Do it while you're young honey.... (Part Deux)

Where did we leave off? Oh...the sucky things about Roth....

Now because the Roth is so accommodating, there are some rules. But the fact that most of these rules are easy to follow for us young folk is one of the reasons you should "do it while you're young honey...."

• You can only contribute money that counts as earned income. This means if you're in school, you can't use your refund to put into your Roth. However, you can use the money you EARN at your part time job.
• You can only contribute up to $5,000 a year to the Roth. This rule is for 2010 and the government adjusts it for inflation and other things every year, but generally the point is, the gov'ment is not about to let you pour tons and tons of money into this because it has so many great perks.
• Tied to the bullet above, you cannot contribute to a Roth if your income goes above $120,000 (single), or $176,000 (married filing a joint tax return). Now the government starts phasing out how much you can contribute once your income hits $105,000 (single), or $166,000 (married filing a joint return). This means that a single person making $110,000 can contribute something, but their max is below $5,000. But once they make $120,000, they can't contribute ANYTHING. This is another reason to "do it while you're young honey..." For most of us, our incomes won't get to $105k until we're a few years into our careers. I for one have a goal to be making at least 6figs by the time I reach 30. That gives me 5 years to contribute $5,000 a year ($25,000 to just let sit and grow tax free, until retirement...sounds good to me). Speaking of 5 years, I read if I do just that....$5k for 5 years and just let it sit...it would grow to nearly $500k by the time I hit 65. Sounds REAL good to me.
• Lastly...since Roth has so many tax advantages, there is no tax deduction for contributions made like there is for the 401k. However, coming out of college my income was too high for that 401k deduction anyway...so to hell with it.
  

Oh...point of clarification: Contribution vs Earnings. In the earlier bullets I talked about contributions being able to be withdrawn whenever you darn well feel like it without having to pay taxes on the withdrawal. Earnings are able to be withdrawn for certain things...sometimes tax free and sometimes taxable. Contributions are whatever YOU contribute to the Roth. The hard earned money from your pocket.  So for me that $25k I'm going to put in before 30. Earnings are whatever you MAKE off of the money you contribute. The money you get by just watching it grow but that you really didn't earrrrrn. That money will be taxed if you take it out before retirement (and I think there's a 10% penalty on top of that). But whatever earnings you leave until retirement...are YOURS YOURS YOURS tax free AND penalty free. So...do it while you're young honey!

Do it while you're young honey...

I've been exploring a lot of retirement investment options in addition to my 401k. As most of you know, generation y, you, me, the Millennials...won't be able to count heavily on Social Security benefits. Sucks for us! Some financial analysts predict that we're in for a rude awakening when retirement arrives. Because a lot of us don't take this as seriously as we should, they predict that our generation won't live very comfortable lives as old timers.

I am not claiming that mess, and I don't think you should either. So you can have a kitty litter of kids to take care of you orrrrr you can make some wise choices now to prove those analysts WRONG. I've read over and over again that one of the smartest things for young adults to invest in is a Roth IRA (of course this is after you've set up your emergency savings and are contributing as much as your company matches, to your 401k).

Another 2011 Resolution: by my 25th birthday...I'm going to be finished building my emergency savings and I'm embarking on the Roth. Let us explore....

One of the best things about the Roth IRA is the tax advantage! (oh how I love tax advantages) Because you can only contribute after-tax dollars into the Roth, you are able to withdraw the money tax free. Remember that with your 401k and a traditional IRA, the money goes in before it's taxed and therefore is taxed when you withdraw it out after retirement. Yeah...Unc Sam be bout his money. 

There are a few more big advantages of a Roth IRA:

1. Roths are much more flexible than your 401k because you can invest in pretty much anything you want...stocks, mutual funds, real estate...you name it, your Roth can put money into it for you.
2. You can withdraw any contributions you have made to your Roth whenever you darn well please without incurring any taxes OR penalties. (This is not true for either the 401k or traditional IRA)
3. You can use up to $10,000 of your Roth IRA to buy your first home (tax and penalty free). This not only includes your contributions but you can take out earnings also (TAX AND PENALTY FREE!), to go towards your first home. And this rule is for each person...so if you're a couple, each of you can take out $10,000 for the first home.
4. You can use money from the Roth towards the education expenses of your children. Although any earnings used are taxed...there is no penalty.
5. My absolute fav advantage is that your Roth can be as low or high risk as you'd like. Because you can invest in anything you want...this allows you the flexibility to be risk averse or risk seeking. I love that this gives me the ability to have a little fun and switch it up when I feeeeel like it!

 Next up...Roth IRA disadvantages. Yesss yesss...as wonderful as it is...Uncle Sam ain't plain dumb.

Stay tuned!

Let's play....questions :-)

I asked a few of my friends for feedback on 25 and retiring. One suggestion was that I have a day devoted to answering personal finance questions asked by readers. I like that idea so let's do it!

