Diaspora, are you to blame for your financial misery?

May 20, 2019 | Money Professor

Diaspora, are you to blame for your financial misery?

Some people have lived in the diaspora for years or what feels likes decades, and yet they look around and feel like they have nothing to show for all those years of hard work. Some people feel disappointed that they have been working all these years and maybe sending money “home,” but there is nothing to show for this either. Do you sometimes feel like this? I know I used to.

The truth is sometimes we are caught in a web of comparing ourselves to false standards that do not represent our truth. Before I dive into the hard stuff, I want you to hug yourself and say –

I am wonderful. I am not a failure. I have done my best, and I will continue to do my best.

Seriously, do this.

Ok- so the other truth is that maybe we find ourselves a little frustrated by our financial situation because we have not done a few things right. If you have been sending money back home for two decades and the receivers are still in the same situation or expecting you to keep remitting, then maybe your financial strategies need to change.

Over the weekend, I had some intense conversations on remittances. To be expected. My research and that of others studying remitting behavior across Africa, in Mexico, various Caribbean countries shows that on average, you diasporians are sending more than the average monthly income in your home countries. That’s right. You are sending between $200 and $500 on regular months. Then you send more for emergencies and other random events. You may be sending/remitting between 3 and 10%  of your income. Your money is making western union rich – Just kidding.

The reason that you are upset or feel some type of way is because it sometimes looks like you will never stop sending. A friend of mine said sending money home sometimes feels like flushing money down the toilet – ouch.

People will never stop asking for money so you, my friend,  have to decide how much you are willing to send, for what reasons and for how long you will fund that expense.

Those of you supporting parents probably have to accept that since many of our developing countries have an awful welfare system, you the children will need to be the buffer. That said there are things that we can do to not only improve the lives of our parents but also manage the financial bill.

So here are some ten things to think about

1. Do your parents have a permanent home? In the village or the city- paying rent long term will cripple your finances. If you do not like where your parents are living, consider a long term investment in the type of upgrades that will make a happy place.

A year ago or so I spent some time at a cousin’s house in rural Masvingo and woow. Just woow – the house was better than most homes in the city, and everything was about 90% solar powered. They had a borehole and a water tank drawing water into the house. I had the best shower of my life.

I have seen friends who choose to rent when they visit home because their parent’s house is not up to standard for their diaspora kids. I have also had some friends extend and improve their parent’s houses in high-density areas. You know your situation best, so plan accordingly.

2. Do you have a plan for access to food? I was having the food conversation with my inlaws a while back when mom in law jumped in and said you don’t have to worry about us for food. Also- just to say my mom in law is incredible, she raised five wonderful men. Three are still single by the way JMy mother in law, and many of the women in her area are farming on a small plot of shared land. She grows enough maize/corn to last them the year, sweet potato (which she exchanges for labor), and they have a yearlong supply for vegetables. Instead of buying them food we invest in agriculture inputs, and each year the actual bill has reduced as she is modifying her seeds. We have also come up with a long-term plan to subsidize her labor costs.

I know others who are engaged in small scale chicken projects etc. The goal is to keep things manageable and support something that people have already started. If the idea comes from the diaspora, it will likely fail. Organic projects have a long shelf life.

3. A significant expense for diaspora folks is school fees for siblings, nieces, etc. In most cases where the parents are late, you may need to keep this budget item until the child has completed their studies. However, if the parents are living, you will want to try and engage them. This type of conversation is hard, but this is something I have been actively working towards. I no longer accept “the father is useless” as an excuse. If he is living and breathing, I will find him and ask him to take care of his responsibility even if this means going to court or engaging in DNA tests. I am tired of our cultures, giving a free pass to absent fathers. I  wish I had healthily engaged my relatives whose kids I supported  to see if we could come up with a plan for me to help them help themselves. It is too late for me, but I hope this is not the case for you.

You will also need to have a post-graduation plan. Will the kids continue to University, find jobs, or start their own business? It should be made clear early on that not earning an income is not an option. Budget an extra year of school fees to use as start-up funds for their next stage of life. It is also vital to foster the spirit of giving back while they are young.

