If you follow my blog, you know my boyfriend and I did our first weekend getaway this past weekend. He’s not much of a traveler and had never been to Washington, D.C., so I figured it was the perfect place to see how we travel together. Turns out, he has little interest in spending much … Continue reading “A Semi-Frugal Weekend Getaway to Washington, D.C.”
Traveling 6 months a year is possible, even while pursuing financial independence! Michelle shares how she designed her lifestyle through mini-retirements and semi-retirements to travel to 40 countries. If you want to travel the world and design your lifestyle, you can’t miss this episode. Listen to the episode on Apple Podcasts, Spotify, Stitcher, Castbox, or on your favorite […]
The post FYF 006: Traveling 6 Months A Year in Semi-Retirement with Michelle from Frugality and Freedom appeared first on TwentyFree.
You: walking around town wearing hand-me-downs, sipping coffee from a thermos you brought from home, running a debt-free hand through your home haircut, wondering if there are others like you in this world of seemingly endless consumption.
Me: other frugal person, catching your eye, noting your home-sourced thermos, digging your not-off-the-rack outfit, wondering if you’re a kindred spirit.
The dilemma: how to spot a fellow frugal in the wild without being horrifically awkward? How to become best garage sale gal pals without seeming like a total weirdo?
Plenty of us blend into the dominant consumer culture with our used cars and packed lunches. We nod along as co-workers lament their credit card debt and extol their brand new kitchen cabinets in the same breath. We don’t contribute to these conversations because we don’t want to isolate, we don’t want to be rude.
Who wants more money in retirement?
Well, everyone. (Stupid question.) But not many seem to be doing anything about it.
In Australia, superannuation has become a bit of a political football. While currently employers are legislated to pay 9.5% of staff wages into their employees’ retirement funds, it’s scheduled to rise to 12% by 2025.
In all, it’s a great scheme that is designed to take pressure off the public purse by weaning people off government pensions and into self-funded retirements. So what’s the problem?
Unfortunately, some employers don’t do the right thing and withhold payments, while in political circles there are concerns in some quarters over whether business can afford to pay people an extra 2.5%. For others, the argument against a rise is whether the money should be put towards retirement rather than take-home wages, given the low wage growth conditions the country is currently facing for the foreseeable future.
It’s leading to an ideological debate where you see arguments like this being made:
Imagine being a union member trying to support a family and having your political representatives tell you that you are too stupid to spend your own money: you don’t deserve your wages.
Not to put too fine a point on it, but often people can’t be trusted with their own money. If you look at the finances of an average household, people’s savings are generally in a dire situation despite Australians enjoying very high incomes on a global level. And the economist quoted above should know that.
In fact, how is this for a headline: “Australians’ record debt is making us work longer, spend less“.
And it’s true. Three-quarters of households hold some level of debt, and 55% have credit card debt, which is largely avoidable with good financial management.
So shouldn’t the push be to get more people to not only receive more superannuation,
but also contribute extra money towards it?
How much money do you need to retire?
How much money you need to retire depends wildly on what you want to do.
At His Her Money Guide we’re all about having a retirement where you can make the most out of life after you ditch the ball and chain of working life.
But there are some rough guides for superannuation, which largely agree with each other. They generally say that an Australian couple retiring at 67 needs about $62,000 a year to live a comfortable retirement – and about $45,000 for a single. A modest retirement will cost $40,000 for a couple, and $28,000 for a single.
Meanwhile, the pension will give you about $32,000 a year as
a couple, and $21,000 for a single. Being on the pension will allow you to
live, but not much more. It’s a frugal life, without much support for extra
costs such as healthcare, but it’s a nice safety net.
Now all those numbers are net – after any tax.
So what sort of balance do you need to achieve that? According to the Industry Super Funds retirement calculator, if you want to retire at 67 (and live to 85 – the average life expectancy) and live that ‘comfortable’ lifestyle, you’ll need $1.1 million in superannuation as a couple, and $780,000 as a single.
For a ‘modest’ retirement lifestyle, you’ll need $720,000 in
superannuation as a couple, and $500,000 as a single.
If you play it safer and adjust your life expectancy to 95, you should increase those sums by around 50%. Ouch.
