How Minimizing Your Paycheck Can Maximize Your Savings

As beautiful as Ben’s smile may be, whisk him away into savings and you’ll be happier than ever. The old man himself agrees with me: “A penny saved is a penny earned!”

You just got that big promotion, or that new job, or that solid yearly raise. “Score!” you exclaim. “Now I can buy all the junk I ever wanted!” But taking a step back, you realize that while a small amount of that money can be used to buy that fancy new video game or purse, most of it should probably be saved toward the bigger things in life. But it’s so tempting seeing those extra couple Benjamins hanging out in your checking account…

In this post, I’ll show you how to shrink your paycheck so you’re never tempted to spend money you should be saving. Make yourself feel poor so you can get rich!

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How an IRA Can Help You

You may remember from my 401k post that there are several good reasons to invest in an IRA (Individual Retirement Account). These include:

  1. Maximum Flexibility: Invest in anything, with any investment manager/bank
  2. Avoid Taxes: Gains in an IRA are not taxed like they would be in a regular taxable account, so you’ll pay the government less.
  3. Penalty-Free Contribution Withdrawals: You can withdraw the money you put in at any time without penalty (though you can’t withdraw the investment gains that have grown on that money). This is good thing, just in case you ever need that money (though please remember that the stock market is NOT the place for your emergency savings).

Let me walk you through some of the basics of your IRA.

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How to Handle Your 401k

It’s best to start early when it comes to retirement savings!

Most professional jobs these days provide 401k accounts to the employee. However, employees–especially us young’uns that haven’t seen this stuff before–are often confused about what to do with this account. There are a lot of considerations, like how much to put in there, where to invest your money, what your company match means, how vesting works for that match, and whether you should take the Roth or Traditional option. I’ll guide you through all of these decisions to help you get the most out of this awesome account!

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Financial Independence – My Current Status

I shouldn’t lecture you about personal finance without practicing what I preach. In the interest of honesty and transparency, here’s a little bit of information about my own financial situation.

Financial Independence? What’s that?

For those of you unfamiliar with the financial independence movement, it is a radical new way of thinking about early retirement that involves living below your means, saving the extra, and exiting the rat race at a young age. The basic, driving principle is: if you can save 25x your annual expenditures, you can live off the investment returns from that money indefinitely and never have to work another day in your life. When I started my job, I began reading blogs about financial independence and became fascinated with the concept. Looking over my accounts, I realized that financial independence could easily be a reality for me! As a natural saver, I have always put away anything I don’t spend into my savings account, and get a warm fuzzy feeling when I see the numbers in it rising. Having a more concrete goal in mind for all those savings would only motivate me further!

While some followers of this movement tend toward extreme frugality in order to retire at the age of 30, I found that I didn’t really buy in to that lifestyle completely. While I definitely believe in living below your means, I’m fortunate enough that my means are a lot higher than rice and beans for every meal, and I want to be able to enjoy some creature comforts in life. I also feel really passionate about my career, like many others who work in technology. My goals are more moderate–I’d like to commit to a solid couple of decades of rewarding work, and retire around age 40.

My Spending

Part of having healthy finances is keeping an eye on your expenditures. This is especially important for someone interested in early retirement, like me, because increased spending extends the time I will have to keep working! I consider myself a pretty reasonable spender, though I do have my vices. The chart below illustrates some data I’ve collected on my spending and saving habits:

Where every dollar from my paycheck goes
Where every dollar from my paycheck goes

This shows where every dollar I take in as monthly income goes. You can see from the chart that I invest heavily in my 401k, and also put money into a Roth IRA. The “Other Savings” category includes my savings for my shorter term goals, which go into a regular savings account. I haven’t quite figured out what those are yet, but this is something like a “House Downpayment Fund.”