4. Stop with the building projects. If you have been sending money for the last decade to build a house that is still at window level, it might be time to stop. I used to think building scams were a uniquely Zimbabwean problem but alas from Capetown to Cairo around to Jamaica and the Philippines it is a universal problem. You may be better off investing in a home in your host country/new home country or honestly just saving your money.
5. Budget your money – my favorite sermon on giving was when our pastor told us that God does not like disorganized giving. If you are not planning your giving, then end up in debt -what you have done? Listen to me on this. Been there done that and never again!  If you do not have – you do not have. Avoid financial emergencies by investing in small monthly payments for health care and funeral policies for key members of your family. Have an emergency fund but please stop creating crises for yourself.
6. Do not borrow money to go home. Every year around Christmas, social media is awash with stories of folks taking out $5,000 loans to visit the home country. Look, unless you are going for a family emergency plan long term for the trip and wait until you have the money. Borrowing money with no way/ or resources to pay it back will make you miserable.
7. Do not be a show-off. Stop using the money you do not have to buy gifts people do not want. Why are you clocking $3,000 on your credit card for t-shirts and sneakers? Does your 5-year-old cousin need jordans to know that you love them? Do you need to rent the flashiest car when you go home? BE SERIOUS –

This is also a message for me. I was the worst at this. I would spend and spend and spend unbudgeted money for gifts. People will be excited for 5 minutes before they start asking why you did not buy them this other thing.

Who are you trying to impress?

8. Stop living a life you can’t afford. You are going home so now you want to spend $5,000 on new clothes? Look, I love treating myself but only if I have saved and can afford the new thing. In January, I did splurge a little on a new purse because I was feeling sad and wanted to cheer myself up. In my sadness, I still paid cash for it. I understand that sometimes we need a pick me up but not if that will make you miserable later. If you must- by yourself one special item and maybe don’t take it home. At our house beautiful things belong to everyone lol

Your family will not love you any less because you do not have the latest X item.

9. Have you invested in your future? Do you have a retirement plan? Do you have a plan for if you get injured and have to stop working? What about if you get laid off? The western world is getting more and more expensive, and things do happen. We are human, not machines. When I interviewed nannies for a work project, job security was always a top concern. Many of our diaspora jobs do not provide a long-term cushion, so this is something we need to do for ourselves. Dear friend, please get yourself
   1. Life insurance – that covers death/repatriation and will live your loved ones, some cushion. Some even over disability cover
   2. A high yield savings account which can give you at least 2% interest
   3. Savings for at least five years after you stop working
   4. Invest in some technical training, an associate degree, or even returning to school full time. You are worth the investment
10. Are you enjoying life?

The first time I went to England, my heart was broken as I saw the life of deep sacrifice that my mom was living to afford sending money home. I was hurt- deeply. I sent my mom $50 when I got my first paycheck- she laughed and said Pipo I am fine. I encouraged my mom to move into a nicer place and to start living a wholesome life. To take time off on weekends to attend church. To do one thing- just one thing that she loves. The people she was sending money to were living their best lives while her best life was being wasted in awful jobs and sacrificing joy. I speak to you as I would my mom – take care of yourself. Honestly, live in a decent place with heating. Buy healthy food, and you deserve that yoga class if that is your thing.

Diaspora do not be miserable

Remittances and Black Tax 2: Dealing with and Living with Black Tax

May 18, 2019 | Money Professor

Remittances and Black Tax 2: Dealing with and Living with Black Tax

Now that we know that there are historical reasons behind black tax –  YOU  can  STOP blaming yourself or feeling let down by your parents. Anger and guilt can do a lot of harm to the soul.

First step: Develop an understanding of your financial responsibility

Before you even have the big talk with the family about money (these rarely end well) do your math. If your family expenses are not fixed, then try to go over your spending over the last few years – itemize each expenditure and cost, for example:

1. Health care for mom $200 every month or 6 months
2. Rent for the parents -$200 every month
3. School fees for your baby sister and or  niece $1,000 a year
4. Agriculture inputs for gogo $300/year
5. Groceries for the in-laws $500

Even if you are married, I would suggest doing this first part individually, then comparing your numbers and expenditures. You can decide on a plan together later.

