The killer rule that boosted my financial intelligence the most

Posted by W2W Expert Panel .
There’s always a better deal out there.
Shelly Eweka
My dad taught me to never be afraid to walk away from a deal—there will always be a better one out there. A textbook negotiating move, it works when closing on a home or buying a new car, down to little things like haggling over the price of a bag while on vacation.
“Can you give me a better price?” Whenever I ask this simple question, the answer is usually yes. But when a seller (or buyer) won’t budge, I don’t either—knowing a better deal can be found elsewhere. Sensing that I can take or leave their offer, the person on the other side of the negotiating table usually revises it in my favor.
Who wants to be a millionaire?
Cathy McCabe
My career started in financial services and so one of the biggest sources of financial advice was actually my job. One of the most compelling was the importance of thinking about retirement even when you are at the very beginning of your career. With lots of bills to pay and retirement many years off, it’s easy to think that you should put off saving for those “golden years”. But if you do you will lose out on the magic formula called the power of compounding interest. Combine that with an employer match and you have a definite recipe for success.
If your employer offers a retirement plan, be sure to take advantage of it. You can start small, say 2-3% of your salary. Have it taken out of your pay before it even reaches you and you won’t even notice it. Many retirement plans offer a matching feature so even if you are saving only 2%, it’s likely that you will actually be saving 4% with the employer match. Then watch the savings grow. Here’s some math that might convince you. If you started saving $5000/year at age 25 and it grew at a rate of 6% annual effective rate, by the age of 65, you will have accumulated $798,735. But if you wait to start saving until you are 40, you will only get to $566,317 by the time you hit 65. As another example, if you start saving $672.00 a month and it grows at a rate of 5%, 40 years later you will have accumulated $1 million.
Bottom line, take advantage of the time you have between your first job and when you retire to build your financial security for the future. You can start small and increase over time. But the most important thing to do is get started right away.
Sources:
https://www.tiaa.org/public/pdf/C23240_Its_easy_if_you_start_early.pdf
https://www.tiaa.org/public/offer/insights/investing-101
Saving is like learning a new language.
Hakyun Morrissey
When I was nine years old, I remember coming home from school in tears. It was hard enough being the new kid—but not speaking English made it virtually impossible to make new friends. The way my parents helped me out of my sadness was by setting mini goals for me. First, I would need to learn one word at a time—fluency being the ultimate goal. I soon learned you don’t need a 30,000-word vocabulary to socialize—300 gives you enough of a start.
Incremental change is incredibly powerful: Palaces are built brick-by-brick, nest eggs dollar-by-dollar. When a 25-year-old participant comes to me with $10,000 in her 403(b), reaching $2 million seems desirable but almost impossible. She wants, needs a large retirement nest egg just as surely as I needed to converse with my schoolmates. If she really tightens her budget she could manage an additional 1.5% (on top of the 5% she was already deferring in salary)—but that would hardly make a dent in her goal. So why bother? Well, raising her 403(b) savings rate by 1.5% each year would mean 14% of her salary would be savings-bound by the time she was 30 (the recommended amount).
Big, inspiring ideas are what motivate us initially (“I want to be an astronaut”). Breaking down your end goal into a series of challenging-yet-achievable baby steps is crucial in making big things happen.
Keep a roof over your head—but stay below this 30% ceiling.
Melanie Simons
Living with roommates, renting a basement apartment, or accepting a longer commute has, over the years, allowed me to live within my means while saving for the future. Fortunately I’d learned, back in financial planning class, about this rule of thumb: Housing expenses should total 30% or less of your gross income.
Someone with a $60,000 annual income, for example, may spend around $1,450 on monthly mortgage payments. Whereas, if you earn $100,000 and spend over $2,417 on rent and utilities, you’re beyond the 30% threshold—and likely limiting your ability to save and pay off debts. And anyone who forks out more than 50% of gross monthly income on housing is considered “severely cost burdened.” (Good news for those who have paid off student loans or other debts: Your ceiling can be a bit higher—up to 41%, according to the Federal Housing Association).
These are general guidelines and it’s not unusual to pay way more than that on a pad, especially in expensive cities like New York and San Francisco. But 30% is a solid anchor for keeping your budget in check, and leaving enough in your paycheck for savings.
Don’t always go for the immediate tax break—paying Uncle Sam now means you (or your family) can avoid taxes in the future.
Alicia Waltenberger
Back in 2007, I hadn’t given Roth IRAs much thought. They seemed like just another financial product—yet more jargon to baffle my clients with. What was wrong with a plain old IRA (or a traditional IRA, as they were now being called)? I liked deducting my IRA contributions on my itemized tax returns. With a Roth IRA, I would lose that benefit.
Then I was asked to co-author an article for the TIAA Institute on the topic of Roths. My eyes suddenly opened to why foregoing an immediate tax break was sometimes a good thing. For me, the most appealing aspects of a Roth IRA are:
  1. You don’t have to pay income tax on qualified withdrawals—adding some predictability and peace of mind to your retirement.
  2. You never have to withdraw a dollar, even if you live to 110, so a Roth can form part of your legacy to loved ones (who won’t owe taxes on distributions either).
  3. After five years, you can withdraw the principal amount, penalty-free.
Check if your employer plan has a Roth option. I choose to split my 403(b) contributions between Roth, “after-tax” money and regular, “pretax” contributions. Your current income tax rate might be lower than it has ever been, so you may decide to give the IRS their share now, as your money goes in, rather than later, when your tax rate may be higher (and your investments may have compounded, meaning you’ll end up giving more to Uncle Sam in the long run).
Look at total rather than base salary.
Cindy Wilson
Many years ago I was considering a job change, and was offered a slightly lower base pay.However, after asking a few questions, I soon realized the retirement plan benefits were quite significant.When making big career decisions, we often factor in other benefits—and overlook the employer’s retirement contributions.But once I factored them in, I decided to accept the offer.
To attract the best talent, perhaps more offer letters should highlight retirement plan benefits more prominently. Consider how a $100,000 base salary, plus employer 403(b) contributions of 10%, equates to a total of $110,000—even more if you project the estimated long-term growth of that annual $10,000 contribution.Only in rare cases have I seen total salary (including long-term projections) featured in job offer letters.
Just remember, in order to get the maximum employer match, employees usually need to contribute something themselves first. Before accepting any offer, it makes sense to understand how much of an employee contribution is required. My advice: Always put in as much as necessary to maximize any match. Even if your paycheck is stretched between loan repayments and rent, it’s worth considering the big picture and deferring enough of your pay to unlock all employer contributions.
These are general guidelines and it’s not unusual to pay way more than that on a pad, especially in expensive cities like New York and San Francisco. But 30% is a solid anchor for keeping your budget in check, and leaving enough in your paycheck for savings.
Whatever your skills, they are likely in demand on one app or another. And you can update them to keep pace with whatever is in most demand. Tech-savvy seniors are learning new skills using just their smartphones, taking courses or listening to ebooks while driving between gigs. The smartphone is a godsend for 65-year-olds who want to retool for the future.
Aside from the economic benefits, there are psychological benefits to staying engaged. Renting out a spare room or walking someone’s dog can lead to social interactions that might not have otherwise happened.

