For most, it’s difficult enough to juggle money given all of the demands and choices - saving for retirement and college. Paying down debt. Building up reserves. Living a comfortable lifestyle. Taking care of aging parents.
At the same time, we’re confronted by so many choices – am I getting the highest rate on my savings? Paying the lowest on my credit cards? Should I pay off my mortgage early? Do I know what I’m doing with my 401(k) at work?
No wonder most people throw their hands up in the air!
But even trying to do the right thing can have consequences. Take for example, a basic rule of thumb - saving regularly.
On top of everything else, let’s suppose you scrimp here and there and manage to save $100 per month into an account providing a hypothetical 5% return.
Over the span of 20 years, you would have contributed $24,000 in principal and the ending balance would be just over $41,000.
But here in MA, we have to pay income tax. Assuming a 25% federal income tax rate and a 10% state tax on interest and dividends (not counting the interest exclusion from MA banks), that little pot of money is really only $35,000.
By saving, you would have paid just over $6,000 in income taxes over those 20 years. And how much work did the IRS do to get that money? None. Zero. Zip.
But let’s talk about that $6,000 in taxes. If instead you were able to take that tax and invest it at a hypothetical 3% tax free rate, it would have earned you another $2,000 in interest.
Think about it – if you could simply be more efficient in saving, you could have $8,000 more. That’s 1/3 of your principal invested!
Or, by not being efficient, you basically threw away $8,000 in money you could have had. And the worst part – most don’t really even realize this.
This is not about some magic investment strategy to try to earn a higher return. After all, the more you make, the more the IRS takes. And in my personal opinion, tax rates will only go up in the future.
With your finances, taxes can play a big role and must be considered.
But you can do something about this. It will just take a careful analysis of various account types and savings vehicles, combined with knowledge of the tax code and you’re all set!
Seriously, this is something you can do about. The only question you have to answer is when do you want to stop throwing away money?
Answer to last week’s trivia: D. Someone with a college degree has, on average, a net worth that is four times greater than someone with only a high school diploma.
This week’s trivia question: According to Sallie Mae, what percentage of total college costs is borrowed through either student loans or parental loans? Is it:
A. 5%
B. 27%
C. 39%
D. 69%