So can you guess what I’m going to say next?
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It’s time to save for retirement
Yes, it really is time
to save for retirement.
It doesn’t matter if you want to retire early like us, or keep working until you’re 67 or later. If you’re like us and in your 30s, it’s likely you’d have to work until 70 or later before you can access a pension.
But with an increasingly ageing population, the writing is on the wall. The economy is pretty rubbish, and somebody will eventually have to make the move to push back pensions because it isn’t affordable with an ageing population. People will be rightly upset, but it really comes down to a choice of either paying higher taxes while working to fund schemes like the pension, or working longer. There’s no free lunch when you’re living longer and longer.
That now abandoned retirement at 70 policy was for people born after 1965, so my husband Alex and I would certainly be affected, and I dare say most Australian readers we have would have been as well.
Given that the can is just being kicked down the road for raising the retirement age – it will have to eventually happen (if not to work for even longer than 70) – it’s up to people to take action and fund their own retirements.
As we’re creatures of habit, the sooner we all start saving
for retirement, the better off we’ll all be.
Incidentally, the idea of superannuation is that it largely happens in the background where people can’t avoid it. It’s because the system understands that people don’t behave rationally.
The immediacy effect that prevents saving
You really want to make saving money a habit, and the first step is realising you need to do it.
Unfortunately humans aren’t rational. So much economic theory is based around people doing what’s in their own best interests, but in reality it just doesn’t work like that. We are lazy and suffer from inertia.
On average humans also live in the present, and prioritise it over the future. This is called the immediacy effect. It’s biology, and it sucks.
People on the whole don’t act on things like climate change because the problem is too distant. It doesn’t matter if there are longer term benefits for things like a cleaner environment (whether or not you wanted to disbelieve in climate change) – the immediate impacts of prevention and adaptation aren’t worth it. If you can have cake now, it doesn’t matter if you can’t have it later.
The climate change example is like kicking the can down the road for the age pension all over again.
So what can we learn from this?
Well, clearly our human tendencies are, on the whole, impacting people. If we look at average retirement savings, we see that people aren’t putting any priority to their retirement. What could equally be seen as a future opportunity or future problem – depending on a person’s state of finances at the time of their retirement – is being largely ignored.
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Overcome the urge
If you’re looking at the superannuation target balances I listed earlier, and then looking at your own balance and feeling anxious, the last thing you should do is put your head in the sand. No more kicking that can down the road! That never ends well!
Instead, you should actively think about how you can improve
your retirement savings.
One way is to earn more money, and I don’t necessarily mean getting a bigger wage (though that certainly helps!). Rather, some employers offer bigger superannuation contributions – well above the 9.5% compulsory rate. I’ve seen some employers offer as high as 17%. Have you seen a higher rate on offer?
But basically, if you can land a job with a 17% contribution rate, your superannuation in-flows will almost be doubling. It’s definitely worth looking into and trying your luck.
The other thing you can do is make extra contributions to
your retirement, which can be highly tax effective.
For instance, if you earn under $250,000 a year you can
currently contribute up to $25,000 a year at a 15% tax rate.
Given that your income tax rate is likely 32.5% or 37%, this is effectively free money since you’re saving 17.5% or 22% in tax. That’s a saving of $175 or $220 per $1,000 you contribute.
Okay, yes, you’re locking away that money until you’re 60 (or older – because if retirement ages increase, it’s likely the superannuation preservation age will increase too). But imagine how grateful your future self will be for every extra $1,000 extra you throw in, with compound interest taking effect over a number of years?
And heck, even if you stop working at 60 and start to access your superannuation then, guess what? You’ve still retired early! And naturally, the more money you have, the better and more secure your life will be in older age.
Superannuation and early retirement
Hopefully we’ve convinced you to be kind to your future
self, and work towards building your retirement funds.
Superannuation is just one way that you can save for retirement. People also hold other asset classes such as cash in term deposits and high interest savings accounts, shares, and property. However, superannuation can be one of the most tax effective ways, and hands-off ways to invest (given that a fund manager does the work for you).
As always, we’re not here to tell you what to do. It’s down
to your personal goals and circumstances.
For myself and my husband, we’re naturally getting
superannuation contributions paid by our employers.
