March 1st, 2021 paycheck
I've adjusted my spreadsheet to allow me to track my finances based on my investment policy and easily share it here in the form of an image.
Seriously, I cannot tell you how much I dislike spreadsheets. The spreadsheet I use to build wealth living paycheck to paycheck is the only one that's lasted longer than a month.
I've just finished listening to The Simple Path to Wealth by J.L. Collins and I've made it up to Unit 7 of Choose FI's Financial Independence 101 course.
I'm 41 and will be 42 in July, this is year one.
I am debt-free.
What that means for me is:
- I'm able to pay bills as they arrive (utilities and other non-credit payable bills),
- I'm able to pay the balance of my revolving loans every paycheck (credit cards, lines of credit, and so on), and
- I have no terminal loans (mortgages, car loans, student loans, and so on).
The timing of when I get paid, when I move money, and when those movements actually settle might make things a bit out of sync; not sure how much that will matter.
For example, as of me writing this, I had a pretty hefty balance on my credit cards, which I paid off. And, when I wrote this the money was “in transit.” Also, my brokerage accounts often get credited with a dollar amount before that amount is transferred from my account; makes it seem like I have more money than I really do because the same dollars appear in two places. We’ll figure out how to present it.
When this paycheck landed I had a cash reserve of about four months of housing and food. My target right now is to basically have enough for the current month plus one-half or all of the next month. This will grow back up over time and I feel comfortable taking the risk in order to get the dollars into “the market” earlier.
The cash reserve is currently held in these certificate-like vehicles at my credit union. I have one for each month of the year and they’re part of my more time-oriented approach. There’s usually a penalty if I withdraw early. So, for now, this transition to the more lean approach will just happen naturally.
Given this is the first year, I'm wanting to keep it simple and straightforward; minimal moving parts.
I’m still learning how taxes work with the different types of investment accounts I now have. The Choose FI Financial Independence 101 course also taught me something new; how progressive taxes work. I didn’t know that all your money wasn’t taxed at your marginal tax rate; the tax rate you qualify for based on income. Instead, there’s a thing called the effective tax rate.
I make roughly 100,000 USD annually at the moment. This means:
- 14,200 USD is taxed at 10 percent; 1,420 USD.
- 40,000 USD is taxed at 12 percent; 4,800 USD.
- 32,150 USD is taxed at 22 percent; 7,073 USD.
- What remains, ~14,000 USD for this example, is taxed at 24 percent; 3,360 USD.
Then there's the standard deduction, which for me is 12,500 USD because I'm filing single; so, that 100,000 USD becomes 88,500 USD. At which point, only 2,150 USD is taxed at the 24 percent. Further, because I currently contribute six percent of my income to a pre-tax 401(k) plan, 6,000 USD, none of my income is taxed at 24 percent. If I up this contribution to the maximum, which is 19,500 USD, even less of my income will be taxed at 22 percent. Finally, if I actually max-out my HSA contribution, which I thought I had been doing for the last two years, I can reduce that burden by another 3,600 USD.
(In a way, I'm glad I wasn't contributing what I thought I was to the HSA because all that extra money went to paying off debt.)
With that said, another freaking growth opportunity for me was realizing there are income maximums put in place to contribute to a Roth IRA. This limit is also based on what’s called your MAGI, which has to be calculated as it doesn’t appear as a line on your tax forms. If your MAGI is under a certain amount, you can contribute up to the max to the Roth IRA. If your MAGI is over a certain amount, you can’t contribute anything. If you MAGI is between those two, you have to do another calculation to figure how much you can contribute. Because we can’t make it simple.
As if this writing, you need to take your gross income (all earned income). Then you subtract all pre-tax deductions; resulting in your AGI. Then, you add back all or part of certain deductions.
Luckily tax software should be able to calculate MAGI for you.
TurboTax told me I would have been able to contribute the full amount for 2020, which means I should be able to contribute the full amount for 2021. I’ve contributed 96 percent already, leaving myself a bit of padding in case bonuses and mid-year raises change things enough to matter. And because my employer offers a retirement plan, I wouldn’t be able to take any deductions for contributing to a Traditional IRA.
Seriously, this feels more complicated than it needs to be. We just keep adding vehicles and rules around those vehicles. I feel like the tax code is like listening to someone talk about Pokémon or Magic the Gathering.
I want to build up enough in taxable accounts to survive for 5 to 10 years, in case I FIRE at 50. I want enough built up in a Traditional IRA to cover another 5 to 10 years to carry me from 60 to 70. Then I have open access to all three. If I’m still working at 55 and decide to FIRE then, then I can withdraw from the 401(k) penalty free and earlier than I could from a Traditional IRA; you know, complicated and all time-based. Feel like Sir Ken Robinson talking about the most important thing being your date of manufacture.
At 65 I should qualify for Medicare. And depending on if it’s still around and how I feel health wise, I’ll take social security around 65 as well.
So, 50 is the taxable accounts. 55 any 401(k) funds I might have. 60 is any Traditional IRAs I might have. 65 is activation of government accounts. 70 is the Roth IRA and HSA accounts.
I won’t be burning these accounts to zero between activations, that’s just when I’ll be able to access them.
First things first though, cash down and stocks up; that's what we're looking at over the next few paychecks. I've been blessed with a big shovel and a low total lifestyle cost and I'm hoping it won't take long to get aligned.