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Cha-ching, it's the [Financial Literacy] thread
mRahmani
DetroitRegistered User regular
DetroitRegistered User regular
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.
INVESTMENTS
401(k): 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.
Roth IRA: 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 Money is taxed before going into the Roth fund, but there is no tax when money is withdrawn.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.
BUDGETING
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.
CREDIT CARDS
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:
Cash back: 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.
Airline miles: 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:
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
INVESTMENTS
401(k): 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.
Roth IRA: 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.
BUDGETING
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.
CREDIT CARDS
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:
Cash back: 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.
Airline miles: 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:
Quid wrote: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
You can't give someone a pirate ship in one game, and then take it back in the next game. It's rude.
mRahmani on
+31
Posts
YOU DON'T LOSE MONEY MOVING TO A HIGHER TAX BRACKET.
If you have an opportunity to earn some extra cash or take a raise, do it. If you move in to a higher bracket then only the income earned above that bracket will be taxed at the higher rate. Don't sabotage your future because of a myth popular among people who hate taxes.
Probably, but it depends. Some (most?) balance transfer cards charge a small fee up front, I've commonly seen 3-5%. So if you need to move, for example, $1000, and the fee is 3%, your total payment will be $1030. You should do the math first and make sure that the fee won't outweigh what it'll cost you to just pay the amount off as is.
EDIT: Also make sure there are no stupid gotchas on the new card, like an annual fee.
You can't give someone a pirate ship in one game, and then take it back in the next game. It's rude.
You pay no capital gains tax on any income generated by TFSA assets, whether it be dividend or sale.* That is why you should put your higher risk, higher return assets in TFSAs. TFSAs are almost entirely superior to RRSPs unless you're paying some exorbitant income tax rate or you're very near to retirement anyways,** whereupon the tax deduction for RRSP investment is superior to the tax-free status of TFSA income.
* I believe interest would be automatically plowed back into the TFSA anyways, so there wouldn't be capital gains tax on it until you sell the assets and withdraw the money from the TFSA.
** Mathematically anyways. There are other legal differences that may be relevant.
One thing that was never really impressed upon me is that saving $20 a week when you're 20 and turning that into an IRA when you've got enough saved up to start one (usually $500 or $1000) is way better than waiting until you're in your mid 30s and can afford to max out an IRA.
Pretty much this. That being said, you can typically call the credit card company and convince them to waive the fee. Not always, but it's certainly worth the phone call. However, if you know that you can pay the amount off within the balance transfer 0% period, do it.
The reason the card companies are offering you the benefit of 0% is because *most* people aren't able to pay off their balance transfers in time. Plus, those people will typically continue charging the card while attempting to pay it off. What's interesting is if you read the fine print on a credit card, the lower-interest-rate charges typically get paid off first. This means that, for example, if you decide to use a credit card that you transferred a balance to, all of your payments will go to pay off the transferred balance while your new charges sit there and gain interest.
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With regards to finance, many financial professionals (read: financial planners) recommend paying off debt as your first and most productive step toward any level of financial independence. The line in the industry is, "You're making a 15/17/20/24% return on that money!" While I disagree with the statement, I understand the sentiment. Basically, by paying off the given debt, you're not paying the X% interest, so since you're not losing money to interest payments, you're -- in essence -- making a return on that money. Even the money didn't really earn you anything; which is why I have issue with the analogy.
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I will have a longer post in here in the near future. I'm a Mechanical Engineer, but I decided to start getting smart about my finances about 3 years ago, so I've done a lot of research. Before that, my wife and I both read "The Automatic Millionaire" shortly after we were married, and I've been saving in my work's investment plans since I started 15 years ago.
The awesome thing about right now is that the 2008 crash brought a lot of attention to banking and finance, there is a wealth of tools out on the internet; and I'll let you know the ones I use, or have used. For example, I tried YNAB for budgeting for a bit, but I just couldn't make it work with the way I handle money. That being said, their YT videos do a fantastic job of explaining how the system works and how you can set it up for yourself.
A 401k is a retirement investment plan offered by your for-profit employer. You can contribute up to $18,000 of your income yearly ($24,000 if you're over 50). Most of these will be administered by a financial firm that will give you a choice of various funds and investments to put your money into. A 403(b) is similar to a 401(k), but provided by a non-profit employer.
