FICA Tax

If you don’t usually look at your pay-stub, take a look at your most recent one now.  Look at the gross amount you received this pay period and multiply that by 7.65% and that amount should match the number that says FICA or FICA tax.  I just double checked my last pay-stub and yep, it matches exactly.

So what is FICA taxWikipedia defines it as, “a United States Federal payroll (or employment) tax imposed on both employees and employers to fund Social Security and Medicare”.  Basically, it’s where our Social Security and Medicare money comes from.

6.2% of FICA tax is for Social Security and 1.45% is for Medicare.  If you’re self-employed, you have to pay double the amount (15.3%) because you’re covering the employee and the employer portion for yourself.

If you made over $113,700 in 2013, it gets a little tricky.  And thanks to Obama Care, if you made over $200,000 in 2013, it gets even trickier.  Since most of us millennials aren’t making that much just yet, I’ll save that calculation for another day.

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Compounding Interest

Compounding interest is the main reason why you should start saving for retirement as early as possible.  Time is compounding interest’s best friend.  Instead of earning interest on just your principle (the amount you put into the account), you also earn interest on any previous interest accumulated.

I won’t bore you with specific calculations but here is a great example that illustrates the power of compounding interest:

Mary and Shelly both put $2,000 into their retirement accounts every year but at different times in their lives.  Mary only put money into her retirement account from age 25 to age 33 (a total of $16,000).  Shelly on the other hand, didn’t start putting money into her retirement account until age 33 but she didn’t stop until she retired at age 65 (a total of $64,000).  Both of them earned 10% on their investments.

So who had more money in their retirement account at age 65?  Thanks to compounding interest, Mary did even though she saved a lot less money than Shelly.  Mary ends up with $531,188 and Shelly ends up with $442,496.

If you haven’t started saving for retirement yet, the best day to start is TODAY.

My Financially Productive Weekend

Since I took this past Monday and Tuesday off, I just had a 5 day weekend.  Two of the major finance related tasks that I tacked over my long weekend were:

1) Selling My Car

2) Sorting through all of my mail and my mom’s mail from the last 8 months

Selling My Car

A few months ago my mom decided to buy my cousin’s car.  Since her car was newer and better than mine, she though it’d only make sense for me to sell my car and drive her old one.  I never sold a car before and the process intimated me.  So naturally, I procrastinated.  After getting a parking ticket (for forgetting to move my old car on a street cleaning day) and getting billed for another year’s worth of auto insurance, I realized I needed to get rid of that car ASAP because it was costing me a lot to keep around.

I wanted to sell it as hassle free as possible so I went to CarMax.

Sorting Through Mail

My mom, for whatever reason, is awful at opening mail so we tend to have bags and bags of unopened mail sitting around.  I finally decided to sort through all of it and unsurprisingly, there were unpaid bills, HOA issues that needed to be addressed, checks!!, expired coupons and all other sorts of things.  I realized it was time to find a solution for this routine build-up once and for all.

So going forward:

1)  All my statements will be paperless.

Because of the way I track my spending and the fact that I pay all my bills online, I find reviewing statements to be extremely redundant.  I really don’t have any use for hard copies, especially since all I end up doing is scanning and shredding them.  The same result can be achieved by saving a PDF version directly from the website.

2)  I will pay my mom’s utility bills for her.

It seems like utility bills are her weakness because she’s pretty good about paying her credit card bills on time.  Since she doesn’t really need to review utility statements (they are more or less the same every month), I figured I’d just pay it for her using a joint credit card we share.

3)  All her statements will eventually be paperless.

Once we get used to the first two changes, I will slowly convert all of my mom’s statements to paperless as well.

I think these 3 adjustments will dramatically reduce the amount of mail we receive and hopefully, that’ll help her get into the habit of opening mail at least weekly.  If not, at least we’ll have less paper clutter sitting around and no more money will be wasted on late fees again!

Did you get any finance related tasks/errands done over the holiday weekend?  If not, this upcoming weekend would be a great time to do so since the New Year is right around the corner!

401k vs. Roth 401k

The difference between a 401(k) and a Roth 401(k) is essentially the same as the difference between a Traditional and a Roth IRA in terms of what tax benefits each account offers.

Which one is more advantageous for you will again depend on other factors such as your age, future earnings potential and if your employer even offers a Roth option for your 401k plan.

Personally, I use a Roth 401k and a Traditional IRA for my retirement savings.  A set amount is taken directly from every paycheck and deposited into my Roth 401k by my employer.  When it’s time to file my tax return, I work with my accountant to see if I can get an immediate tax reduction by making a deducible contribution to my Traditional IRA.

IRAs (Traditional vs. Roth)

There are 2 main types of IRAs, Traditional and Roth.  The shortcut I use to try to remember their difference is to equate the word Roth with paying taxes nowThis word association will also be helpful when we talk about 401ks vs. Roth 401ks.

Whether a Traditional or Roth IRA is more advantageous for you will depend on factors like what other retirement plans you have and how much money you make.  Most of us millennials just starting out in our careers would probably benefit more from having a Roth IRA since we will (hopefully) be in a higher income tax bracket when we retire.  By using a Roth IRA, the trade off is we pay a smaller percent of taxes now rather than pay a larger percent of taxes later.

Traditional IRAs are the opposite – you don’t pay taxes until you take the money out at retirement.  However, the money that you put into the account is only completely tax-free if you qualify for a full deduction (i.e. if you make less than $59,000 in 2013).  If you make more than that, you will still have to pay taxes on part or all of the money that you put into your Traditional IRA.  BUT!  It will at least still grow tax-free.

401k vs. IRA

Most people have heard about 401ks and IRAs.  But not everyone knows their differences even if they own one or both of these retirement accounts.  Don’t worry.  Up until 2 years ago, I didn’t know their differences either even though I owned a 401k.

Here are a few of their most notable differences:

  • 401ks have to be opened and sponsored by your employer, while IRAs have to be opened by you.  So if you’re currently not working or if you’re employer doesn’t sponsor 401ks, you wouldn’t be able to contribute to a 401k right now.
  • 401ks have higher contribution limits than IRAs.  For 2013, the contribution limit (max you can put into the account that year) is $17,500 for 401ks and $5,500 for IRAs.
  • 401ks usually have limited investment options like specific mutual funds you have to choose from, while you can invest in almost anything in an IRA.
  • 401k contributions are taken directly from your paycheck so you don’t pay taxes on the money until you take it out to use during retirement.  IRAs are funded with after tax money but if you meet the requirements, you can get a deduction on your tax return.

As a general rule, if your employer sponsors a 401k plan, you should use it, especially if they have matching contributions.  That’s free money right there!

What Affects Your Credit Score

It’s hard for us to know exactly how our credit score is calculated.  However, we can get a pretty good idea of what it’s affect by.

MSN Money does a great job of summing up the 5 things that affect your credit.  In short, the 5 things are:

1.  Payment History – pay your bills on time!

2.  Debt – don’t have too much debt, especially credit card debt

3.  Length of Credit History – the only thing that can help this category is time (managing your credit well over time)

4.  New Credit – don’t open too many new credit lines in a short span of time (like applying for multiple credit cards in the same year)

5.  Credit Mix – the more diversified your debt, the better.  Having a combination of mortgage, student loans and credit card debt is better than having all your debt be from credit cards.