With my five year college reunion coming up this weekend, I’ve been reflecting on what I’ve learned in the last five years. Plenty of lessons have nothing to do with money (e.g. drinking champagne, then whiskey, is a bad idea; buying a AAA membership is a good idea), but I’ve picked up a few useful tricks on the way:
Pay your taxes: I’d always taken for granted that taxes, along with insurance and social security, were handily deducted from my bi-monthly paychecks, with a single end-of-year true-up made to the government. Outside a traditional firm-employee structure, however, the process is a bit more complicated. For anyone self-employed or working as an independent contractor, you pay the IRS in quarterly installments of estimated taxes , explained more simply by Learnvest.com. Tools such as Evernote or ProOnGo’s Receipt Reader are great to track expenses and calculate your deductions.
Organize your life: learning to track expenses is just the tip of an organizational iceberg. Keeping your financial records organized helps with simple tasks from paying your credit bills on time (if you haven’t automated payments online) to understanding the cost basis of your investments. I’ve also used Evernote and Delicious to keep track of articles, tips and calculators for future reference. These days most people manage their bank and investment accounts online, but for technophobe investors or holdouts with security concerns, a disciplined approach to organizing statements and tracking will yield dividends in clarity and convenience down the line.
Plan to retire: when I first joined the workforce I nearly missed my firm’s deadline to open a 401(k) account, and I did so only after an exhaustive survey of my coworkers about why I should, and how much to invest. In the end, I’ve maxed out my account each year, motivated in part by the firm’s generous matching policy. I think this was the right choice – without the weight of a mortgage or family to pay for, cash put into my retirement investments would otherwise have gone to buying shoes and concert tickets. Additionally, setting up the 401(k) was a good starter lesson in researching and selecting investments. Companies such as BrightScope have begun providing greater transparency into 401(k) plans for individual employees and investors.
Re-evaluate your goals: As I and many other friends have left our first employment to start graduate schools, different jobs or startups, we’ve each faced the question of what exactly to do with our carefully cultivated 401(k) investments. Depending on your next step, there are four alternatives:
- Stay put. This allows you continued tax-deferred savings and consistency of investment choices and management services, but can potentially limit your investment and withdrawal options.
- Roll over your 401(k) into an IRA. There’s plenty of information about rollovers out there, and your plan provider probably has a useful guide to doing so: see Fidelity Rollover IRA. The key benefits, in my mind, are gaining control over your savings and a broader range of investment choices, potential consolidation of other accounts for ease of management, and the option to withdraw for education and home purchasing without penalty. However, you may lose plan specific investment options, and the option to borrow against the account.
- Migrate. If you’re starting with another firm which offers a plan, you can roll it into the new plan. In addition to continued tax-deferred savings, depending on the plan’s terms, this might provide benefits from new plan-specific investment options and services, as well as the option to take out loans against the plan. But you’re still subject to the typically more restrictive provisions of a 401(k), and this may limit options for your beneficiaries.
- Cash out. The least ideal alternative, given the required tax withholding and penalties for early withdrawal. Not to mention lowering your funds available at retirement.
Take a (little) risk: As a cautious person and newbie investor, I was initially reluctant to look beyond the relative safety of mutual funds and ETFs. I’ve learned to push myself to do the research and make equity investments (after starting my retirement accounts and building comfortable savings cushion, of course). Some of these investments have played out better than others, but at this point in my life I have a pretty long investment horizon, so now is the time to take some investment risks.