Second Step: Evaluate each expense and prioritize 

1. Is this a necessary expense? If I do not pay for it, will it ruin someone’s life?

One of our favorite married couple mentors sat my husband and I down and asked us this question. Is this an expense that we need to be taking care of? Are you the only person who can take care of your niece’s tuition? What is the situation with the parents? If they are not late, are the parents in a position to make part payments for this expense or another?

2. Rank the expenses in order of importance

You cannot cover every expense. You have to be honest with yourself about what you can afford and what you need to be paying for. If an expense is sinking you into debt, cut out other expenditures. You are the only one who can tell you an honest story about what it is that you can afford

3. Cut out any frivolous expenses

My husband and I realized that we were paying for a lot of things that we shouldn’t have been. I also spoke to my therapist because one time I was feeling overwhelmed, and she said – people will never stop asking for money. You have to say no. I no longer give people cash for leisure trips. I cannot afford to pay for every church trip or kid’s school trip. I also no longer provide start-up funds for business projects because as my therapist gently reminded me – I am not a bank.

A lot of diaspora friends have lost a lot of money to half baked ideas that sink your money. But this is something that you need to decide for yourself.

4. Decide if you are giving someone a loan or a gift.

Third Step: PLUG IT INTO THE BUDGET

Now that you know your black tax/remittance responsibilities plug the numbers into your budget and treat that number like any monthly bill. If the money you spend ranges from let’s say $100 to $500 then you want to set aside maybe $250 each month. THESE FUNDS ARE NOT PART OF THE EMERGENCY FUND. You know you will spend this much so set it aside.

If you are consistently going over budget, you will need to adjust some things in your budget to make this bill fit into the equation.

FOURTH STEP: Family talk (only and only if you need to)

If possible, you may want to have an honest conversation with your family about how much you can afford to give them each month.  I will write a separate post with a step by step guide on opening up this kind of conversation. It does not have to be a big thing, and not everyone in the family needs to know your plans. I discussed my ideas with my mom, and that was it.

LIFE HAPPENS:

Because life happens and sometimes, we need to spend a little more – I keep what I call a Zimbabwe emergency fund. I put in $30 a month in one acorns account just for this and minor emergencies.

I do not have a foolproof plan for dealing with back tax, and I still get shocked once in a while– please share your tips for a remittance/black tax survival.

Remittances and BLACK TAX – PART 1

May 18, 2019 | Money Professor

Do you FINANCIALLY support your parents?

Do you FINANCIALLY  support family e.g. siblings, aunts, uncles?

Do you get FINANCIAL  support from a family member?

Do you send money to someone monthly or a few times a year?

If you answered yes to one or more of the above then you should read this post on remittances and black tax.

Some Background

I have been working on this remittances and black tax series for a long time. Black Tax has become a buzz word/phrase since Trevor Noah’s book, but the concept of remitting money back home or supporting parents, siblings, and extended family has a long colonial history. In this first post, I will trace the historical nature of black tax in our communities, particularly for those who come from settler colonies like Zimbabwe and South Africa. The same historical factors are also at play in many marginalized societies around the world.

Most people think of black tax and or remittances as a burden. I get the mental image of someone pushing a heavy load that gets passed on from generation to generation. This mental image is not entirely wrong if we consider the political and historical factors that have made it difficult for most racial minorities or indigenous people to build wealth- even many decades after the end of formal slavery or colonialism.

I do not discount the role of bad financial habits in failure to build wealth, but mistakes and poor habits alone do not explain why millions of people remain in poverty. A lot of hardworking people in the diaspora have good habits, but the weighty responsibility of providing financially for immediate and extended family makes upward mobility a little bit harder.

