IRA and 401(k) limits announced: what will you be saving next year?

Coin stack and saving moneyKJ: The IRS has announced the limits for 2014 for what you can save to your 401(k) and IRA for the next tax year, and with the start of the year quickly approaching, now is the time you should take a look at what you are able to set aside. Gather your spreadsheet or good old pen and paper and start planning. You will be in a much better position this time next year if you start the planning process now, so don’t delay!

What’s the same?
The contribution limits are the same for 401(k)/403(b) plans and IRAs for 2014 as they are for 2013. So, you can potentially contribute up to:

    $17,500 for a 401(k)/403(b) employer retirement plan with catch-up provisions of $5,500 for those ages 50 and older, and
    $5,500 for an IRA (traditional or Roth) with catch-up provisions of $1,000 more for those ages 50 and older.

So, what has changed?
Not a whole lot, really. The main thing that has changed, however, are the income limits that would allow you to contribute to IRAs. The Roth limits have increased slightly to:

    $114,000 – $129,000 phase-out for single filers, or
    $181,000 – $191,000 for married individuals filing jointly

And, the income limits to contribute to a traditional (deductible) IRA are (for those who also have access to a retirement plan at work):

    $60,000 – $70,000 for single individuals, or
    $96,000 – $116,000 for married filers

Break it into smaller chunks
While the contribution amounts for an IRA and 401(k)/403(b)/TSP are a large chunk of change, here’s what the contributions look like when you break it up throughout the year:

    401(k)/403(b)/TSP
    About $1,458 per month for the 401(k) limits, or
    $729 per paycheck for semi-monthly payments (or $673 for biweekly paychecks – biweekly or semi-monthly…what’s the difference?)

    IRA
    About $458 per month to reach the IRA limits, or
    $229 per paycheck for semi-monthly payments (or $211 for biweekly paychecks)

Even if contributing the max isn’t realistic for you and your family, start with just $100 per month and build from there as you’re able to. Saving money is one of those habits that’s easier and easier to build on over time, and the sooner the better!

One lump-sum payment versus regular, contributions
With a 401(K), you’re not really able to just do one lump sum contribution at the end of the year, but you are able to do this for an IRA. I am a fan of setting up regular contributions to an account throughout the year to help keep you in check and stay on track, but for those of you who are close to the income limits or would just prefer the flexibility and ease of tracking, you can just send your savings to a savings account and just transfer your yearly contribution to the IRA later in one swoop.

    What will you be contributing to your retirement accounts next year?
    Does your budget need to shift to maximize your contributions?
    Share with us what you do to make sure you save!

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It’s never too early to save

KJ: Starting to save early is not just a good habit to build for long-term success, but there are also some obvious mathematical benefits too. See the JP Morgan chart below which illustrates why it is so important to start saving young.

JP Morgan Chart Saving Early & Compounding Interest Over Time

With the compounding effect of interest and savings over time (i.e. letting your interest earn you interest, so your $1 in interest today will make interest next year, and that interest will earn interst the year after and so on and so forth), starting later means you have to save significantly more just to accumulate a similar level of savings.

AJ: Kirby and I have consciously made decisions since the day we both first started our careers that follow this line of thought. There are always circumstances that are outside of your control that impact your ability to save as much as possible, but it’s imperative that you do save whatever you are able along the way to make up for lost time. The long-term benefits speak for themselves, so stay the course and learn to do without the unnecessary.

There are always excuses for not saving today, but the longer you wait, the harder and harder it will be to catch back up.

So, where do I begin?
KJ: As you work toward your financial security, consider the following prioritization:

    1) Set up a savings or money market account at a bank (preferably one with no monthly fees and with ready access online or in proximity to your house and/or work), and make sure you get at least $1,000 put away as soon as you can.
    2) Then, focus on paying down your debt while simultaneously building up your emergency fund.
    3) Last (but certainly not least), once you’ve built up your emergency fund (usually best to aim for 3-6 months of your living expenses), then you can begin to focus on longer-term goals like retirement, children’s education, vacation slush fund, etc.

