Monday Night Finance- Volume 98

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Why a Roth IRA Is a Bad Idea (Yes, You Can Lose Money)

If you like to read personal finance content, I’m sure you’ve seen many articles and books touting the advantages of Roth IRAs. Named after Senator William Roth, these accounts allow you to pay taxes on your contributions upfront, leading to tax-free growth and withdrawals in retirement. Many personal finance personalities advocate for always investing in Roth accounts. But is that really the case? And can any personal finance advice be truly universal? Nick Maggiulli’s article looks at the potential downsides of Roth IRAs, drawing from his own financial journey where choosing a Roth IRA over a Traditional IRA led to a significant loss of potential retirement income.

I heard it on radio shows, saw it plastered all over my social feed, and even confirmed it with a few Roth calculators. The Roth was the way to go. Pay taxes today and never pay taxes again? Sounds good. So I invested blindly for a decade. Just recently, I ran the numbers myself—and discovered the horrifying truth. By choosing a Roth, I had already cost myself $400,000 in retirement income. 

~Nick Maggiulli, Life And My Finances

The article challenges the common perception that Roth IRAs are universally beneficial investment tools. Maggiulli shares his personal discovery that, for him, investing in a Roth IRA instead of a Traditional 401k cost him an estimated $400,000 in retirement income. A survey conducted by the author with 635 individuals revealed that while 92% believed investing in a Roth IRA was the right choice, it only made financial sense for 9% based on their age, income, and expected retirement withdrawals. The article argues that for most people, their income and tax rates in retirement will likely be lower than their current rates, making a Traditional 401k a more financially sound choice. This is supported by statistics showing that many Americans are not saving adequately for retirement, indicating they will earn less in retirement and thus be in a lower tax bracket. The author emphasizes the importance of individual research and understanding personal financial situations rather than following popular investment advice blindly.

How to Budget as a Freelancer

During the pandemic, many people got their first taste of working from home. In 2023, however, as companies are recalling employees back to the office, the landscape of workplace flexibility is changing. For those seeking to maintain the autonomy and comfort they’ve grown accustomed to, turning to freelance or contract work emerges as an attractive alternative. With just a high-speed internet connection and a laptop, a world of opportunities opens up, allowing one to work from anywhere, at any time. This shift to freelance work, though liberating, brings its own set of challenges, particularly in the realm of financial management. The article “How to Budget as a Freelancer” delves into the crucial aspects of managing finances in the unpredictable world of freelancing, offering essential tips for navigating income fluctuations and ensuring financial stability.

When it comes to your budget, you need to appreciate the fact that you have to. Be consistent with your income. What did your income and expenses look like in the last year, expenses especially? If you know what this looks like, you can estimate how many contracts you need to fulfill to be able to meet your financial obligations.

~Savings and Sangria

The article “How to Budget as a Freelancer,” addresses the financial challenges and strategies for successful budget management in freelancing. It emphasizes that while freelancing offers great liberty and control over one’s work, it also brings the stress of uncertain income and the need for effective budgeting. The author advises freelancers to analyze their past income and expenses to estimate the amount of work needed to meet financial obligations, underscoring the importance of having multiple clients for a steady income. A key point is to separate personal and business finances to avoid confusion, especially when expenses like equipment upgrades are involved. Furthermore, the article highlights the significance of tax planning for freelancers. It suggests allocating 30% of income from freelance contracts for taxes, ensuring that when tax season arrives, one is prepared and not overwhelmed by a large tax bill. This comprehensive approach to budgeting is presented as a critical step for freelancers transitioning from traditional employment to managing their own business.

How Much Money Should You Save Every Month?

Do you know how much money you save every month? Maybe you don’t think about it often, but when you were first hired, you elected to save 5% of your income in a 401(k) or something similar. Often, these initial decisions are made without a comprehensive understanding of personal finance or long-term goals. Saving money is more than just a percentage; it’s about understanding your financial situation and planning for the future. Whether it’s for retirement, an emergency fund, or a specific purchase, the amount you save should reflect your individual needs, goals, and circumstances. But how do you know how much money you should be saving. While should is a tricky word, this personal finance article by Marjolein Dilven addresses the question of how much to save monthly.

According to the 50/30/20 rule from Senator Elizabeth Warren, at least 20% of your income should be saved. 50% goes to needs, and 30% goes to wants. Ideally, 15% of that 20% you are saving will go to retirement savings or investments. The remaining 5% should go towards you building your emergency fund or paying down extra on your debt (the minimum payment on your debt is not accounted for in the savings category).

~Marjolein Dilven, Radical FIRE

Dilven emphasizes that this is an incredibly personal decision and that the right answer depends a lot about your life stage, income, and other financial commitments. However, in general, Dilven recommends the 50/30/20 rule, allocating at least 20% of income to savings, with distinctions between short-term and long-term financial goals. The article outlines strategies to enhance savings, such as budgeting, automating savings, optimizing job benefits, and pursuing side hustles. It acknowledges the challenges in meeting savings goals, suggesting adjustments in goals, expenditure cuts, or additional income sources. Emphasizing the importance of gradual progress towards financial objectives, the article also encourages investing for growth, advocating for a tailored savings plan that aligns with personal financial aspirations and circumstances, rather than adhering strictly to general guidelines.