Colonial Legacies

If you follow me on social media (sorry) or even speak to me for a minute, you will know that I absolutely love Tsisti Dangarembga’s Nervous Conditions. I have dubbed it my book for every condition. So, when I first started thinking about remittances, I thought back to a comment one of my students made when we read the book for class. She said – dang babamukuru was taking care of everyone! But something else that struck me and we know this to be true is that the best profession for black folks in colonial Africa was to become a teacher. Then maybe a lawyer who spent most of their time defending activists against brutal dictatorships. Babamukuru, like many folks in his generation who were also gifted academically, understood that the success of black men (forget women) had a limit. I am quite lucky that I have older parents – my mom had me in her mid to late 30s (which is not old!) but quite atypical. My older siblings are between 12 and 17 years older than me. Most of my peers have younger parents. I also had a guardian who was born in 1926 Rhodesia – he was brilliant – taught me to read a newspaper at just 5 years old – but like many his generation for a long time the best he could do was become a teacher.

There is nothing wrong with being an educator – the problem is that in settler colonies or even in the U.S black people were told that this was the limit. If you have not yet read Hidden Figures, please do so. Black people were also told where to live and how to live. Black people lived in reservations where the land was often arid and agriculture not nearly as lucrative. Families worked really hard to send one or two kids to school. Those two kids, if they were lucky, would manage to get a job in the city, and it became their responsibility to take care of their parents and fund the education of their younger siblings.

The discriminatory housing structure in urban areas also fed into black tax. The black areas were designed to accommodate single men. You can probably see how this type of structure also damaged families. Young couples lived apart from each other for months with the husband working in the city while the wife and kids lived in the village. The men working in the town would often travel back home at the end of the month with gifts and goodies not just for their growing families but for everyone because their success was everyone’s success.

In the 60s and 70s, black people would slowly start moving into the urban areas -mostly into high-density parts of the city. My parents bought their first house in Mabvuku in the 60s. In the 70s they would move into a rental in the new leafy suburbs. My father says they were evacuated within 24 hours when the landlord came for a “check-in” and found more than 20 people in the house. He had assumed that it would be my parents and their 3 children (I wouldn’t be born until after independence – lucky me). My mother has a different recollection, but she also agrees that the house was packed. My parents are the oldest siblings in their respective extended families, so their MANY young siblings (and cousins) had joined them in the city. This NEVER CHANGED much to my distress.

My parent’s story is the story of many of your parents and maybe grandparents.

Independence – UHURU! We are FREE

Just kidding not really-in some ways the economic structures would positively change after independence but not that much. The biggest employer in Zimbabwe and many post-colonial states was the government. The post-independence era should have eased the financial burden on those coming of age in the 80s, but it was not so easy. Indeed, many could now support their parents in the village with less hardship, but it remained the responsibility of older siblings (often raising their own kids) to send the younger ones to school. Life was not too expensive back then, so it was manageable until…

Wait a minute – the WAR was not over – Ghukurahundi

As most families moved on from war and began rebuilding their lives, our friends and families in Matabeleland continued to live in the thick of war. Breadwinners died, young men and women fled home before they could finish their studies. Many of the orphaned children would never enter the mainstream economic system. And thus, many in Matabeleland remained in poverty and black tax has real and long term implication for those who have made it.

ESAP- Hello World Bank 🙂 Structural adjustment programs

I have a lot of respect for the hardworking people at the World Bank. I worked there for a few months and left with a lot of new insight on what the Bank does well and where it fails. ESAP was a total failure.

By the 90s my parents had been living in Hatfield for over a decade. My parents were elders in the neighborhood and often adjudicated various issues, including marital disputes. Being the only kid in the house at the time, I was always included (not quite but I could hide behind sofas pretty well- I can hold my breath for a long time) in the discussions. One time, this girl came to report that she had had her ear beaten off by Mai Nhingi whose husband she was having an affair with. It was a bloody affair – literally.

During ESAP, as our government was forced to adjust the economy, a lot of people lost their jobs. There are some valid reasons for why the Bank forced Zimbabwe to do this, but the damage was intense. Quite a few people in Hatfield, which was once home to some of the first black middle-class families, lost their homes. It was sad. When a single person lost their job, the domino effect was felt all the way into the rural areas. To make matters worse, we also suffered a bad drought that season.

When it rains, it pours -HIV?

As if things weren’t already bad – HIV was like drought, ESAP, please hold my beer! I disagree with a lot of the western literature that claims that HIV was a rural disease. People became sick in urban areas and died at home in the village. In Zimbabwe alone, more than 2 million people died. Many of them were young, educated, metropolitan, professionals, and BREADWINNERS! Their children became the responsibility of their siblings or aging parents. Whatever pension or life insurance benefit, most of them left was eroded by inflation in the 2000s.