However, unlike most people in the general population, the vast bulk of our retirement finances aren’t centred around superannuation (let alone relying on the age pension).
In our next article, Alex will walk us through why we actually don’t make any extra contributions towards our superannuation retirement savings. Huh? Why’s that? Stay tuned to find out.
Until then, promise yourself that you won’t let your
lifestyle in retirement suffer because of basic human tendencies.
PS: Do you think superannuation savings contributions should be raised? And do you think people should contribute more to their own super?
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The post The importance of superannuation retirement savings appeared first on HisHerMoneyGuide.
Whenever I bring up my various side hustles, I’ll sometimes get criticisms that these gigs aren’t worth doing since I have to pay taxes on that income. I was reminded of this in a recent guest post I wrote over on Money Wizard, where I talked about how I’ve made around $90,000 from side hustling over the past four years.
On the one hand, I get the rationale behind this criticism. If I’m making $100 but have to pay a large portion of that income to taxes, then I’m not really making that much, which then begs the question of whether whatever I’m doing is worth my time. This is even more true with side hustle income, which arguably is taxed at your highest marginal tax rate since, in theory, you could have opted to not make that extra income at all. (One solution to this problem is to think about side hustling differently – it doesn’t have to be just about the money.)
That said, this idea that earning extra income isn’t worth it because you have to pay taxes is sort of confusing to me. Making more money – especially if you can make more money doing something that you enjoy and that doesn’t take up much of your time – is something that I think a lot of us want to do. I don’t think I’ve heard of too many people opting to make less money simply so they can pay less in taxes.
Admittedly, I often underestimate the impact of taxes and often downright ignore them when I discuss concepts like the Reverse Latte Factor. There’s a reason for this though. The point of these types of posts is to make a general point about how small amounts matter – especially when combined with the power of time and consistency.
In any event, the truth is that when I think about side hustling and taxes, the actual paying more in taxes part is something that I just don’t worry about too much. There are just so many strategies you can implement to lessen the sting of taxes that I don’t think it’s as big a deal as people think. These are things that you simply can’t do when you’re only working a regular 9-5 job.
In today’s post, I want to go over some of the strategies you can use when it comes to side hustling and taxes.
A Brief Primer On Taxes
Whenever you receive earned income in the United States, you’re responsible for paying taxes on it. As the IRS explains, there are two ways to get earned income:
- You work for someone who pays you; or
- You own or run a business or farm
When you’re side hustling, you’re going to be earning income in that second category since, more likely than not, your side hustle is going to be a business (and probably not a farm). This is true even of simple side hustles where you’re working as an independent contractor. The easy way to think of it is that if you’re getting paid via a 1099, then you are an independent contractor, which makes you a business.
If you’re business, you’re going to be paying taxes. And you’ll be on the hook for a decent chunk of them. Below is a list of the different taxes you’ll pay on your typical side hustle income:
- Federal Income Tax
- State Income Tax
- FICA Taxes (employer portion)
- FICA Taxes (employee portion)
The federal income taxes you pay will depend on how much you earn from other sources of income. State income taxes will also vary based on your income and what state you live in (and in some places, you might have to pay local taxes as well).
The one big downside of side hustling is having to pay self-employment taxes. The government taxes earned income at 15.3% in order to pay for Social Security and Medicare. 12.4% of that goes to Social Security taxes. 2.9% goes to Medicare taxes. If you’re getting paid as a W-2 employee, your employer pays for half of those taxes and you cover the other half (so in your paycheck, you’ll pay 7.65% to Social Security and Medicare).
But when you’re self-employed and earning 1099 income, you’re both the employee and the employer, which means you’re on the hook for paying the entire 15.3% yourself. When you add up the federal and state income taxes you pay, plus the 15.3% in self-employment taxes you’re paying, the taxes can really add up.
Strategies To Deal With The Tax Problem
Because your side hustle likely makes you a business, you have the opportunity to take advantage of a lot of things that can reduce your tax burden. Here are some strategies you can implement:
1. Take Advantage Of Business Expenses
The biggest advantage of side hustling is that it gives you the opportunity to reduce your tax burden in the form of business expenses. Almost everything that you want to buy in life requires you to purchase it using after-tax dollars – that is, money that you’ve paid taxes on already. Business expenses allow you to get around this and purchase things using pre-tax dollars.