The selfie-employed generation

Of course, it’s not just retirees who are taking advantage of this brave, new on-demand economy. Today, I’m seeing more people take on projects rather than full-time positions, as consultants rather than permanent employees. And they seem to prefer it that way. In 2017, around 10% of all workers were in an “alternative work arrangement,” mostly as independent contractors (a category that includes gig workers). Crucially, 79% of independent contractors said they prefer their alternative work arrangement to traditional employment.1
If you’re thinking of becoming self-employed, you’ll need to track your income and expenses, which can be a headache come tax season. The IRS offers tax tips and links to relevant publications on its Sharing Economy Tax Center.
Gig work can be unpredictable, and you won’t have access to traditional workplace benefits such as health insurance and a 401(k). You’ll need to build your own safety net, saving money during those busier times when your services are in demand, to carry you through leaner times. You may want to consider setting up your own single-participant 401(k) plan or a Simplified Employee Pension Plan (SEP Plan), which allows self-employed workers to set aside up to 25% of their pay.
In the absence of a traditional workplace to provide financial stability for the future, gig workers taking advantage of digital platforms need to extend their tech savvy to the many saving and investing tools available online.
Gig work is allowing more people to smoothly transition from full-time employment to full retirement. Our grandparents may have enjoyed the security of company pensions and jobs-for-life, but they also had the constraints that came with it. Smartphones empower anyone willing to embrace technological change and use it to shape her professional destiny. Just make sure you use them to take control of your financial destiny, too.
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October 30, 2018
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