401(k)s & Super Bowl Sunday

Can you believe football season is over already? I swear months fly by now that I’m working.

Last week I had a few people ask if I could write about 401(k)s. Here goes. A 401(k) is a defined contribution plan. You (the employee) can put a set amount of money from your paycheck into that 401(k) monthly. Most of the times your employer will have a few investment choices within the 401(k) and you have to choose which one is right for you. Simple enough, right?

Let’s go a little deeper into this simplified definition. You can make contributions to your 401(k) before or after tax. Which one should you do, you ask?

Before tax.

Let me tell you why. Let’s say your annual salary is $36,000. In taxes, you pay 15% Federal, 5.75% State (VA), 1.45% Medicare, and 6.2% Social Security. If you make $3,000 a month before tax, you take home $2,148.

Let’s say that you have a 401(k). You decide to contribute $250 a month.

If you choose to put the money in before it has been taxed, you are not being taxed at the federal or state level. You do have to pay Social Security and Medicare tax. Subtracting Social Security and Medicare tax, $230.87 would go into your 401(k).

If you allowed that same $250 to be taxed, you would have $179 after tax. By avoiding Federal and State tax, on day 1, you have already had a 20.75% return. Without the money even being invested! Where else can you get a return like that?

Let’s look at post tax. To compare the two, let’s say you want $230.87 in your 401(k) after taxes. In order to put $230.87 in after tax, you would have to earn $291.32 in pretax money.

What would you rather do? Would you rather put $250 or $291.32 in your 401(k) to get the same ending value of $230.87?

So you pick pretax. You’re getting a phenomenal return and now you have to choose which fund or funds to put this money into.

Funds vary from plan to plan so it is very important that you choose the correct choice for your life stage and what’s going on in the market. Choosing different funds and the percentage in each fund can help reduce overall risk and help your 401(k) grow even more.

Ideally, you want to rebalance your account every eight weeks to stay with the cycle of the market. When you rebalance remember to sell high and buy low. This is the exact opposite of what most everyone does. Most people sell when the market is down, hoping to get out of what seems like a horrible situation, and they buy when the market is high, hoping to get in on the action. They’ve got it all backwards!

Super Bowl Sunday gave me a great excuse to bake. My friends had a bunch of people over for a Super Bowl/Chinese New Year party. There was an interesting mix of food there- I wish I would have taken pictures to share!

I knew I wanted to make something for the Super Bowl half of the party, but I had no clue what to make. I ended up baking chocolate cupcakes with a buttercream field on top.

For the past two months, I’ve been dying to use the grass decorating tip my parents gave me for Christmas. What a great time to try it out!

Getting the grass to 1) stand up and 2) be the same length was tough. Piping the grass killed my wrist. I had to do a little at a time, pipe the lines, take a 10 second break, fix any mistakes, and then move onto the next cupcake.

Football Field

My system might have seemed pretty insignificant, but I ended up with 24 beautiful cupcakes. If you treat your 401(k) like I treated my cupcakes, doing a little at a time, checking for areas that need improvement, you will have retirement savings that you are proud of.

It takes time and maintenance for good 401(k)s and cupcakes. If you would like a complimentary second look at your fund choices, or assistance in selecting funds when you rebalance your portfolio, mention this blog post in an email and we can meet to discuss your options.


Taxes & Tiaras

Let’s talk about taxes. Last week I told you that 1/3 of your paycheck/resources would end up going to them.

“But Bridget, I’m not in the 33% tax bracket??”

You’re right- you might not be in the 33% federal tax bracket. You do end up paying around that amount. Let’s think about all of the things you’re taxed on. Federal tax (15% to 25% depending), state tax (Virginia 5.75%), Social Security tax (6.2%), Medicare tax (1.45%), personal property tax, real estate tax, sales tax, gas tax, and any possible city or locality tax.

See how that can add up real quick?

That’s a lot of taxes! I’m not anti-tax, we need some tax to provide for programs, roads, and schools. But when is enough tax…enough?

If the government is taking one third of your paycheck for services and programs, don’t you think you should keep that same amount for yourself? That’s where the investing/saving third comes into play. If you pay the government a third of your paycheck/resources, you should pay one third to yourself.

For a young professional this is a lot easier said than done.

As an advisor, I practice what I preach. When I make my monthly budget, I use the “third, third, third” rule. As a young professional who is a under a year out from school, I know it’s hard to live off of one third of your paycheck.  Using that rule has made my savings and investment accounts grow a lot more than they otherwise would have.

I learned to live on a budget right out of school and decided it was a good habit to keep. That first paycheck was wonderful. I could and would have been able to spend it all in a few trips to Home Goods and the grocery store. I tried not to fall into the trap of “I owe it to myself.” It is all too tempting to go out with that paycheck and say I deserve this lamp and this nice duvet cover. Don’t fall into that trap!

What I’m saying is: If you try to live off of just one third of your paycheck, you will save more. Odds are, you probably won’t be able to, and will end up using some of the investing/saving third. Trying to stick with this rule will make you aware of how much you spend and hopefully help you save a little bit now so you don’t have to worry as much later.

Here’s a personal story about me and taxes.

I bought a new car this year. Exciting, right? My old car was my dad’s that he had bought in 2001. I loved that car, but there comes a point where you need to know that it will start in the winter no problem and will get you from A to B without leaking all of its oil along the way. I would have kept driving that car, but the constant cost of repairs were not in the cards for me.

Guess what happened in December? I got hit with a personal property tax bill. Luckily, I only had to pay December’s bill. Turns out my county sends two out a year- one in June and one in December.

I’m not going to lie, I was pretty upset about it. Why did nobody tell me this? Shouldn’t there be a disclaimer when you buy the car? Why are they taxing me when I got a more gas efficient car? It might as well be a hybrid! The government should be thanking me. These were all of the thoughts that were going through my head. Some were said aloud. You can ask my boyfriend, Patrick. I was an angry elf.

I paid the tax bill. Do you know what I did next? I put the exact same amount of money into my savings account after. Why wouldn’t I want to pay myself what I had to pay the government? Gotta look out for #1. The government’s doing it, why shouldn’t you?

Silver lining to that story? I know those two tax bills are coming this year and you can bet that I will have money set aside in anticipation of them. I know they’re coming, and I will be ready.

Last week was my birthday. Naturally, I had a tiara on at the dinner table. See? Taxes & Tiaras. I feel like TLC could use this idea for a spinoff show of Toddlers & Tiaras. I can see it now… toddler beauty queens doing taxes for their talent portion of the show.

The cake I talked about last week turned out great! I had seen a lot of rosette cakes pop up on Pinterest and wanted to give that a try. I put my 1M tip on a piping bag and started icing the cake. Turns out you’re supposed to start rosettes from the inside and work your way out. As a novice rosette maker, I started from the outside and worked my way towards the center.

Rosette  Cake

I thought it still turned out pretty good for a reverse rosette. Here’s a tip for all you first time rosette makers: use a biscuit cutter (or any type of circle shape) to outline where you want each rosette to go. If you plan it out before you start piping them on, you can make sure you don’t have any awkward gaps.

Feel free to email me if you would like to talk more about “third, third, third” of if you want the cake or icing recipe.

Thanks for taking the time to read this week!