It’s not until you can make it to step three that you can really get your savings to begin to work for you, and as the chart illustrates, the sooner the better! For your life, maybe your “target” is to maximize your employer match in a 401(k), save for children’s education, fund some to your IRA, and set some additional “rainy day” funds aside to help with the unexpected that inevitably comes up (new roof or car repair anyone?).

    When did you start saving?
    What’s holding you back from saving today?
    Tell us about why you decide to save.

It's never too early to save is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

15 year versus 30 year mortgage: knowing how to choose

Battle of the Mortgages 15 year versus 30 yearKJ: So you need a mortgage (like most of us out there). If you’ve ever been through the process, then you know that getting a mortgage will subject you to decision after decision after decision. One decision we hope to help you with is understanding if you should consider a 15 year or 30 year mortgage. Here are some key considerations when it comes time for you to make the decision:

You can pay less in interest over the loan’s life
With a mortgage that is an amortizing asset, you pay much more of your payment toward interest in the early years and much more to principal in the later years. And, with a shorter time period offered by a 15 year mortgage, much more of your payment goes toward principal each month. Also, with the shorter-term, you have significantly less interest you pay over the life of the loan. For example, assuming a 4% interest rate and a loan of $150,000, a 30 year mortgage would have you paying a total of $107,000 in interest while a 15 year mortgage would have you paying a total of $49,000. That’s $58,000 in interest savings!

Your payment is not double
The first reaction that most people have is that they cannot afford a 15 year mortgage because it MUST be double what a 30 year mortgage is. I mean, it’s half the time after all! In fact, that’s not the case at all. If you take our previous example of a 4% interest rate, the 15 year mortgage payment is actually 55% more ($1110 per month compared to $716 for the 30 year). Still a bit higher of a payment, but not anywhere near double.

You get a lower interest rate
While the previous examples suggested the interest rate on a 30 year and 15 year mortgage were the same, they often aren’t. It’s not infrequent that you’ll save anywhere from 0.5% to 1% per year on your interest rate to go with the 15 year mortgage. As such, if we continue our example of a 4% 30 year, but instead use a 3.25% rate for a 15 year mortgage, your payments could look like:

    30 year at 4%: $716
    15 year at 3.25%: $1,054
    Difference: $338 or 47% higher

So then why not get a 15 year mortgage?
The key answer: you lose budget flexbility. As many learned in the 2008-2009 crisis and the Tech bubble burst, your income is all but certain. So, if you get a 15 year mortgage, you are locking yourself into the higher monthly payment for the remainder of the loan, and when times get tough, the last thing you want is a high fixed expense.

But wait, maybe there’s a happy medium?
An alternative that may be the best of both worlds is to get a 30 year mortgage, but pay it as if it’s a 15 year mortgage. That way, you lock in a lower monthly payment, but you reduce the amount of interest you will pay over the life of the loan because the extra monthly payment will go directly to pay down your principal and thus allow you to shave years off the life of the loan.

If something happens to your job (voluntarily or involuntarily), you aren’t locked into the higher payment, and you can make sure your emergency fund can last even longer to help cover your other essentials that crop up.

    Do you have a 15 or 30 year mortgage?
    How did you decide which to pursue?
    When comparing a 15 yr versus a 30 yr, would you add anything to this list?

15 year versus 30 year mortgage: knowing how to choose is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

What goals have you set for yourself?

Success On Dartboard Showing Accomplished ProgressKJ: For this post, we wanted to dedicate the majority to discussing goal setting and checking in on the status of your goals:

    What is the biggest financial accomplishment you have achieved in the last month?
    What about the last 6 months?
    What about the last year?

Set Goals
So maybe your New Year’s resolutions haven’t paned out like you thought, but it doesn’t mean you can’t pick them back up and get on track before the end of the year or find new goals worth pursuing. Setting goals is the first step to this whole process, and if you haven’t done that, then spend just 15-30 minutes with a pen and paper and write out some goals (financial and non-financial) that you have for you and your family. We spend the vast majority of our life working, so why not periodically sit down for 30 minutes to find where you would like to be headed! Your goal list should include setting timeframes for when you would like to accomplish each of these goals. It could be very short (within the month), or it could be longer-term in nature like five years.

