How Much Should I Save?

Hey everybody!  Today’s post is my answer to a question I see asked a lot by strangers on the internet machine.  What $ or % should I save each year/month/week?   Now, there are people that will give you a pat on the back for saving 10% or 20% each year, but that’s not the mentality here.  We want to live frugally and maximum our savings so that we can reach financial independence as soon as possible.  I think setting a realistic goal that considers all relevant factors is important to measuring your success.  Here’s what you need to do:

Step 1: Make a budget.  This needs to be a realistic budget that you ideally have followed for a couple months.  Make cuts where you can and add a buffer if you think it may be necessary.  You don’t want to have excuses for not meeting your goals because of small unexpected expenses (etc: buying wedding gifts, needing a oil change, putting a deposit on an apartment).  Use this as an opportunity to scrutinize all of your expenses.  This budget should include rent/mortgage, insurance (car/rental/home/health), food/eating out, clothing, toiletries, gifts, fuel, travel, vacations, monthly memberships, internet, utilities, cable, minimum debt payments, etc.  In my opinion, the shorter this list, the better.  For the curious, you can see the budget I’ve been following for several months here.

Step 2: Figure out your annual tax liability.  Oh, taxes, fun.  It’s a necessary evil that definitely makes an impact.  If you don’t believe me, look at this to see the numbers for yourself.

If you make a pretty steady amount, you can just look at your prior year taxes and use that amount.  Be sure to include payroll (6.2% social security and 1.45% medicare), federal, state, and local income taxes.  If you recently received a raise or don’t have documentation to determine your tax liability, here is a semi-quick way to calculate:

  • Annual salary * 7.45% for payroll taxes.  This will only differ if you make above the SS cap (2013 = $113,700)
  • Federal taxes: Use this calculator.  If you itemized last year, then grab your 1040 for the number, otherwise, use 0 for the standard deduction.
  • State taxes: Use this link to determine your calculation.
  • Local taxes:  St. Louis has a 1% tax if you live or work in the city.  Luckily, this doesn’t apply to me right now; however, you’ll need to do the research on this one, since I don’t know where you live.  Feel free to leave a comment or PM me if you have questions on this.

Step 3: Subtract taxes and living expenses from your annual salary.  This number is  your maximum savings amount and should include pre-tax retirement accounts (Traditional IRA/401ks/etc).  Ideally, this is the amount that you are able to use to pay down debt or put away for the future.  If you’re not sure what to do with all this money, see this post about my current strategies for saving.

It’s really that simple!  Three steps and you’ll have a realistic goal that you can measure your success against.  If you prefer weekly/monthly measurements, then just divide the number by 52 or 12 and keep track of your progress.

Do you measure  your savings progress?  Do you have a goal?  How did you calculate it?

 

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Posted in Money Management

How Traditional IRA Phase-Out Limits Work

Hey everybody! I wanted to drop some knowledge on you today about phase outs for Traditional IRA contributions based on how much money you make. If you ever plan on making more than ~90k (or $120k if you’re married) then pay attention!  As always, I am not a tax expert and you should always consult one prior to making any investment decisions or tax

First, the concept. Our fabulous friends in Congress decided that us regular ol’ folks needed ways to lower our tax burden when saving for retirement. So, they passed the Tax Reform Act of 1986 to help us out. *How nice* “What does it do”, you ask? Well, they told the suits over at the IRS that you don’t have to pay taxes on money that you put into a Traditional IRA account until you actually take the money out of the account in retirement. Sweet, right?

So, in theory, if you made $50,000 and put $5,000 into your traditional IRA, you would only have to pay tax on $45,000 (super simple example, excluding other items that reduce your taxable income, such as standard deduction and 401k contributions). However, our friends in Congress didn’t want the super-rich-Romney’s of the world taking advantage of this, because they have enough loopholes as it is. Due to this, the amount that you can write-off (the $5k in my example) is reduced once your income gets to a certain level, assuming that you are covered by a retirement plan at work.

