It’s Sensible Financial’s 20th anniversary! To celebrate, the Sensible Financial staff offers some financial tips for Financial Literacy Month you can use year-round. I’ve grouped them into 8 categories for ease of reference: saving, retirement, charitable giving, investing, debt management, insurance, estate planning, and security. There were so many useful pieces of information, I’ve divided the material into three articles. In this one, we’ll cover saving and debt management.
Saving enough is essential for accomplishing many of your financial goals. Timing your saving well and using tax-efficient accounts can help you make the most of the funds you set aside.
- Save early and often, compounding returns are your friend. Albert Einstein once called compound interest the “eighth wonder of the world”.
—Josh Trubow, Senior Financial Advisor
- The earlier you begin saving and the more you save, the greater the opportunity to capture returns on your returns.
- Automating saving and investing is the surest way to accomplish your goals. You can automate savings from your paycheck into a retirement account.
- Amassing an emergency fund with safe assets should come before investing.
- Contribute to your 401(k) plan to get the employer matching contribution.
—Anne Smith, Human Resources Generalist
- Your employer match could be 3% to 8% of your salary – that’s like getting a raise!
- Most companies allow you to sign up to contribute as a new hire or join the plan after you’ve been with the company for a while. Your contribution will come out of your pay as an automatic deduction.
- Once enrolled, check annually to learn if there is any change to the match calculation so you can adjust accordingly.
- If you expect income to be higher in the future, contribute to a Roth 401(k) and/or Roth IRA.
—Gyb Spilsbury, Associate Financial Advisor
- Pay the income tax now while in a lower tax bracket to avoid paying tax in the future in a higher bracket. Doing so can lower your lifetime tax bill and allow assets to grow tax-free.
- Elect to make contributions into your Roth 401k through your employer. You can also open a Roth IRA and make contributions if your income is below certain limits.
- Roth IRAs also offer the additional benefit of tax-free growth. The longer the time horizon, the greater the impact of tax-free growth.
- If you are self-employed, a Solo 401(k) can be a powerful retirement savings tool.
—Nic Rosa, Associate Financial Advisor
- If you don’t make contributions to an employer-sponsored plan, you can contribute up to 100% of your salary (until you reach the 2022 maximum “employee” contribution of $20,500). You can also make additional contributions as the “employer.” The plan may even allow for Roth contributions and catch-up contributions starting at age 50.
- You can open a solo 401(k) at most custodians. Work with your accountant to determine how much you are eligible to contribute.
- If you are already contributing to an employer plan, a SEP (Simplified Employee Pension Plan) IRA may be a simpler option. Solo 401(k)s are more complicated to open and maintain than a SEP IRA.
- If you have children, start a college fund as soon as possible.
—Marina Cekani, Operations Analyst and Assistant Trader
- Start saving for college when your child is born to maximize growth potential.
- 529 accounts may be your best education savings account option as they allow tax-free growth for qualified education expenses. You can even automate contributions.
- Depending on the state, you also may be able to receive a tax deduction or credit on 529 contributions. 529 accounts are great for tax advantage – a savings account or brokerage account may be more flexible if you might need the money for other purposes.
- If you are in a high deductible insurance plan, consider opening and contributing to a Health Savings Account.
—Charles Luce, Operations Group Leader, and Chief Compliance Officer
- An HSA is the most tax-advantaged account for funding Qualified Medical Expenses. Your contributions are tax deductible. If used for Qualified Medical Expenses, distributions are not taxable either! Consider paying for current medical expenses with other resources and invest your HSA to take advantage of the tax-free growth. If your employer contributes less than the yearly maximum, consider “truing up” the contribution to the max every year.
- Ask your HR professional if your company has a preferred HSA account provider. If not, many institutions provide these accounts. Find an institution that doesn’t have periodic fees and has low-cost investment options. In 2022, the family contribution limit is $7,300 (individual is $3,650). If you are 55 or older, you can contribute an extra $1k.
- You have until the tax deadline of the following year to ensure you’ve maxed out your contribution.
Paying attention to your borrowing and paying it down and off thoughtfully can help make your hard-earned income go farther.
- Particularly in a low interest rate environment, consider refinancing your student loans.
- Refinancing can reduce total interest paid on your loan.
- Research lenders and obtain multiple quotes.
- Carefully consider which loans to refinance. When refinancing a federal student loan, you forfeit various potential benefits such as public service loan forgiveness and income-driven repayment plans.
- Consider two ways to accelerate debt payoff: Snowball vs Avalanche.
—Erica Sibley, Executive Assistant
- The Snowball method can be more expensive but yields quicker results and helps to maintain motivation. The Avalanche method can result in paying less interest over time but requires more discipline.
- Snowball: make minimum payments on every debt and pay off your smallest debts first before moving to larger ones. Avalanche: make minimum payments on every debt and use extra funds to pay off debt with the highest interest rate.
- The Snowball approach gives you a quicker sense of accomplishment. The Avalanche method is most efficient financially.
Stay tuned for our next collection of financial tips on retirement, estate planning, insurance, and security.
We hope this financial information will help you understand your financial options and make more informed decisions. If you need additional help, please contact your financial advisor.
This article is the first in a series. Read part two and three for more tips!
Photo credit: “[317/365] Popular Trick” by pasukaru76 is marked with CC0 1.0.