Save some money first !!
Mar 10 '00 (Updated Mar 13 '00)
It used to be that financial planners recommended that you keep 6 months worth of expenses in liquid assets - like a savings account. Then they reduced it to three months. I ignored this advice during the early years of our marriage and nearly paid a severe price.
True, its great to put money away for retirement, save taxes and so on, but you still need to have cash on hand to cover those emergencies that life just loves to throw at you. Suppose you need to pay for an expensive car repair, a new heat pump for your house, the IRS, legal or medical fees or even three of these at the same time. Or you might even lose your job. A good guideline is that you need to have enough money on-hand to pay your rent or mortgage for a couple of months.
Should you keep this in a bank savings account, paying a pitiful 2-3% ? Well, frankly, only if you are stupid. A Money Market fund will pay you over 5.5%, give you a checkbook, and let you regularly sweep $$ into the account from either your paycheck or regular checking account. Some will let you deposit just $100 or $500 to begin with if you promise to automatically deposit more each month.
A 401(k) - that you need to use as well. The minimum you should contribute is whatever you employer will match. Note that even now, some employers do not offer any kind of match. A common match is 50% of the first 3% , or 50% of the first 6% you contribute. Some generous employers
will match dollar for dollar up to a certain percentage. Also be sure to check out the vesting scheme. This means that you don't immediately own whatever you employer matches. Although the $$ are placed into your account and they hopefully grow, you may only 'own' 25% after 1 year, 50% after two years of employment and the full 100% after three years of employment.
So lets do some simple math. If you get a 3% match and you earn $50,000 a year, contributing 3% of salary then your employer will put $1500 into your 401(k)and you'll put $1500 in, making $3,000 total. Plus you pay no taxes on that $1,500. You can do the math with your situation. After you've chosen your contribution to maximize the match you can decide whether to contribute more to the 401k, open up a Roth IRA or a regular IRA, but thats the subject of another article.
Two gotchas to be aware of. Although you can take a loan from a 401(k), or even take some funds out without penalty - other than regular income taxes - for medical emergencies or home-buying; if you leave the company yo have to pay off the loan. The second gotcha is only if you earn an incredible amount of money and your company has a %match policy. This years maximum 401(k) amount for you is $10,500. If your company matches the first 6% you put in then you have to make $175k to get it all. If you make more than $175k then you need to make sure you don't ever contribute more than 6% during the year, even though most plans will let you go up to 15% or 20% as you'll lose out on some of the match. Sounds confusing, but if you make more than $175k you can pay for tax advice anyway !!
Another epinions reader pointed out that the IRS caps the salary you can use for contributions to a max of $170k. This actually means that you need to contribute an average of 6.18% over the year to get the full 10,500 in.
6.18% = (10,500/170,000) as a percentage.
 |
|
|
|
|
|
|
Epinions.com ID:
jcare
|
 - Top 500 |
|
Location: Southeast Pennsylvania
Reviews written: 269
Trusted by: 219 members
About Me:
Bullets can hurt people. Both in guns and PowerPoint.
|
|
|
© 1999-2009 Shopping.com, Inc.