Starting today, email any questions you may have regarding personal finance to 25andretiring@gmail.com. Actually, I guess you can email questions regarding anything there...to be or not to be answered on the blog. I'm down with lending an opinion or two on various matters when asked (and when not asked) <-- people who know me just nodded and laughed at that.

I will answer the questions on Thursdays. Dare I name this segment "Thirsty Thursdays"?! ha. We shall see.

The answers will commence next Thursday :-)

Thanks for reading!

Introducing Tax Tantrum Tuesdays!

Disclaimer: This entry is long. My apologies beforehand. In my defense, it's kind of a tantrum.

Everyone I know has asked me a tax question at least once. It is only right that taxes have a very special place in this blog. I have named that very special place "Tax Tantrum Tuesdays."

I often attempt to convince everyone that income taxes are much, much more simple than people think. Regardless of me saying that over and over again everyone refuses to even want to attempt to bother with them. I think this is for one of two reasons:

1) The IRS has instilled some SERIOUS fear, or
2) These people just think I'm a flat out liar. <-- which is quite offensive

 I will admit, paying income tax is less than fun, but if you can think of the tax impact a financial decision may have before you make that decision, it's a great feeling. And you wouldn't realize how taxes can motivate you to do some really positive things.

For example...I resolved that this year I will tithe 10% of my take home pay to my church. Now previously I'd been tithing but definitely not 10%. *bbm embarrassed emoticon*  Let's say I take home $60k after tax every year. Tithing would require $6k from me over the course of a year (that's $500 a month...that's more than my car note).  

Now I know I deserve a slap on the wrist for even fixing my mouth to complain about how much I have to be tithing...but let's be real, I went from borrowing a dollar or two from my momma to throw in the collection plate, to putting in $10 or $20 of my own money, to writing a $50 check when I was feelin' myself to...$500 a month?! Lord, give me the strength. By the way, this is still a hypothetical.

But thanks to the wonderful world of taxes, I know that if I am able to itemize, everything I tithe to the church is tax deductible as a charitable contribution, as long as my church is a non-profit. Yes, yes, I know...God himself should be reason enough for me to want to give...I'm really showin' the heathen in me today. Sorry.

While this is in no way my entire motivation for tithing...it's definitely a great motivator. Especially when the little devil on my left shoulder tries to convince me in September that I can skip one month of my tithing commitment to go on a trip to Vegas with the girls.

Back to charitable contributions...I have noticed that they are by far the #1 misunderstood deduction. The charities that convince you to give lots-o-$$$ because it is tax deductible usually don't remind you that charitable contributions are only tax deductible if you itemize. What in the world is itemizing??? When you file your taxes you are able to take a standard deduction (which is $5,700 in 2010, set by the government and raised for inflation every year) OR you can itemize.

Itemizing, in the most simple terms possible, means that you add up a bunch of special deductions outlined by the IRS - charitable contributions being one of them, home loan interest and property taxes being two other very common ones - and if the total of all these deductions is greater than the standard deduction (which is $5,700) you can itemize. Then and only then do charitable contributions mean anything for you and your taxes.


So back to my example, if I give $6k (10% of my yearly take home pay), I can itemize (because $6,000 is greater than $5,700). Believe me, that seemed obvious but to someone it wasn't. This allows me to take advantage of other fun itemized deductions that may result in even more tax savings but since I'm getting a little long winded with this one...I'll save those fun tax facts for another Tax Tantrum Tuesday...

What's your credit grade?

Don't you hate checking your credit score? It is seriously the most nerve wrecking thing in the world to me....Well aside from my yearly performance reviews at work when I think my reviewer is going to tell me they've been keeping a log of all the cumulative hours I've spent g-chatting or web surfing at work. I've already got my rebuttal ready in my head. hahaha.

Back to credit...What if someone has stolen my identity, I don't know it yet, and I'm about to find out and lose my mind when I check my score? What if there's some bill in a faraway land that I TOTALLY didn't know (or forgot) about and they've sent me to collections because they have no idea where I am and think I'm just not paying on purpose? What if everything I think I've been doing right isn't as right as I thought and my credit score has tanked?

I think of everything that could possibly go wrong to ruin my credit and I subsequently run scared, thinking "maybe I just don't want to know"...I pay my bills on time and I have never had a problem being extended credit so I'm cool.

Well in the spirit of the new year, I checked today...anddddd....everything was great. haha yall didn't think I was going to actually TELL you my personal business now did you?!

But I found something fun that I decided to share with the group today: this idea of a credit grade. Of course you know (or you should!) that FICO (which is the one that matters) credit scores range from 300-850, of course with 300 being the absolute worst and 850 meaning you're a straight A student.

For an overachiever like myself (lol) grades mean MUCH more than scores. Wouldn't you agree? I think all of us have asked a teacher more than once..."okay but what grade is that?" I mean shoot, give me a 60...if that means an A, I'm cool.