Create an Action Plan
Then, create a plan of attack on how you can accomplish your goals. It’s one thing to say “save for retirement,” and it’s an entirely different thing to put pen to paper and say, “I want to save $X/Y% to my IRA this year by putting in $Z per month.” Figure out if you will have to make any budgetary adjustments to shift your priorities in order to get there. Having a succinct action plan with details on checkpoints along the way will meaningfully improve your ability to actually accomplish those goals.

Time for a Check-Up
In looking at your answers to the questions at the top of this post, have you noticed a trend? Have you made improvements over the last year or have you stagnated? Just as it’s important to actually set financial goals, it’s important to keep up with them over time to see that you are accomplishing them. Especially with the compounding effect of savings over time, the more you let your goals go by the wayside, the worse shape you will be in when you finally come to your senses 5, 10, 15 years later…

Right the Ship
If you’ve fallen off the wagon (New Year’s resolutions often come to mind as the first goals to go by the wayside each year!), then find a way to get back on track. It’s better to get on track late than it is to never be on track, so find ways to begin meeting those goals or even ways to make up for lost progress if you’re able!

Our Turn
AJ: Outlining this made me a little misty! The year certainly isn’t over yet but what a great year it has been. I’m more proud this year of our accomplishments than any year prior. We are overwhelmingly blessed, for sure!

Biggest financial accomplishment in the last month: Planning for and purchasing two large, statement pieces of art with proceeds going to an organization we’re passionate about. Much like in our last post on budget myth busting, being on a budget doesn’t mean you’re cheap and can’t give back to causes that mean most to you.

Biggest financial accomplishment in the last six months: Selling our first house and buying our second house.

Biggest financial accomplishment in the last year: Taking my parents on a fully paid-for-in-advance trip of a lifetime.

None of our goals and accomplishments this year have been anything close to an impulse buy, but with proper planning and enough time, most anything is possible!

    So, what’s on your list?
    Are you where you thought you would be?
    What are you doing to get back on track and heading toward your goals?

Image courtesy of Stuart Miles / FreeDigitalPhotos.net.

What goals have you set for yourself? is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

Budget myth busting

Budget myth bustingAJ: On Monday we issued a challenge to save an additional $100 in the month of November. We honestly weren’t sure how it would be received, as it’s a busy time of year for everyone, but you all have embraced the challenge in a big way. Not surprisingly, we could all get by with a little less and going into the holidays is an especially relevant time to do so.

As I started to think about where our extra $100 would come from, I immediately had visions of what the outside world must think of us super budget-ers and wanted to do a little budget myth busting, if you will.

KJ: Since budgeting often has a lot of negative connotations and can garner strong feelings of negativity, we’re here (with your help!) to bust those common myths of budgeting, so you can see the importance of setting a budget at all stages of your life.

You have to tell everyone you’re on a budget
AJ: NO, SIR. I can assure you that prior to Kirby and I airing our budgeting laundry via this blog 99% of the people in our lives did not know we were on a budget. It’s not their business, and it rarely impacts the lives of those around us. Even when we indulge in lavish meals or over the top vacations we plan for it. We don’t skip and make it painful for everyone around us: we plan well in advance. What you do or don’t do with your money is very personal and private, and I encourage you to budget for yourself and not for a new conversation starter with strangers.

KJ: You certainly don’t have to tell everyone (we kind of do, since we’re running this fun blog), but it’s not something to be ashamed of. Just because you budget doesn’t mean you should be shy about it. It’s not taboo, it’s not some hideous disease your doctor just diagnosed you with. It’s actually an empowering way of life, so you can enjoy the things that are most valuable to you.

You’re cheap, and you can’t have nice things
KJ: In fact, I think budgeting is often quite the opposite. Budgeting allows you to know what you are spending, and allows you to direct your expenses (most of the time, but not always!) to what you actually WANT to purchase and what you most value. Often, budgeting can mean you’re actually buying something more expensive that can last quite a bit longer because you have planned ahead to make it work within your income and expenses.

