Personal finance is an important topic, but unfortunately, most of us don’t receive any formal education on the subject. We enter the workforce, start earning wages or a salary, and figure it out as we go. There are plenty of people giving advice on what to do with your money, too many in fact. It isn’t easy to know where to begin and what we are hoping to achieve. My goal is to provide answers to these questions.
A good place to start is with an emergency fund. You want to have some funds available for unexpected events and expenses. A common rule of thumb is to have 3-6 months of your basic expenses saved. You want to make sure that groceries, gas, utilities, and other critical expenses are covered if something happens. If you don’t have one right now, that’s ok! The important thing is to start working toward that goal, in whatever amount you can. A Chinese proverb says, “The best time to plant a tree was 20 years ago. The second-best time is now.” Personal finance can trigger strong emotions in us. We can get lost in thinking about what we should have done or what we did that we shouldn’t have. It’s important to recognize those feelings and forgive yourself. We do the best we can and focus on doing the next right thing (I trust you all will get the reference). The key to personal finance is consistently spending less than you earn. That will allow you to build the emergency account and save for other goals.
An emergency fund prepares us for the present. We also want to plan for the future, namely, retirement. It can be difficult for us to focus on the future. Our brains aren’t wired for it. But visualizing the future we want and seeing the benefits of starting to save today may help. Contributing to the DISH 401(k) plan is a great way to save for retirement. 401(k) plans provide tax benefits, either delaying taxes to the future (the Traditional 401(k) option) or paying taxes today to allow your savings to grow tax-free (a Roth 401(k)). Not only do you get the tax benefit, but DISH will match your contributions 50% up to $5,000 per year (you contribute $5,000, and DISH will contribute $2,500). Investing the funds in your 401(k) will allow them to grow over time. Investing takes advantage of compound interest, which Albert Einstein called “the eighth wonder of the world.”. The following charts will demonstrate how amazing compound interest can be.
Let’s say you contribute $600 to your 401(k) each year ($50 per month, ~$23 per paycheck). DISH will contribute $300. If you get an 8%[1] return on your investments in 10 years, you’ll have $13,038 in your account, even though you only contributed $6,000!
You received $3,000 from DISH, and you gained another $4,038 from your investments. It would be nice to have an extra $7,038, right?
If you do this for 20 years, look at what happens…
Now you have $41,186 in your account, but you only contributed $12,000! DISH contributed another $6,000, but your investments added $23,186. Your own contributions make up less than one-third of the account balance. Note that in a Traditional 401(k), you’ll have to pay taxes when you make withdrawals from the account, but in a Roth 401(k), the withdrawals would be tax-free. Also, keep in mind that DISH contributions to your 401(k) account are subject to vesting, which means that if you leave the company within 5 years, you won’t get to keep 100% of DISH’s contribution. Your contributions are always fully vested.
Compound interest grows your account more and year each year and speeds up over time. The growth rate stays the same, but your investment builds on itself each year. A shortcut to calculate the growth of compound interest over time is the Rule of 72. The Rule of 72 estimates how long it will take your investment to double. Simply take 72 and divide by the rate of return you expect to receive (8% in this case), and the result tells you how many years it will take to double your money. At an 8% rate of return, your investment will double every 9 years. $100 invested today will be $200 in 9 years and $400 in 18 years. Over time, your investment growth can be larger than your contributions.
If you were to contribute $5,000 per year to your 401(k), which gets the maximum DISH contribution of $2,500, in 10 years, you’d have $108,649, and in 20 years, you’d have $343,215. Pretty incredible! If you can’t contribute that much today, again, don’t worry! By starting today with whatever amount you can, you are still preparing for the future. Often, we find that if we start by contributing 1% of our wages or salary, we don’t even realize it is gone. Over time, you can increase the contribution.
Deciding how to invest your funds can seem daunting, but the DISH plan has some great options. Choosing a Target Date fund is a simple way to invest your funds. Target Date funds are professionally managed and invest in an appropriate mix of stocks and bonds based on when you plan to retire. Stocks are generally better for a longer time horizon. In contrast, bonds are generally more stable and better for the near and mid-term.
If you are in a low tax bracket today or think you’ll be in a higher tax bracket in the future, the Roth 401(k) can be a great option. You’ll pay taxes on your contributions today (the same taxes you would pay if you didn’t contribute to the plan), and the money will grow tax-free. If you are in a higher tax bracket today, or would rather save on taxes today, then the Traditional 401(k) can be a great option too.
If you can, contributing to a Health Savings Account is also a great way to save for the future. You are eligible to contribute to a Health Savings Account if you are only covered by a high-deductible health care plan, such as the DISH health care plan. Like a Traditional 401(k), your contributions are pre-tax, but unlike the Traditional 401(k), funds used for qualified health expenses are also tax-free. When your account has over $2,000 in it, you can start investing the funds, which will grow tax-free. DISH also contributes to this account if you take certain actions. We call this account a triple tax benefit since the funds go in pre-tax, grow tax-free, and even come out tax-free for qualified expenses. There’s nothing else like it. Keep in mind that if you withdraw funds for non-qualified expenses before age 65, you’ll pay taxes as well as a 20% penalty.
Flexible Spending Accounts are also a great way to contribute pre-tax dollars and use them for qualified medical or dependent care expenses. However, unlike the Health Savings Account, these funds must be used each year, or they’ll be lost. It is better to use these accounts if you know you will use the funds in the current year. You can’t contribute to both a Health Savings Account and a Health Care Flexible Spending Account in the same year.
It can be daunting to think about managing your finances. We could cover many other topics, but the most important thing is to start taking baby steps today. As you’ve seen, there are significant benefits to starting as soon as you can. Thinking long-term is not just important to our future selves but to our peace of mind and well-being today. I hope this was helpful, and please don’t hesitate to reach out if you want to discuss these concepts or other topics!
Zeke Anders
Planning Specialist
Twickenham Advisors | Hightower
100 Church Street SW |Suite 625
Huntsville, AL 35801
(o) +1 256.213.1146
Zanders@twickenhamadvisors.com
[1] The 8% return on investments is not a guarantee and is a hypothetical example used for illustrative purposes only
[2] This chart is for illustrative purposes only
[3] This chart is for illustrative purposes only
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