I was reading the Young Black Professional Guide and they recommended Quizzle. Quizzle is a site that offers credit scores, reports and some other debt related information for free (and some at a cost). Quizzle gave me a grade for my credit score (made me feel some kinda way) so here is their grade breakdown:

Credit Score	Quizzle Score	Grade
720 to 850	90% to 100%	A
680 to 719	80% to 89%	B
620 to 679	70% to 79%	C
580 to 619	60% to 69%	D
350 to 579	0% to 59%	F

sidenote: in case you decide to use Quizzle you should know they give you a CM credit score which is NOT the same as the FICO credit score. They're computed similarly, however, when you credit is computed by Experian, TransUnion or Equifax, FICO is used most (if not all) of the time.

Just as a quick point of information, the National Score Index reports the national average FICO score is 692. The averages are also given by state:

For my Illinois residents, our average is 699.
For my Michigan friends, your average is 695.

I have a problem with the average being in the B range but then again it reminds me a lot of the curve at Ross so I guess I'm used to the days when a B- was basically as if you failed and the majority of the class earned a B+ (or A- if it was an elective). *rolls eyes* I digress.

Needless to say, anything below an A leaves room for improvement...And I actually find myself more motivated to work on my credit score when I convert it to a grade. Who woulda thunk it!

Check out your credit "grade"...see if it's representative of your A-game :-)

New Years Resolution: The 50/30/20 budget

I read an interesting article on MSN Money discussing "how much you should spend on..."

The writer discusses a very simple question I'm sure we all ask ourselves everyday: "How much should I be spending?"

She then suggests the 50/30/20 budget:

• 50% of your take home (after tax but before insurance and 401k deductions) should cover your "must have" expenses which include, rent, utilities, transportation, food, insurance, minimum loan payments, etc. Any purchase that can be delayed for a few months with no serious consequences is not a "must have" expense. Anything you're contractually required to pay is a "must have" expense.
• 30% of your take home pay goes towards your "wants." Vacays, clothes, eating out. The trick here is that some bills may overlap in the "must haves" and "wants" categories. Internet and television is technically a want but if you have a contractual obligation it would go into the "must have" category.
  
• 20% of your take home pay should go towards savings. Remember minimum loan payments go into the "must have" section but any payments you make on loans above the required payment would fit here. Additionally all retirement savings including 401k, IRA and stock investments are included here. Last but not least, your emergency savings fund fits here as well.
  

The writer adds that it takes time to get to these percentages. Starting out she was at about 60% for must haves. It took a year for her to get to 50/30/20.

I quickly computed my ratio as of now and came up with 60/20/20. I'm sure if I take a more in depth look those ratios would become a little less pretty.

Take a look at your ratio starting out 2011. Where can you shift things around? Are you spending more in places you should be spending less? What goals have you set for long term spending and saving? Challenge yourself to achieve a new ratio by 2012.

easier said than done - the intro

How many of us know what it takes to be financially savvy but still struggle with saving enough, investing enough (if anything at all), and spending wisely, all while maximizing the financial freedom and fun of the "roaring 20s".

Luckily there are so many personal finance enthusiasts, financial self-help books, and relevant methods of saving, that conceptually, being a single 25 year old earning enough money to make financially savvy decisions and have enough disposable income left over to actually enjoy the roaring 20s, seems super, duper, simple. (sorry I know that sentence was long...read it one more time) But that's easier said than done.

I found myself surprised at this revelation...mostly because all throughout college I considered myself pretty financially savvy. I very rarely spent frivolously. I knew how to make and follow a college student budget. I even saved some of the millions I earned during my summer internships.

But during college my budget was so tight that I had very few options for spending. Disposable income back then meant some extra money to spend on a new dress or good eating for a little bit. There was no option (as financially irresponsible as it would've been anyway) to use my "bonus" for an extra vacation or a David Yurman ring I'd been slobbing over. I mean that kind of waste wasn't even POSSIBLE.

Almost two years into a career...I'm working with a much larger salary, more bills, more [expensive] desires, and more disposable income to actually spend on those [expensive] desires. Oh and DON'T forget about those taxes and gratuities. They'll get you every time.

I'm thankful for the extra financial cushion but it definitely leaves much more room for trouble. Saving has become increasingly harder and spending...sooooo much easier.

Needless to say...[the shit] is easier said than done. Part of my reason for starting this blog is to tap into what I like to call "my financial being":

• really think about the financial choices I am making right now. At 25. Before retirement.
• determine how my current decisions are contributing to (and/or hindering me from) my long term financial goals
• enhance my knowledge (and yours) around what it means to be financially savvy...read more, learn more, know more

The end goal is quite simple: to maximize revenue and decrease costs.
After all, I'm trying to build a brand here and in order for that to happen successfully, the business must be in order.