Handling Finances

I’m traveling to London next week, and between a crazy work schedule and preparations for the trip I plan to take a break until June.  I’ve put a lot of my financial transactions on hold for the last month (i.e. retirement saving and saving for other goals) to build up some cash in my checking account for the trip, and while I was going to try to write a pre-trip article or two, I think I could use a break from writing altogether.

So goodbye until June and I’ll be sure to write about travel financing when I return!

I know what you’re thinking — I promise not to mention politics in this post!  This isn’t about the government’s tax policies or broad economic theories.  This post is about how a little planning ahead can pay off significantly.

2007 was a year of transitions for me.  I finished a Masters program in optical engineering (laser physics) and I got a new job playing with lasers.  I got married and moved out into the scary real world.  I also started my first retirement accounts and started significantly saving for the future.  And that’s where my planning paid off.

Because I didn’t start working in my new job until the end of the summer and had only a low-paying research assistant position in the spring, I didn’t make a whole lot of money in 2007.  My wife’s nannying income certainly bumped it up but in the end, we earned just enough to start paying taxes.

My Tax Rate: 0.45%

I didn’t know exactly when tax rates would kick in, but I did know that my taxable income would be very low this year so when I started my retirement account, instead of putting 12-15% of my income into a tax-deferred 401(k), I maxed out my tax-free Roth IRA with after-tax money.  My effective tax rate for 2007 was 0.45% so assuming a 28% tax rate at retirement, I saved about $1100 in taxes — or at modest 6% return on investment, that’s 11-12 thousand dollars in retirement!

Why bring it up now?  Well, I was curious as to why I was only getting $600 in my rebate check.  There’s nothing I could have done (besides earning more) to get the full $1200 and to be fair, as a husband with a good-paying job, I wouldn’t be stimulating the economy with the extra money anyway.

The Plan for 2008

It’s a bit doubious to call low income a “tax break” but this type of year can be predicted ahead of time.  With a little planning, you can match your deductible donations with high income years (say, when you sell stock) and keep taxes as low as possible.

For 2008, I’m going to do much the same as with 2007 but for a different reason.  *warning — governmental tax-policy discussion ahead!*  With our government’s record deficit and much of the military action in Iraq funded only on an ongoing emergency basis (i.e. no budgeting for future expenses), taxes aren’t going to go down in the next decade no matter who runs the country (in my humble opinion of course).  With that in mind, I’ll continue to put as much money into my Roth IRA as possible.  Not only will I be trying to max out my Roth IRA contributions, but if I save more, I’ll be building up a reserve in my taxable account for future years.  I’m going to want as much money growing tax-free as I can get, and with tax increases on the horizon I’ll wait to put more than the minimum required to get a matching contribution until I can use that contribution to reduce my income when it’s taxed at a higher rate.

So I didn’t make it without mentioning the government and taxes, but at least I didn’t mention what I WANT to happen and which candidate I think would screw up the country the most…  Small victories I suppose.T

I keep summarizing our finances to my wife. I let her know where our money is kept and how much money we have. We discuss our plans and goals regularly.

Still, when I asked my wife where she would find our emergency fund if I was incapacitated in an emergency, she had no clue. It turns out that while my wife is interested in our finances and in our financial future, she really couldn’t care less about the details. Before we got married, she was generally good with finances — spending less than she earned while occasionally paying a bill late due to disorganization. Now that I take care of money and keep her updated as to our general progress toward goals, she just doesn’t bother to pay further attention.

I don’t think that’s a problem — as long as we continue to communicate and align our goals, we won’t run into serious problems if just one of us takes care of financial details. Still, she does need to be able to access our money in an emergency, so I’ve begun working on my alien abduction package. It will include instructions and important account numbers for all our accounts including which accounts she owns and which (like retirement accounts) will need to be transfered to her if I’m abducted (we don’t like to talk about me dying).

We don’t yet have a safety deposit box, so I will likely be encrypting a copy I can keep in a reasonably secure online file-saving account.

It’s taking me a bit of time to get this together, but I’ll post a reasonably scrubbed version as Mrs. Micah did at the link above. It should make reasonably interesting reading as it will include both the location of my money as well as the reasoning for this location and special instructions on how accessing it may be complicated.