All you care about is how much (if any) you can write-off to reduce your tax liability. So, here’s what ya need to do:

  1. Calculate your Modified Adjusted Gross Income (MAGI). This link should help with that calculation.  If you don’t know your AGI (adjusted, without the modification…gotta love the IRS terms), look at Line 37 on your most recent 1040, and that should give you an idea.  If you have a pretty straight forward tax situation (no self-employment, rental properties, adoption expenses, student loan interest, etc) then all you really need to do is take AGI + IRA contribution = MAGI.  Bam, done!  If you’re more complicated, check out the link and meet us at #2.
  2. Next, you need to know your filing status.  Again, check out your old 1040, Boxes 1-5 towards the top of the first page.  Now, you can find out what MAGI amounts start the phase-out.  For 2013 it is as follows:
    Single and Head of Household: $59k – $69k
    Married (and covered at work): $95k – $115k
    Married (and not covered at work): $178k – $188k
    So, if your MAGI is under the first number, you don’t have to phase-out.  Congratulations, you don’t make enough money for Congress to penalize you.  On the other hand, if your MAGI is higher than the second number, you don’t get to write anything off…congrats on being “rich” in the eyes of Congress.
  3. Now, here is the interesting part for the people that fall in between the MAGI range.  You calculate how much you can write-off based on this handy-dandy formula:  (Highest Dollar Limit of MAGI Range – MAGI) * [Contribution Limit/(Highest dollar limit of phase-out range - Lowest dollar limit of phase-out range)]
  4. What? That didn’t make 100% sense reading it for the first time.  Huh, let’s try to break it down:
    Highest Dollar Limit of MAGI Range – This is the $69k, $115k, and $188k from the phase out amounts in #2
    MAGI- Can’t help much here, you gotta calculate this one. 
    Contribution Limit – How much did you put in the account this year (not gains!).  2013 limit is $5,500
    Highest dollar limit of phase-out range – the 2nd number in the ranges in #2
    Lowest dollar limit of phase-out range – the 1st number in the ranges in #1
  5. Whatever that formula gives you is how much you get to write-off to reduce your taxable income.
  6. Ok, fine, fine, I’ll do an example for you.  Here’s the facts:27, f, brown hair and eyes….oh, wait. Wrong screen.  My bad.  Taxes…got it.

AGI $65,000
Single
$5,500 annual contribution

So, here’s how the formula works out:(69k – 65k) * [(5,500/(69k -59k)] = 4k*0.55 = $2,200.  So, our example results in a $2,200 reduction to taxable income.  Not quite as awesome as $5,500, but it’s still nice to have something to help with retirement savings.

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Atkins and Whipped Cream Bikinis

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Hey everybody!  It’s been a bit over 2 weeks now that I’ve been doing an “Atkins” style diet and I wanted to catch you up.  For those of you in the know, I haven’t been doing induction or any strict carb counting (although I did that back in January).  Even though I’m not being as strict as a Catholic nun, I would guess that I keep my carb intake under 40 grams per day.  As a reference point, the USDA recommends 130 grams per day (craziness!!)  So, here is how I’m managing this diet:

  1. Eat several small meals each day.  I eat 6 meals a day.  This includes breakfast, 10am snack, lunch, 3pm snack, 5pm snack and dinner.  This helps keep me full throughout the day and it helps to know that I never have to wait more than an hour or so before the next time I get to eat.
  2. Always have snacks handy.  Always.  In the fridge at home.  And at work.  In your purse.  In your luggage for vacation.  Everywhere!  These can be hard boiled eggs, beef jerky, berries, peanut butter, nuts, etc.  Anything with a decent amount of protein to curb your hunger.  And it goes without saying, nothing with a lot of carbs.
  3. Find a way to splurge.  This will be different for everyone.  Maybe it’s a juicy steak.  Or a block of extra sharp cheddar cheese.  Or a cup of coffee.  For me, it’s sweets.  I’ll make sugar free pudding with half and half to keep the carb count low.  Or grab a handful of blackberries.  Or add some sugar free hot chocolate mix to a coffee.  There are plenty of options and the important part is that I know I’m not neglecting my cravings (which can easily result in failure of a diet)
  4. Mix it up.  For most of us, Atkins is a new, different way of thinking about food.  Because of this, it can be easy to pick a few meals and have the same thing over and over.  However, I’d suggest that you try to vary your meals as much as possible.  Look up new recipes.  Use your imagination mixing together your favorite ingredients.  Check out an Atkins-friendly restaurant or cafe.  Whatever it takes to make sure that you keep things interesting.
  5. Measure your progress. Personally, it’s easier to stay on task if I know that I am making strides towards my goal.  Measure/weigh yourself at regular frequencies and give yourself a pat on the back when you see that scale tipping the right direction!
  6. Keep the right mindset.  As with any healthy diet (not a lemon-cayenne pepper detox), the change to low-carb diet should be a lifestyle change, not a crash diet that you follow for a few weeks or even months.  With this type of positive outlook, you envision a future of looking like Ali Larter in a whipped cream bikini instead of envisioning a future of gorging on brownies, pizza, and pasta.

What (if any) diet do you follow?  Have you ever tried Atkins?  Would you add anything to this list?

Flickr Image Source: ‘Meat…For Health Defense – Cover’ by Umpqua

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Posted in FIT Bens