Feed your 401 (k) instead of taxes!

by James & Miel on January 6, 2008 · 0 comments

Most people know that it’s a good idea to be saving away while you are young for when you are old and gray. Many people look at their budgets with discouragement that they don’t have enough extra at the end of the month to put more (any) money into their retirement account.

Well, I’ve got news for you!

What if you could contribute more to your retirement without taking a big hit in your monthly budget?

Sound too good to be true?

In the past I’ve understood the magic of putting more into your retirement and not feeling the impact as much as you’d think. In my last paycheck I was given a big reminder of this that I wanted to share with our readers.

At the end of 2007 I was contributing $3,513.64 to my retirement and $1,864.68 to taxes on a monthly basis to make sure I maxed out my retirement.

At the start of 2008 I bumped back down my retirement to evenly max out my retirement for the year; paying $1,192.30 per month. However, this pumped up my taxes to $2,659.52 per month.

This means that I’m now paying an extra $794.84 per month in taxes by not contributing to my retirement as heavily. So instead of having an extra $2,321 per month, it is now only $1,600.

Considering that retirement accounts are compound over time, it makes much more sense for me to take that extra $700 that I’m paying towards taxes now and put that towards my retirement instead. Given then I’m already maxing out this will mean that I’ll paying larger taxes later in the year, but the feds might as well wait their turn until my retirement is paid up.

Lessons learned:

  • If you aren’t contributing as much as you’d like to retirement, consider that by hiking up your monthly contributions your pay check may not be as affected as you’d think!
  • If you have the wiggle room in your monthly budget it may be better to pay your retirement first and the feds second.

Food for thought!

Happy savings!

Miel

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