POST-2000- Land reform, Murambatsvina, 2008

The reason we know that land reform was just about ZANU PF is that the leadership did not crunch the numbers. While much of the conversation has focused on its impact on white farmers, it was the majority of black folks who suffered. Farm workers who did not have an economic safety net and those who lost their jobs as various industries that benefited from agriculture shut down. No doubt land reform was needed, but the focus back then was to bolster ZANU PF not benefit the masses. Just as with the war veterans $50 000 payouts. A reasonable economic position would have been to build homes for war vets and provide free education for their children + health care and support small business initiatives.

Murambatsvina displaced over 700 000 urbanites. May I recommend the Audacity of Hope for a good read on this. Many of those displaced were breadwinners. Many people lost access to ARVs – many children dropped out of school.

Each cycle of political violence would reduce the number of breadwinners, and weaken the socio-economic fabric. The few who managed to emigrate would find themselves shouldering the financial burden for those who were left behind.

USAP is one of my fav scholarship support programs in Zimbabwe. Please donate to edmatters because they do good work and Rebecca Mano is amazing. At some point, it became the rule that siblings of former USAP students could not apply to the program. The brilliant idea behind this proposal was to get new families into the system, and one hoped that those siblings now situated in America would help their younger siblings apply. This would not happen in a relatively stable economy. We would not expect a 21 year old to shoulder the financial responsibility of their parents and their siblings, but this is our reality.

I could go on, but you would stop reading- come back for part two.

So how much will I actually take home?

May 15, 2019 | Money Professor

When I got my first full-time job, I was excited by the salary bump. Our graduate school stipend was just $15,000. I have discussed this before …

A friend was asking if there is an easy way to calculate your take-home salary and there is. You could ask payroll, but in my experience, they tend to get annoyed by such questions.

Here is what you will need to use online take-home pay calculators

1. Cost of pre-tax contributions towards health, taxes, life insurance, retirement,  commuter plan, etc. Most of these are detailed in your benefits package
2. Post-tax contributions: Other retirement contributions or work lunch etc

Once you have the numbers, you can use this handy tool to calculate your take home

https://smartasset.com/taxes/hawaii-paycheck-calculator#q=take%20home%20ca

I played around with taxes in different states – Hawaii is lovely but those taxes – oh my

Moving Expenses

May 15, 2019 | Money Professor

New Faculty Hire friends (like me) or anyone moving for a new job -just a reminder that “for tax years 2018 through 2025, the deduction of certain moving expenses is suspended for nonmilitary taxpayers”(IRS). Employer reimbursements/allowances will be taxed as income, so plan accordingly.

• Moving companies tend to charge anywhere between $115 and $200 per hour for packing and any moving help
• You may have to pay extra for boxes – I was recently informed that if we do not have the original box for our TV, we will need to pay $25
• You may have to pay extra  depending on the set up of your new home so you will need to have all that information ready before you sign a contract with a moving company
• If you are going the DIY route compare costs of various companies UHAUL, PENSKE, and some car rentals, e.g., the enterprise now offer moving trucks
  • You want a truck with moving rails
  • You will want carts * spend the extra $ your back will thank you later
  • Get a truck one size up than what you think you need
• Car Movers – If you are moving from one end of the country to the next, it might be cheaper to have your car shipped. Then you can fly to your new home. Do the math on gas and fatigue + lost love if you will be spending 20 hours in the car with your family.
• Storage- depending on your situation, you may need to store some things. Costs range from $50 to $200 per month depending on size and location

Immigrant Professional- RETIREMENT IS COMING- ARE YOU READY?

May 6, 2019 | Money Professor

RETIREMENT IS COMING

SOURCE: GETTY IMAGES

ARE you thinking about retirement? I know it sounds crazy if you are in college, in your 20s or like me in my early 30s. But no matter where you are on this journey you should be thinking about it. If you are in your 40s, 50s or 60s maybe retirement feels a little close, and you are feeling worried. Worry not – as long as you start planning today then you are not late or too early. Depending on where you are- your strategies will be different.