An IRA is an individual retirement account. You can create one of these yourself with any firm that provides them. If you are not covered by a 401(k) or 403(b) plan, your contributions to an IRA are tax-deductible. If you are covered, some of your contributions are deductible, based on your income.
You can have Roth 401(k) and Roth IRAs. The difference is that your contributions are not tax deductible, but your withdrawals will not be taxed.
In both regular and Roth retirement funds, you are not taxed on the capital gains - any returns on your invested funds.
A SEP-IRA is a special type of IRA for very small companies or single proprietors. The rules on contribution amounts and limits involve a few calculations based on the total salary and net profit of the firm.
A SIMPLE-IRA is another type of IRA for small firms. It's kinda like a cross between a 401(k) and an IRA, with specific rules on contributions (both minimum and maximum).
One thing to remember with all of these retirement funds is the early withdrawal penalty. If you take money out of a retirement account before you are 59.5 you will pay an automatic 10% penalty in addition to paying all federal and state taxes on the amount you withdraw.
This is not the greatest example, but the effective return rate shows off why compounding interest can be powerful:
Back in ~February, I opened a Betterment account as a thought experiment of whether I could make more over time from investing $2/week than someone playing the lottery. I rounded up the payment to $10/month. Here's where it stands today:
$90 isn't much to invest over the course of a year, but note that this particular investment has gained 7% so far; which is above the accepted return average of 4%. A time-weighted return of 17% is also really good. How Betterment calculates their percentages is explained HERE
god bless and welcome to the MONEY.e^xi zone
Keep in mind with a balance transfer they often charge you a flat fee or 3% (or whatever) even if there's 0% APR.
So a balance transfer of $2,000 only makes sense if the interest you'd pay over the time is more than the 3%/fee. There are calculators that can help with this.
edit oh i was beaten, oops.
I also have an Amazon store card for 5% off there in a statement credit.
not having to pay taxes now may not actually be better for you in the long run. you're basically betting that taxes will never be higher than they are currently
and currently taxes are near the lowest they've ever been in the US in the modern era (like post WW2)
One reason to have them in conjunction with a traditional IRA/401k is that they allow you to game your tax brackets when you are in retirement, particularly in the 'go places/do things' stage of early retirement. If you want to withdraw an extra 15k one year for a big trip of whatever, by using a roth that extra 10k won't be counted as income, potentially pushing you into a higher tax bracket.
They can also be good if you have a lot of deductions driving down your tax rate. Mortgage interest, kids, etc.
Second, you can withdraw the contributions before you turn 59-1/2 without paying a penalty or taxes on it. So if you are putting away $1000 a year in a roth starting at 25, by the time you hit 40 you'll have a pool of 15k you can tap into in case of emergency. Obviously that isn't something you want to do but you never know.
Third, You can make a qualified withdrawal(no penalty) to help with a first time home purchase. There's obviously some risk there if you are trying to buy and the market has a big drop, but if home buying for you is 5+ years away the interest is probably worth it.
I know this isn't the point of the graph, but it's depressing that a savings account with a 5.5% interest rate seems wildly unrealistic at the moment.
I'm also pretty financially illiterate so if someone wants to enlighten me about how it's actually pretty easy to get that rate then please feel free.
I have an old retirement account with TIAA-CREF about $20k. It goes up and that's fine. It just sits there. (It's gone from like 15k to 20k in 4 years)
I have my current job retirement account where I contribute 6% to get a 3% match (the max from employer).
Both of these are in low fee, pretty favorable return mutual funds. I feel okay with that.
Am I missing out by not having an IRA/Roth IRA? I don't quite understand what I should/could be doing differently than my current set up.
Thank you.
Savings accounts are pointless nowadays
Doc: That's right, twenty five years into the future. I've always dreamed on seeing the future, looking beyond my years, seeing the progress of mankind. I'll also be able to see who wins the next twenty-five world series.
you get that rate from things like ETFs and IRA's fairly commonly
though it won't be constant, that's a reasonable average you could expect i think
my understanding is an IRA is mostly for people who don't have employer-provided retirement or people who want extra retirement, but aren't, like, a necessary component of a strong retirement portfolio or anything
With a savings account you can't. To get a return like the above (which is a conservative estimate) you'd need to invest in an IRA or mutual fund. The OP has links to a couple good resources for those.
Edit: Actually now I don't see it. Vanguard of betterment.com are good resources for those.
