New Year – New You

Now that we are almost a full month into the new year, and everyone has already ditched their New Year’s resolutions, I’m dropping in for some reminders and motivation. Do you want to wake up this time next year in the same exact financial position you are in now? You’re working 5 days a week, and are going to receive a full year of pay, but what do you have to show for it? Sure, you have some new gadgets, new clothes, and you might’ve upgraded your phone to the newest iPhone that Apple offers, but is that what a year of your life amounts to? If you said yes, then you can go ahead and close this tab because I don’t have anything for you.

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If you’re still here, then I’m guessing you’d like to be a little better-off this time next year, at least financially. Now is the time to make conscious decisions and set your year on auto-pilot. All you have to do is make a couple of moves now, and you won’t have to think about it again. While you can just wing it and still be better off in a year, to fully maximize your year and the amount you can save, there is a hierarchy to your financial decisions. Keep in mind, that while you might not be able to make it all the way through the list of contributions, any level of this will have you better off than you were last year, and will set you up for a future better than you currently have. Admittedly, this is assuming you’re entirely, or at least mostly debt free. If you are not debt free, I’d pop paying off debt with a 4%+ interest rate between #1 and #2 and any debt at 3%- would be between #3 and #4. Here’s the typical order of operations:

  1. Contribute to 401k match.
  2. Max HSA account.
  3. Max IRA (Roth or Traditional).
  4. Max 401k.
  5. Invest in taxable accounts or real estate.

You will contribute to the 401k match first because it is pre-tax and also a guaranteed return of whatever the match is. For instance, my employer matches 50% of my contributions up to 2% of my salary (this is a pretty shitty match by the way). In this scenario, I’ll need to contribute 4% of my salary to completely receive the match. If I make $50k a year, I’ll need to contribute $2k a year to receive the maximum match of $1k. Over the course of the year, with bi-weekly pay periods, I’ll need to contribute $76.92 per pay period. However, because this amount is pre-tax I will be taxed on less pay, and I’m already getting a 50% return without having to deal with the volatility of the market.

To keep a running tally, this puts you $3,000 ahead of yourself last year, before adding in the amount that you could get from your investment choices.

The HSA account is also pre-tax, so again you’ll be paying less money in taxes. The kicker is the contributions can also be withdrawn tax free once you hit retirement age (65+). The only catch with the HSA is that the contribution levels are different whether you have a single insurance plan or a family plan. Also, not everyone’s insurance offers an HSA, and it’s not to be confused with an FSA, which is entirely different. With a single insurance plan, the contribution limit for 2018 is $3,450, and with a family plan the contribution limit is $6,900. Or, you can look at it as $132.69 per paycheck for an individual, or $265.38 for a family.

Now you are either $6,450 ahead, or $9,900 depending on your contribution limit.

Next on the list is maxing your IRA. The IRA limit per year is $5,500, or another $211.50 per paycheck. Now whether you choose a Roth or a traditional IRA is an entire article in itself. But, the reason why this one is third on the list, is because it’s not pre-tax. This is the first one that you will feel the full hit of the $211.50 per paycheck. But on the other hand, this one, like the HSA at a certain age, can be withdrawn tax free (there are ways to get it out tax free before typical retirement age, but again, this article can only be so long because of the typical attention span).

The running total has almost hit $12k ($11,950 to be exact) or $15,400. Keep in mind, this is just the contribution, and does not take into account the return on investment that you’ll receive.

Popping back to the first thing on the list, we are now going to contribute to the 401k to the max amount. The max this year has been raised to $18,500. But, keep in mind, we were already contributing to the match, so we’ve already taken $2,000 off that amount. (the max contribution of $18,500 does not include the employer match). This one is the biggest one with a contribution of an additional $634.61 per paycheck. But, again, this is pre-tax.

$28,450 is the amount of money you’ll have saved this year with the individual HSA plan, or $31,900 with the family qualifying plan.

Now that we’ve maximized the tax advantaged accounts, you’ve got a few options. You can: 1. invest in a taxable account; 2. invest in real estate; or 3. do some high level stuff like a backdoor Roth contribution. We will assume if you’ve made it this far in the order of operations, that you are savvy enough to come to your own decision on which of these options is best for you and your financial plan, risk level, or involvement level.

By setting up automatic contributions to each of these things, you’ll be able to save thousands per year at any level, and frankly, you’ll be forced to spend less because you’ll be receiving less. To some people, that may sound like a nightmare, but once you start the contributions, you might feel a bit of a pinch the first month or two. But like most things, you adapt, and with the benefit of delayed gratification, and foregoing some new clothes and gadgets, your financial future is years ahead of where you would’ve been without making changes.

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