Oy – I Just Need More Money Then X is Easier
As I shared in my blog post Cash Flow Faucets – Your Paycheck – Lessons in Life Management – our family goal is always to have all faucets off to restrict my cash flow and force my family to live off less. What this has resulted in over the years is lower debt and most money in deferred tax accounts that I can’t reach easily and leaving us” without enough money” for what I would ideally like to have to run our personal finances on a month to month basis. This post makes the case for throwing out normal personal advice and building up a small taxable portfolio and then ramping up deferred tax accounts.
My Dilemma and Likely Yours
My dilemma, and likely yours, is that you need more incremental cash flow each month to help you achieve all of your financial objectives/obligations on a monthly basis. E.g. if you only had $X more a month, then everything would be on track.
For our family’s finances we seem to “tread water” on all non retirement account goals as our maxing our deferred income for 401(k) and HSA has significantly reduced our tax home pay over the past several years. We can obviously increase cash flow if we needed to but if we had $X more of after tax income we would be in a better spot to hit all of our objectives.
Ok Math Time
If you have followed this blog or my recent posts you can see I routinely pull out the calculator to see what makes the most sense to accomplish this goal. Let’s do some quick math.
Scenario 1: $5K a month paycheck, maxing out 401K, expenses of $2.5K a month. Assume no 401K appreciation for easy math.
Result: $19.5K in 401K or $15.6K after tax (assumes 20% tax on 401K).
Scenario 2: $5K a month paycheck, reduce 401K to 5% of paycheck to quality for company match. Assume no 401K appreciation for easy math.
Result: $3.2K in 401K, $11.7K in taxable accounts for a net of $14.4K (assumes 20% tax on 401K). Most important we increased our income from investments to $27 a month.
I have made some simplistic assumptions on taxes to illustrate the point. If you want to see what your 401K contributions due to your take home paycheck see this link: https://www.free-online-calculator-use.com/free-online-paycheck-calculator.html
If I was 20 All Over again
Reflecting on the above math and my own personal finance journey – the dilemma really comes down to the deferral of income and if that trade off makes sense or not for your situation. If you aren’t a disciplined saver I would encourage you to put as much as your 401K as possible so you can’t easily touch the funds. If you are a disciplined saver – is a higher income or a 401K balance you can’t touch for 40 years more important to you? Or can having more income help you achieve better savings goals overall? Why not start maxing out your 401K at 30 vs. 26 when I was able to do it for the first time.
As we have had kids, bought houses, cars, etc…. we continue to hit our overall financial goals but I continually feel cash poor and if I did it all over again I would have a higher amount of our savings in a taxable account. I would actually be able to save at a higher rate now if I had more taxable investment income covering some of these day care bills.
Instead, our family is in a tread water stage as the day care and baby expenses eat into our ability to save at the rates we had prior. As I read other “FIRE movement” type articles I think the underlying themes of a lot of theses is having income replacement to give you an option but then a lot of the standard advice points you to maxing out your 401K that you can’t access for 40 years. If I did it all over again I wouldn’t have maxed out my 401K until I had around one year of after tax paychecks in a taxable account throwing off income.
Leave a Reply