So yeah, Start Early.
I would do some math and see if you like the numbers you'd get with your current investments, and if you'd like to save more then and IRA is probably how you'd do it.
Personally, I would also roll off the old retirement account into an IRA, mostly because I'm uncomfortable with old 401ks for places I don't work any more. I've heard stories of all kinds of headaches for people trying to access that money down the road.
fuck up once and you break your thumb / if you're happy at all then you're god damn dumb
that's right we're on a fucked up cruise / God is dead but at least we have booze
bad things happen, no one knows why / the sun burns out and everyone dies
yeah i see stuff like this or look at the projected returns on my retirement and i'm like
cool i should get a good six or eight years out of it
well played, chanus
I have about $10k sitting in a savings account, and I expect to be adding at least $1k to it per month. I'm also hoping to pull out enough to pay off my mortgage before I hit 59.5 (slightly over 30 years from now).
This leads me to believe I should be putting stuff into something other than my 401k or an IRA. I've seen Vanguard mentioned a few times, so I'm guessing I should just be investing? In mutual funds? Or whatever an ETF is?
I care less about taxes and gains and more about liquidity, being highly risk averse, but I think it's time to say goodbye to some of my cushion.
Also, I recently started using You Need A Budget; as far as I can tell you need to go to the desktop site to do anything on a phone, and my brain just cannot get a grasp on the way they handle credit card spending, but it is very slick and makes it easier to track what you're spending too much on. They've got a free trial, it's worth a look.
Doc: That's right, twenty five years into the future. I've always dreamed on seeing the future, looking beyond my years, seeing the progress of mankind. I'll also be able to see who wins the next twenty-five world series.
Most people don't even have 2k in savings (which is bad) so good work being responsible!
Looking at the state budget outlooks, now my pension will never materialize and my employer will not contribute towards a matching 401k because technically the pension exists. Ha ha ha!
Sigh.
I try to add $500 a month to my checking account but that's because I'm insane.
*melts into the pavement, a soft warbling nuuuuuuuuuuuuu sound fading into the air*
it's not magic bullshit
it's very specifically crafted and maintained bullshit so a few people don't need to pay as much taxes
fuck up once and you break your thumb / if you're happy at all then you're god damn dumb
that's right we're on a fucked up cruise / God is dead but at least we have booze
bad things happen, no one knows why / the sun burns out and everyone dies
Mostly because our life expectency is rising waaaaay faster than our work-life cabibilities and society has not and likely ~will not~ adjust for such.
A few things that are common in financial planning stuff like this -at least as far as I've seen- is that they always assume 0 social security dollars. I mean I'm as much of a believer in "the boomers are going to drain all the money like vampires and I'm getting nothing" as anybody, but that probably isn't strictly true.
Also, they tend to make very linear assumptions about spending habits. I've seen some better analysis that looks more at like "how much money does a 85 year old actually spend vs a 67 year old". One person I talked to once explained it as "we assume 65% income after age 80, because that's all you'll need for coffee, the newspaper, and daytime TV".
Doc: That's right, twenty five years into the future. I've always dreamed on seeing the future, looking beyond my years, seeing the progress of mankind. I'll also be able to see who wins the next twenty-five world series.
Oh I used to save $600 a month on less salary but I had no car payment and my rent was a lot cheaper. Still, I waste far too much money on bullshit food and drink. Now I take a reasonable $100 per biweekly paycheck and put it in savings.
I have a Roth IRA with Vanguard (0.16% expense ratio!!!). It's *finally* actually making money for me, as it's been in the red for most of the time I've had it. I also have a 403b through my work (Fidelity, expense ratio = 0.7%), which is contributed at 6% from me and 8.5% (!!!!!) matched. Total monthly put-away is like $750, versus gross income of 3200 (23%). I'm 29 now.
I'm reasonably happy with my retirement contributions, but my savings account is very much not growing right now and I'm wondering if I should back off on the retirement contributions until I get back over 10k in savings. I could also stop spending money on lifestyle things (so shiny....), but obviously I really don't want to.
I agree with this post completely. For the flip side however: Depending on your lifestyle in later years your income requirements may be much lower. My wife and I plan to retire to either the country or city by then. Which either means significantly cheaper real estate or eliminating one or both vehicles, either way decreasing our yearly budget notably.
Basically, a person's investments should be planned around the life they intend to live in the next few years to decades down the line.