'll try to expand into other countries' specifics as I can.
A 401(k) is a specific type of retirement fund defined in the IRS tax code, which basically allows you to defer tax on income. Instead of paying 20% (or whatever your tax rate is) on your income and investing it, you're allowed to put the money away tax-free until retirement age. The money is then taxed when you go to withdraw it after retiring. Putting off the tax payment is useful, because having the additional money in the account up front allows interest to grow more quickly, resulting in a larger pool of money at the end. 401(k) plans are pretty standard and most major companies offer some form of them to employees, though the benefits and contribution matching rates vary greatly.
A key thing to note with 401(k) plans is that there is a large tax penalty to withdrawing money before retirement.
Basically a reverse 401(k). Money is taxed before going into the Roth fund, but there is no tax when money is withdrawn. There are arguments both for and against this method, but I am not knowledgeable enough to make them.
There are a number of budgeting tools out there to use, which can help you plan out your finances and start setting realistic goals of how to pay down bills and build savings. I personally use Mint
to track my accounts and set financial goals. I've also heard great things about You Need a Budget
on Steam, though I haven't tried it personally.
Mint is free to use, and basically operates through advertising various credit cards at you. My general advice is to ignore every ad on the site. It's pretty rare for somebody to actually need or strongly benefit from a new credit card.
With great power comes great responsibility.
A credit card is nothing more than a convenient loan. You open a loan (credit card) account with a bank, they set a limit that they are willing to loan you, and you can borrow that much on the account. You are then charged at what's known as an Annual Percentage Rate, or APR. I've seen APRs range anywhere from 6.99% (VERY low, but still not that great) to 35% (EXTREMELY high). The terms of the credit card will vary widely depending on your credit score. If you are new to credit (18 years old/first card) or have rough credit, your credit score will be low, and banks will view you as risky. They will then charge you accordingly. Credit cards can be a useful tool, but they are very dangerous and should be approached cautiously.
Things to run away from: Any credit card with an annual fee. There's no reason to pay an annual fee for the privilege of borrowing money.
So why would anybody use a credit card? Well, they have some neat perks:
Some cards offer a certain amount of your purchase amount back as a reward. I've seen the rewards amount vary from anywhere between 1-5% of your purchase. A typical scenario might be a card that offers 2% back on grocery purchases. So if you go to your local grocery store and spend $100, you earn $2 in rewards. This might come back to you in a check every few months, or it might add up as points on your account that you can redeem for gift cards or something.
Some cards will give you a certain number of airline miles in exchange for how much money you spend, which can be used to get free or discounted tickets on planes. Pretty cool if you like traveling. There can be a lot of fine print detailing which airlines/routes you're allowed to use, so be sure to read the fine print before assuming you'll get a free ride to Tokyo.
0% balance transfers/purchases:
This can be a huge benefit, and it can also get you in a lot of trouble. A lot of cards offer 0% introductory rates, which means you're not charged any interest on the money you borrow. Great! The thing to be cautious about is borrowing money and not being able to pay it off before the 0% interest term ends. If you are going to rely on one of these deals, you need to have a well thought out plan about how much you'll need to pay every month to have the balance cleared before the interest kicks in.
Another thing to be aware of with 0% offers is that some don't calculate any interest until the period ends, but some begin calculating interest right away. For example, on my wife's PC purchase from Best Buy, we got 0% for 18 months - but interest was charged to the account (deferred) from day 1, at 22% APR
. This meant that if we hadn't paid it off in full before the 18 months were up, we would have been on the hook for an extra $250 on a purchase that was originally $1000. Again, these can be very useful tools, but they can also bite you in the ass very, very quickly.
DEATH AND TAXES
Well, mostly taxes.
First, I would like to quote @Quid
YOU DON'T LOSE MONEY MOVING TO A HIGHER TAX BRACKET.
In the US, people get broken into tax brackets based on income. For 2016, they break down like this:
Now, what does this mean?
Each portion of your income is taxed at the respective rate. The important thing to take away from this is that you will NEVER lose money by getting a raise. That's a self-destructive myth. If you have the opportunity to take a new job/pay raise and are concerned about the tax changes, take the raise. I'm going to do a little math here, but I'll try to keep it simple.
Let's say you're a single person making $35,000 a year. That puts you in the 15% tax bracket. This does not
mean that you pay 15% on your entire income, though. Your initial tax liability actually breaks down like this:
$9,275 gets taxed at 10%, for a total of $927.50 in taxes.
You now have $25,725 that hasn't been taxed yet. ($35,000 income minus the $9,275 we already calculated). This will get taxed at 15%, for a tax bill of $3,858.75.
Your total tax bill is $3,858.75 + $927.50, or $4,786.25.
Your after tax income (the number you care about!) is $35,000 - $4,786.25, or $30,213.75
Now, let's say you get a raise, to $38,000 a year. Awesome! You're now just into the 25% tax bracket. Your taxes will now break down like this:
$9,275 gets taxed at 10%, for a total of $927.50 in taxes.
The amount from $9,275 to $37,650 ($28,375) gets taxed at 15%, for a total of $4256.25 in taxes.
The remainder of your income - just $350! - gets taxed at 25%. Your tax amount on that is $87.50.
Your total tax bill is $927.50 + $4256.25 + $87.50, or $5,271.25.
Your after tax income (the number you still care about!) is $38,000 - $5,271.25, or $32,728.75
You made an extra $2,515. High five!
TO BE CONTINUED