Goal: Your Second Number

In this post, I talked about your First Number – the Emergency Fund. Achieving this number is critical to your financial success. And yes, I do think that you must achieve this number first.

Here’s your second number:

You need to put at least $8,000/year into a 401K – and make sure it’s not the stock of the company you work for!

  • The 401K contribution limit per year, as of this writing and to the best of my knowledge, is $15,000. That’s out of reach for many of us, and subject to change by our Congresscritters. But wait, there’s more.
  • You need to roll over your 401K when you switch jobs. LEARN OW TO DO IT NOW!
  • This money is pre-tax, so you’re not going to see the full $8K hit on your paycheck.
  • Each time you get a raise, add more to your 401K until you reach this number.
  • Unlike the other numbers, if you can do better than this number, DO IT! Just keep that upper limit in mind.
  • If you have any money left over after reaching this number, the extra can go into one of your other numbers.
  • If you are lucky to work for one of the companies that provides matching funds, don’t count those funds towards your second number – UNTIL you start running into the 401K contribution limit.
  • Make out of sight, out of mind work to your advantage. If the 401K contribution doesn’t show up in your paycheck, you won’t spend it.

That’s your GOAL for your Second Number.

Next, I’ll talk about your Third Number.

3 Responses to “Goal: Your Second Number”

  1. PookahBoss says:

    As a follow-up, it’s benefit sign-up time at my day job. I’m checking out what it would take to convert my Traditional IRA to a Roth IRA.

    — PookahBoss

  2. Pookahboss says:

    Roth IRA vs. 401K… As I understand it, there is a Roth IRA and a Traditional IRA. With the Roth, you’re paying money into it AFTER taxes. With a Traditional IRA, you’re putting the money in PRE-tax. (A 401K also has a Roth version, as well as a SEP, and other options.)

    With both the 401K and IRA, Roth or Traditional, the exact version that you use really depends on your specific circumstances — that thing that the talking heads on TV don’t want to go into detail about. And they’re right.

    For example, for me, the Traditional 401K is more suitable – it lowers my current tax burden, which puts more money in my pocket each month, which makes it easier for me to reach my Numbers. For someone who is also carrying credit card debt, this method also has its advantages: The larger monthly paycheck means that “little bit extra” can go to paying down the principle on the CC debt. Again, specific circumstances will vary – if you are having too much taken out of your paycheck each month for a Traditional 401K, you won’t see that “little bit extra” from the lowered tax burden.

    For S.O., the Roth 401K looks like the way to go. It means less take-home pay each month. But the money grows “tax free” — because S.O. has already paid taxes: The Roth 401K money gets put in after S.O. gets a paycheck, so our silent partner (the I.R.S.) has already gotten their cut via income taxes witheld.

    I’ll talk more about the IRA, and how it figures into the Numbers, in a future posting.

  3. Bertha says:

    Any thoughts on a Roth IRA vs. a 401k? My understanding is that with a Roth, you pay the taxes up front, as opposed to the 401k where you pay the taxes later when you get the money back out. The theory being that since taxes go up, never down, you’ll pay less of them if you pay them now rather than later.

    At the moment we’ve just got the 401k, though, so it’s all just speculative for now…

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