You finally got your first official job! You’re making more money than you’ve ever made in your life, but somehow you still feel broke. How can this be?
Let’s take a closer look at where your money is going.
For every dollar you spend today, you had to earn it. Which means you had to pay taxes. For example, if you were paid $1,000, you only received $723.50. Why? Because 27.65% went to taxes. Here is the breakout:
· 6.2% went to Social Security
· 1.45% to Medicare
· 15% Federal Tax (I’m being conservative 😊)
· 3.23% State Tax (Indiana)
· 1.77% County Tax (estimated)
Now you’re deciding how to allocate the remaining dollars amongst your strict budget.
But wait! There’s another tax we need to talk about. The sales tax of 7%.
When you make a purchase that requires you to pay Indiana sales tax, you’re paying an extra 7% to the state in the form of a sales tax. That moves the total taxes up to 34.65% (27.65 + 7%). Which makes me ask myself, are those shoes that I want to buy worth 34.65% more than the sticker price? The same question goes for buying furniture or a car.
Every dollar you make, gives you 65¢ of purchasing power. Another way of looking at it is for every dollar you spend, you need to make $1.35.
So, if you would like your money to go farther, contribute to your 401k. It will grow tax deferred (no taxes due as your investments grow). When you contribute, you will still pay Social Security and Medicare taxes, but federal, state, and county taxes will be delayed until you withdraw the money at age 59 ½ or later.
And, if that’s not enough, many companies will pay you to contribute to your 401k. That’s right, they will deposit money into your 401k by matching a portion of your contribution. It doesn’t get any better than that!
Just think, if your investments earn 7% a year, it will take 10 years to double your money. Just think where you’ll be in retirement if you start contributing today!
- Gail Gill, CFP® Worley Erhart-Graves Financial Advisors