TARGETED AUDIENCE: Everyone with a special focus on the immigrant professional. You probably asked yourself-what the heck is a 401k anyway?

NOTE: This post is about regular retirement goals (after 60). I love the FIRE movement (Financial Independence Retire Early), but I am not sure that is for me. I have however learned a lot from the movement, and I encourage you to read as much as you can from them. FIRE folks aim to retire as early as 29 or 39. To meet those goals they live on less than 25% of their income and make so many sacrifices.

SO HOW DO I GET STARTED?

Bonus disclaimer: To prepare for this post I had two phone calls with financial advisors from our retirement management fund- you can call anytime and its free (double check to be sure), I also spoke to my bank then two financial advisor friends who donated their time. The advice was pretty consistent across the board which made me feel confident to write this blog. I have also been reading a ton of books, blogs and I LOVE reddit. However, there is a lot I do not yet know so please correct me and share knowledge from your experience.

How much do you need to retire? It depends on your current budget– you will need about 85% of your current income in retirement. Some advisors say this amount may even be too little because retirement lifestyle can be expensive.  Enjoying retirement might include traveling more (without company reimbursement), and I don’t know about you, but when I am home, I eat more and shop more. At the same time, you may already be living a debt free life – No mortgage and no debt! PAY OFF THAT DEBT! BUT our kids might need more financial help, so there is that –

BEFORE we get bogged down with numbers, let’s think about the different ways available to us to save for retirement. Younger readers- I wish I had started saving in college or early 20s. You are at the best stage to start saving. I promise 🙂

Dave Ramsey, Nerd Wallet and a whole bunch of other money smart people say you should put at least 3% of your income towards retirement. However, 15% is better – but since many of us are still starting just putting something is good. My very first full-time job did not offer me an employer match or contribution so after doing my budget and looking at my debt I could only contribute $100 each paycheck. I worked that job for two years; the employer fund had great returns. I recently checked the account in preparation for this blog and my very small contribution has grown to $6,000. Just this quarter alone I made gains of $745 – YAY! I anticipate some losses in the next few years, but I am sure it will bounce back.

SAVING FOR RETIREMENT WITH EMPLOYER-SPONSORED (pre & post-tax) PLAN 401/403/IRA

1. 401 (k) or 403(b) This is a pre-tax invest plan offered but employers. Breaking it down:
   1. Safe harbor Some employers put in money into your account whether or not you make any contributions. This is called a safe harbor contribution. These are rare but quite common in higher education. Yay to academia. The various schools I have worked for have each offered anywhere between 3 percent and 9 percent just because I worked there.

So, let us say Chipo earns $50 000/year and my employer safe harbor is 3% – each year her employer will put in $15 000 annually into her retirement plan. This is an additional benefit to your salary.

If Chipo does not add anything else according to this  401(k) calculator, she will have  $232k for retirement at the age of 67 with a 6% rate of return.

1. Employer Match: A more common plan is one in which the employer says if you put in at least 3% of your income, we will also put in 3% this would be a 100% match. Nice. So, you put in 3% and get 3% in free money- a lot of young people lose out on this benefit because they do not put in the minimum required to get the match. Others say they will match up to 3% so if you only put in 1%, they will put in 1% if it is a 100% match.

Back to Chipo with $50 000

3% self-contribution  will be $1500/year

3% employer match $1500

Assuming a 6% rate of return starting at the age of 33 with $0 savings so far, she will have $445k in retirement. By putting in just 3% of her income, she has doubled her retirement funds.

1. My fav situation is when you have both the safe harbor and the match. The lingo is a bit complicated- you can read more here. At a few universities, the contributions look like this

Your employer  will invest safe harbor   3% regardless of what you put in

Your employer  will then match up to 3% of your investment

You will put in 3% into your fund

Nice! Under this plan, you will get 9% invested towards retirement.

 Assuming a 6% rate of return starting at the age of 33 with $0 savings so far, she will have $697k in retirement. This is the BEST!