AJ: I’m an odd balance of obsessive about quality and obsessive about value. Trust me, it’s as confusing for me as it is for you. I am a super planner to the max which means I’ve been thinking about buying Christmas gifts since last March. I’ve been purchasing necessities for our home (laundry detergent, toilet paper, cleaning supplies) well before we were close to running out so that come November and December when we have so many financial demands, the basics aren’t one more thing we have to consider. I buy Kirby undershirts and socks long before he admits there are holes in what he has now. This time of year I’m lucky if I make it out to shop one time every two months for anything other than groceries: I simply don’t have the time. But when I’m out I’m looking for anything and everything we might need – a cocktail dress for a client dinner, a formal gown for a black tie event that’s eight months away, a thoughtful gift for my grandma. Literally every shopping trip I’m on is one where I’m trying to get ahead so we don’t wind up with odds and ends of left over sale items and crummy gifts.

You eat like you’re in college
AJ: I almost didn’t even write this one because Kirby and I kind of, sort of, sometimes do eat like we’re in college. Mostly because we like junk. I have written endlessly about ways to make your grocery dollars go further (see also meal planning and why grocery ads are so important) but it’s especially important to note that we are a meat eating, alcohol drinking, snack having household. Stock up on the basics, save plenty for fresh produce, and stop eating fast food (KJ: except for Taco Bell I hope). Done.

KJ: We don’t eat like we’re in college: I had WAY more Rosa’s Taco Tuesdays back then. We live by our food budget, and we certainly don’t eat ramen noodles and hot pockets as our primary meals. Quite the opposite I would say. With proper planning, use of grocery ads, and an eye for a bargain, we eat quite well at home and on the go. The key to planning for our family’s meals is to make leftovers to have at work. That way, you can buy in bulk to get cheaper prices, but you also reduce your expenses for lunch and the temptation to just grab something quick at the local cafe or nearby restaurant.

Only poor people are on budgets
AJ: This one really irks me. I have well-intentioned, kind people in my life who find out Kirby and I have a blog on saving money and say “but you both have good jobs!” as if having a good job equates to being financially irresponsible. The old saying comes to mind: people who have money don’t spend it. If you have money, all the more reason to have a budget. If you don’t have money, you HAVE to budget. If you don’t budget, you’re done for! Well, not quite, but I’m really passionate about the value of budgeting!

Wealthy people are on budgets. It’s part of the reason they’re wealthy. Stand tall, budgeters, and go forth and be wealthy.

You don’t give to charitable efforts
KJ: Charitable giving – whether through your time or money – is a very important part of giving back to the community, so just because “you’re on a budget” doesn’t mean you can’t (or shouldn’t) give back to those in need. In fact, this often becomes some of the most meaningful part of our budget where we can give back to our causes that are dearest to our hearts – our alma mater, Camp Fire USA, and our local church are top regulars, but we also enjoy the occasional $25-50 for walks, fund raisers, and other charitable gifting that is important to others.

AJ: For us, charity provides a source of fulfillment beyond our everyday lives. I often find myself in the weeds of the stress associated with my job, the demands of having so many obligations and the general narrow-sighted ways of our culture. Giving of our time and providing financial donations helps broaden my perspective and helps center me. I’m big on both giving of time and of resources, as we don’t have a huge budget that we are able to allocate monthly to organizations. We are diverse givers – we love the 5k runs, we love the hands-on projects, we love the swanky silent auctions – they’re all important in their own way, and the older I get the more I wish I had done more earlier. Much like saving, giving of yourself has increasing benefits over time.

We are SO appreciative that each of you has taken a look at your situation and are already embracing our challenge. I am inspired by so many of you and so many ways, and I’m thrilled that we’ve inspired a passion in you that we believe in so strongly.

    What budget myths do you believe in?
    What’s keeping you from setting up a budget?
    Tell us what goals motivate you to get on track!

Budget myth busting is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.