End the Year Strong Financially

Girlfriends – End the year with your personal finances a little stronger

Here are some simple tips to get you started.

  1. Start small. Like anything when you want to create a new habit, start with something smaller and increase slowly so you stick with the new habit.  Before you sell yourself short and downsize to save some money just start small. For example, make your own coffee in the morning instead of stopping at a coffee shop on the way to the office. Pack your lunch instead of eating out – unless you are taking a referral partner out.  As a matter of fact, eating out, in general, takes a huge toll on our budgets.  Add a glass of wine or two and your bill really increase.  Wait one extra day to buy the shoes you saw on sale to determine whether you really need them.
  2. Update your budget. If you don’t have a budget then it is time to make one. There are plenty of apps out there or just create your own on a spreadsheet. Write down all your categories of spending, including food, transportation, housing, etc. Each month enter your actual expenses and see if you are reaching your goals. If not, it is time to adjust your spending or increase your earnings.
  3. Have a separate account for retirement savings and your six months of emergency funds.  Make sure you contribute to each account monthly to meet your long-term goals. For your retirement account here are the most common types of plans: 401(k), traditional IRA, Roth IRA, SEP IRA, Simple IRA and Simple 401(k), and solo 401(k). These plans differ in their tax advantages, contribution limits, and withdrawal rules.

401(k): This is the “standard” employee retirement plan.  If you are an employee, your employer’s 401(k) could be the most convenient retirement option. Generally, you can contribute simply by allocating part of your paycheck to the retirement plan. This will also reduce your taxable income at the end of the year.  For example, if you earn $75,000 in a year and contribute $5,000 toward the plan you will only pay income tax on $70,000.  In addition, your money is growing tax-free until you withdraw it. At the time of withdrawal, you will pay income tax which may be at a lower tax rate. As with most retirement plans you will need to be 59 ½ or older to withdraw the money and under current tax law, you will be required to start withdrawing at age 72. There are some exceptions to the withdrawal ages so if you need it sooner, check with a financial planner. The biggest attraction of a 401(k) is many employers provide a matching contribution. Essentially that is free money. These contributions are subject to a vesting schedule which means if you leave before you are vested you may not receive all the “matched” money. You are entitled to all your personal contributions, however. If you leave before retirement speak with a financial advisor on how best to roll over your money so there are no penalties. Another attraction to the 401(k) is the large contribution limits. As of 2022, you could contribute $20,500 or $27,000 if you are 50 or older. You are required to invest only in the choices the plan offers, however, plans are required to have conservative and aggressive options.

Traditional IRA: A retirement plan for anyone. IRA stands for Individual Retirement Arrangement. If you do not have access to a 401(k) you can set up and manage these by yourself. The aspects are like a 401(k) as far as contributions reducing your taxable income and your money grows tax-free until you withdraw it. It also has similar age restrictions. The biggest difference is contributions are much lower. In 2022 $6,000 or $7,000 if 50 or older are the contribution limits. You will have a much larger choice of investment options as you can set up your own plan. There are situations where you can contribute to both a 401(k) and an IRA.  Again, meet with a financial planner as there are limits based on income.

Roth IRA: A retirement plan with a tax advantage. The biggest difference between a traditional and Roth IRA is when you get the tax benefits. With a traditional IRA you pay no income tax on your contributions however, when you withdraw money, you will pay income tax at the tax rate at the time of withdrawal.  With the Roth IRA, it is exactly the opposite.  You will pay taxes on the money you contribute to the plan but pay no taxes when you withdraw, so every dollar goes into your pocket. The big question is whether your tax bracket is higher when you withdraw the money or now. The other big difference is you do not have to start withdrawing money at age 72. You can only contribute to a Roth IRA if your income is below a specific threshold.

SEP IRA: An IRA for small business owners or self-employed people. SEP stands for simplified employee pension. The big advantage of a SEP IRA is the ability to stash away much bigger retirement savings each year.  An employer can contribute up to 25% of each employee’s income up to a maximum of $61,000 in 2022. If you are self-employed you can contribute up to 25% of net income up to the same limit. So, if you have a side business on the side check with a financial planner to see if you can set up a SEP along with any other plan you have to maximize your retirement savings.

Simple IRA: A Simpler small business retirement plan. Simple stands for Savings Incentive Match Plan for Employees. This is a plan for a small business with 100 or fewer employees. The employer must either match employee contributions up to 3% of their salary or contribute 2% of their salary regardless of their contribution. Employees are always fully vested. In 2022 employees can contribute up to $14,000 of their salary or $17,000 if over 50.

Solo 401(k): This is for business owners with no employees. This works like a 401(k) plan but is not as complicated and can maximize retirement savings for self-employed people and business owners without employees. As an employee, you can contribute up to 100% of your self-employment income to a max of $20,500 in 2022 or $27,000 if you are over 50. Then you can put your employer hat on and contribute an additional 25% of your business income. The total maximum contribution is $61,000 or $67,500 if over 50.

Overall retirement plans provide tax advantages as incentives to save for retirement. Find the plan that is appropriate for you and maximize your contribution to put you on track for a comfortable retirement.

  1. Cancel some of those unwanted subscriptions.  Look at your monthly credit card statements carefully and see if it’s time to get rid of some monthly recurring fees.  Do you need Amazon Prime, Hulu, and Netflix?  What about the five magazines you get every month and have very little time to read?  Along with that cancel delivery services for groceries and delivery of food. If grabbing Chinese dinner tonight stop and pick it up yourself instead of having Uber eats deliver.
  2. Sell unwanted items. Not only will you make some extra money you will declutter and feel more organized. Have a garage sale, or sell your items on Facebook Marketplace, Craigslist, or eBay. If you don’t want the extra hassle to make the money, then donate your items and feel good about helping someone else.
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