Benefits of a 401(k) fund

1. Tax benefits: If you max your pre-tax contributions to the allowed amount for 2019 which is $19 000 for those under 50 and an additional $6,000 for those over 50.

You will only be taxed on (annual income-tax contribution). This includes an employer contribution.

• You will have to pay taxes after retirement – this is when a ROTH 401(k) might look a bit more attractive.
• How do I know what plan is best? Let your budget inform you. There are seasons when you want to reduce your tax bill by contributing more.

2. Shelter from creditors- Most plans offer creditor protection.
3. Employer matches and contributions – discussed above. Most employers do not contribute to post-tax contributions.
4. Secret: You can withdraw for certain things with no fines. For example, you can withdraw money towards your first home payment up to $50k and for a medical bill. I am excited about this option (my financial advisors were too). Most of us do not have access to family loans for that first house or substantial medical bill, and this is a nice option to have. You will pay yourself back with interest, and you may lose out on returns during the time the money is out, but you can also avoid ridiculous interest rates. It could be a win-win with the right kind of research and planning. -plans differ on this so please do a double check.

Downsides of a 401(k) fund

1. Taxed at withdrawal – you could be in a higher income tax bracket at retirement
2. You can only start withdrawing at age 59.5.
3. Fines for early withdrawal for unspecified reasons.
4. Some plans have high fees. Do check with your retirement plan about the associated costs. I received a tutorial from TIAA to understand my fees, and so far I am happy with what they offer. Almost every fund has fees so you should not let this derail you too much.

A Roth 401(k)

With the Roth 401(k) you get can still contribute the same max of $19,000 but after tax. This means that when you withdraw your money in retirement, you will not owe taxes (except on the interest). This is a good option if you are in a position to pay a higher tax bill- probably great for younger folks who may have lower responsibilities early on in their career.

HSA – HEALTH SAVINGS PLANS

SOURCE: GETTY IMAGE

This is a little-known secret. It is a great tax-free way to save for future health expenses during your healthier years. Your employer offers you two or three health care plans. One has low monthly payments and higher out of pocket (HIGH DEDUCTABLE). There is usually a max for what you pay out of pocket with either plan so you will not be entirely stranded. This plan allows you to add $3, 500 for an individual and $7, 000 for out of pocket costs. Some employers will also contribute to this plan – some make a 50% contribution which is very nice. The money will grow with interest. You only need to use the funds for health care expenses, and they roll over from year to year.

Your plan will give you a list of what is approved.

I set aside $500 for our family of two the first time I played around with this. I have been able to pay for co-pays, acupuncture herbal tea, some cold medication. I have a debit card linked to the account. If the purchase is not approved, it makes a huge BING sound lol.

Keep your receipts. You can ALWAYS submit for reimbursement.

Other things with health care: Check if your plan covers things like a gym membership, yoga- you can tell I love yoga. I go every day for two hours when I can. The costs can add up quickly.

POST-TAX CONTRIBUTIONS

401(K)

Same as pre-tax but after you have paid your tax bill. For 401 the max is still $19,000. This is an option if your employer does not offer after tax.

Roth IRA

In contrast, Roth IRA contributions are made with after-tax dollars. That is, they don’t reduce the amount of your gross income, or your tax bill, the year you make them. The tax benefit you get comes at retirement, when you don’t owe any income tax on the money you withdraw from your Roth IRA—because you already effectively paid it, back when you contributed.

If you withdraw after the age of 59.5, then there are no fees associated with the withdrawal or penalty. This means you get access to your money a whole decade earlier than with traditional 401k.

Summary 

PRE-TAX – You reduce your annual tax bill by however much you put into the pre-tax plans. You will pay tax in retirement.

401(K) elective deferral plans – you can put in up to $19,000 for 2019.

HSA- If you have a high deductible health plan  you can put in $3,500 for an individual and $7,000 for a family

POST-TAX

IRA: this is the more popular plan-you can contribute up to $6,000 per year

DISCLAIMER: MoneyProfessor is my personal blog. I provide general information – not professional or financial advice. Opinions and representations on are my own. I am not providing financial advice or legal advice on my blog. I am only providing general information. You should consult a professional before making any financial or legal decisions.