Welcome to Part 2, the wonderful world of saving. In Part 1 we covered debt and how to manage student loans. Today my goal is to teach you how to optimize your savings and understand the difference between taxable, and tax-deferred accounts.
When you graduate and you’re on your own for the first time, make sure you build an emergency savings. Consider this is your savings account at the bank. Don’t be that kid who has to run to Mom and Dad the second you have an unexpected expense. You graduated and you’re independent and this is your time to prove you can handle the real world. If you’re single, make sure you have 6-12 months of living expenses saved up. If you’re married and both of you work then 3-6 months should do just fine. Having a safety net will give you confidence. Once you establish it, you can start saving for the more exciting things like a vacation, your first home, a new car, and if you’re that single guy or girl maybe a future wedding.
Once you have that safety net of an emergency saving you are going to want to take advantage of tax-deferred savings. These are accounts like a 401(k) at work or an IRA for example. How these accounts work, are they allow you to invest money pre-tax. The account will grow without tax consequences when you buy or sell investments. So, for example, let’s say you buy 1 share of Apple in your IRA at $300 and then sell it at $310, the $10 gain is not taxable on the sale in your IRA. If you bought that same 1 share of Apple in your taxable investment account you would have to pay capital gains taxes on the sale.
That is why tax-deferred savings needs to be an important part of your saving strategy. The only time you pay taxes on tax-deferred accounts like a 401k or IRA is when you take distributions from the account. Rule of thumb, DO NOT touch these accounts, they are meant to help you save for retirement so leave them alone.
Another account you may want to consider is a ROTH IRA. This is another tax-deferred account that works a little bit different than a traditional IRA. For a traditional IRA, you put in money pre-tax but with a ROTH you put in after-tax money. Essentially with a ROTH, you pay the taxes now so that way in the future your account grows tax-deferred and your distributions are tax-free. This is true as long as you have the account for at least 5 years after your first contribution and are over the age of 59.5. Don’t touch this account until you retire and you will have the sweet ability to take tax-free withdrawals. To get even more of an in-depth breakdown, check out this Roth vs Traditional IRA. Just remember whether it’s a Roth or a Traditional IRA you can only contribute earned income aka money from your job.
That’s a wrap on Part 2 in our Finance Tips for College Grads. In our next post, we will dive into my favorite topic… investing! Don’t forget to sign up for our email list to get notified about any new content.
Have a great week and we will catch you in the next one!
Remember: FITNESS + FINANCE = FREEDOM!
-Strong Dollar Team
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