Tax Day is often to personal finance what New Years Day is to dieting. How is the year ahead going to be any different?
Just like what you put in your mouth today determines what you will look like and feel like three years from now, the actions you take today will determine how Tax Day feels next year and in the years after.
We need to eat every day. It’s the same for accumulating wealth: it never happens all at once, but is rather the accumulation of small decisions compounding through time.
My guess is that there are little baskets with small piles of money inside them strewn throughout your life. The only problem is that you need to see the baskets in order to pick them up.
Start at work.
If you cash a pay check from someone else, be certain you can answer the following questions:
- What type of retirement plan does my company offer? (sub-question: do you work for a non-profit or the government? Congratulations! You have your own rules to learn.)
- Am I getting the maximum matching contribution from my company?
- Am I deferring as much money from my pay into this plan on a pre-tax basis? (more on what that means below)
- Does my company offer me any other benefits that would allow me to spend my money the same way I would otherwise spend it, but on a pre-tax basis? (Think dependent care, health savings, transportation benefits).
Someone at your company should be able to answer all of the above questions for you.
If you work for yourself, either as a freelancer of some type or own your own business, be certain you can answer these questions:
- Am I deducting all of the expenses of my business operations that the law permits, and properly documenting them?
- Am I deferring as much of my income on a pre-tax basis? (there’s that expression again).
- Do I understand the tax treatment of expenses like health insurance and how they affect my self-employment income?
If you need help with these questions, check with your accountant or tax advisor.
When I say “pre-tax basis” I mean that the money contributed by you or your employer is not included in your taxable income. In most cases, it means you will not pay federal or state income tax on amounts contributed, but will pay taxes years down the road when the money is withdrawn.
The overriding principle of personal finance in the 21st century is that we are on our own. The government will not tell you how (or how much) to save for your future, it just wants you to know that it will not be responsible for your standard of living into your 70s and beyond.
This puts a burden on you, the citizen. You are under the burden of asking questions until you get the answers you need. My mission here is to help you to ask better questions.
It’s your mission to start, and not to give up until you find the answers.
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