Retirement accounts

I’m always asking people if they are saving for retirement. Sometimes they say they’re invested in an IRA or 401k. Many of them think that those are investments and don’t realize they are just tax free vehicles(no tax consequences while the funds remain in the box).

Simply put there are two type of tax free vehicles: one where the money goes in before it is taxed and one where it goes in after it is taxed.

If the money went in before being taxed then it comes out  as regular income. If the money has already been taxed then it comes out tax free (unless they change the tax laws).

One idea is to have both tax deferred and after tax retirement accounts. This way you can take advantage of some tax savings up front and still keep you tax burden low during retirement since the regular income amount will be low.

Different kinds of Savings

When I talk about Saving I mostly mean for Retirement but there are other kinds.

You could be saving up for a car or a home or a trip to Europe. You should set up different accounts for different purposes. That way your Retirement account can remain inviolate. It’s important that you don’t think of it as money you can spend.

The Gym Dilemma

You’ve probably experienced this. You decide it’s time to go to gym and get in shape.

The problem is you work out too hard and in the next day or two are so sore that you don’t go back to the gym.

The same thing can happen with Saving. If you set aside too much of your income then you have to take money back out to pay your bills. This violates the bubble and your savings are no longer safe from being withdrawn.

So when it comes to saving you need to pick a doable amount.

Money is not important

Money is not important. It’s the lack of money that is important.

If you make enough money to pay your rent/mortgage, pay for food, utilities, clothes, cars, insurance, etc. If you can afford to fix things when they break and go to doctor when you’re sick then you have enough money. How would your life be meaningfully different if you made twice as much? Bigger house? Newer car? Nicer clothes?

If you don’t make enough money then things are very bad indeed. And many things end up costing you more.

If you don’t make enough money then you will be late making payments and you credit rating will go down. If your credit rating is low then you have to pay more for a lot of important stuff.

If your credit is good then you can get a car loan for 3% interest. The lender will finance up to 135% of the retail value of the car.

If you credit is bad then you could pay over 20% and the lender might loan only 80% of the WHOLESALE value of the car and charge a loan origination fee of $1,000.

When people have bad credit and need to borrow money they can pay hundreds of percent interest. A bad credit report can effect your ability to be hired for a job or to lease an apartment.