Taxes are what they are. Uncle Sam must have his share! My major expenses that I control more directly are food and rent. Which makes sense! I gotta eat, and gotta have a roof over my head. I have tried to keep my housing expenses low by picking a reasonably-priced apartment and sharing my living space. Lucky for me, Texas rental prices are nowhere near as sky-high as the Bay Area! I’ll be honest, I’m not nearly as frugal with my food spending as some other finance bloggers, but I’m not totally crazy with it either. I get a lot of value out of sitting down with a good friend over a hot meal, and though I often try to host parties at my apartment, sometimes it’s fun to go out!

The remaining categories are things like “Shopping,” which includes clothes, electronics, and other semi-necessary purchases, and “Miscellaneous” which could honestly be retitled as “Travel”. Utilities aren’t huge, I keep my bills as low as I can without freezing my butt off or boiling in the Texas sun. Car expenses can get annoying, but I keep them pretty low.

My Personal Finance Journey

Everyone’s journey to responsible personal finance starts somewhere. I started mine by being born into a frugal Midwestern family. My dad was an engineer, my mom a saleswoman and later a homemaker. They taught me many of my first lessons in saving money. My younger years are filled with memories of carefully depositing my $0.25 weekly allowance into the recycled cool-whip container in my sock drawer.

So much better than those fancy piggy banks, don’t you think?

As I got a little older, I continued to “sock” away the $20 from Grandma for my birthday, or $1 my dad gave me for trimming the grass (minimum wage was quite the upgrade for me). Eventually the cool whip container evolved into a real savings account, and started saving for bigger goals. Instead of the latest Pokemon Gameboy game, things like cars and college came onto my radar. By the time I was 14, I was itching for my first job. That summer, I worked at the pool concessions stand and volunteered at my dad’s lab. The next summer, I was able to leave the wet hot dog buns behind and work at the lab for pay, which I did every summer through my freshman year of college.

Personal finance started becoming a big topic in my family during the summer before I started college. I think my parents were hit by sticker shock when we got back the financial aid letters from colleges. They sat down with me one evening and said, “Hey, this is how much we’ve saved for you, and we now realize it won’t nearly cover everything.”

The applications sure seemed daunting at the time, but graduating without debt was worth it!

So began my stint as Scholarship Essay Writer Extraordinaire. I applied to so many scholarships that I literally lost count. That whole summer, when I wasn’t working my 8-5 job at the lab, I was up writing essays and filling in applications. I managed to win a few, too! However, they didn’t cover anything, so I used $10,000 of my own savings toward my public university tuition.

Throughout my freshman and sophomore years, I worked about 15 hours a week in my college town to cover my living expenses. I also kept applying for scholarships every chance I got, spending every break searching and applying for more. I kept getting lucky throughout my college career, and by the time junior and senior year rolled around I had covered my entire tuition piecemeal in scholarships. With my parents’ help and my own hard work, I graduated with no debt and a great degree after four years.

I interviewed like crazy my senior year, trying to put myself in the best possible position after graduation. I was fortunate enough to find my current job, located in Texas, in the Fall of my senior year. Come the next summer, I was ready to move on down south and start out in the “real world.”

The other fantastic thing to come out of my college years was my wonderful boyfriend-now-husband, who thankfully shares many of my inclinations for saving money and passionately discussing the finer points of personal finance. I firmly believe that the partner you choose can make or break your financial future, so having him by my side has made all the difference.

Everything I owned packed into one little car, ready to be driven across the US!
Everything I owned packed into my little car, ready to be driven across the US!

Moving out on my own after college was a fun but overwhelming experience. You don’t realize how much stuff you have until you try to pack it all into your tiny little car. I started my job, and it was then that I realized just how complicated finances can get for a young engineer. 401-what? RSUs, ESPPs, and FSAs? …oh my.

In my quest for knowledge, I stumbled across the likes of Mr. Money Mustache and other radical personal finance bloggers who inspired me to live frugally and think carefully about where every dollar was going. Through several lively discussions with my fellow new graduate coworkers, I soon discovered that they were all just as confused as I was, which inspired me to write the blog that you are now reading.