Picking up even simple side hustles can open up a lot of potential business expense deductions. For example, every year I deduct the cost of my yearly bike maintenance from my delivery income since I use my bike to do deliveries. This is maintenance that I do every year and while it’s not that much money, it’s still money that I’m able to spend with pre-tax dollars.
There are a lot of other things that might qualify as business expenses – phone bills, any equipment you buy, etc. It’s very likely these are things that you’re already buying anyway. If you can turn it even partially into a business expense, that’s all the better.
Of course, I’m not a tax expert, so be sure to speak to a professional when you’re trying to figure out what qualifies as a business expense. The main point to take away from this section is that side hustling gives you the potential to be creative and pay for things that you might already be paying for anyway, but with pre-tax dollars.
2. Use A Solo 401k To Tax-Shelter Your Income
A lot of people don’t realize that if you’re earning 1099 income, you have access to tax-advantaged accounts that are better than the ones you can get from an employer. The Solo 401k might be the best tax-advantaged account out there – a bonus retirement account that most people won’t have access to. This tax-advantaged account works just like a 401k, only you have more control over your investment options and you can potentially put away much more in tax-advantaged savings.
In the past, making pre-tax contributions was likely the way to go about it. These days though, thanks to some recent tax changes, taking advantage of Roth Solo 401k contributions might be the best way to utilize this extra retirement account. You won’t get a tax benefit now, but your money will grow tax-free forever if you utilize a Roth Solo 401k.
3. The 20% Pass-Through Deduction
Under the recent Tax Cuts and Jobs Act, any income that goes on a Schedule C gets a 20% pass-through deduction. There are some nuances about what type of income qualifies for this deduction, but most likely, your side hustle income is going to qualify you for it. This is definitely true if you’re doing simple stuff like gig economy work.
On a practical level, what this means is that you only have to pay federal income taxes on 80% of your side hustle income. For example, if you make $10,000 worth of side hustle income (after expenses), you’ll only pay federal income taxes on $8,000 of it. The TL/DR is that because of the current tax structure, our side hustle income has some notable tax advantages that make it more advantageous compared to traditional, W-2 employee income.
4. Pay Your Taxes With Credit Cards
One of the overlooked strategies you can use to reduce the impact of taxes is to pay your taxes with credit cards. Taxes are generally our largest yearly expense. Most of us pay our taxes straight out of our paychecks and get nothing back for it.
I’ve been doing it differently. By strategically using credit cards, it’s possible to earn lucrative signup bonuses that you can then use for free travel. This essentially allows you to get something back for the tax spending you’re already doing anyway. For example, if you’re going to pay $3,000 in taxes anyway, opening up a new credit card and getting back $500 to $1,000 in points and miles effectively reduces what you paid in taxes.
I’ve made it a point to pay for everything that I can with credit cards over the past several years. This has made it so that I haven’t had to pay for a flight or hotel in years. It’s also important to remember that points and miles are not taxable, which means I’m able to pay for my travel using what amounts to tax-free income.
If you have to pay taxes anyway, being able to pay them yourself, rather than having an employer pull them out of your paycheck, is actually the best way to do things. I wrote a post about the benefits of paying taxes with credit cards, so be sure to check that post out to get a better understanding of why you should be paying your taxes using your credit cards. If you’re interested in learning more about credit cards and travel rewards, I offer free credit card consultations and I have a list of my favorite credit cards here.
5. The Master’s Rule
A little known strategy for tax-free income that isn’t discussed often is the Master’s Rule. This rule states that you can rent out your primary residence for up to 14 days without having to pay federal income taxes on that income.
This is obviously a specific tactic to use, but worth considering. Most of us probably aren’t in our house for 14 days per year, so renting your house out while you travel is an easy way to bring in some side hustle income with little tax impact.
Taxes are a real expense – the largest expense that most of us have. You definitely have to think about them whenever you’re making income.
But it shouldn’t hold you back either. You’re going to have to pay taxes anyway. The beauty of side hustling is that you at least have more options and strategies you can use to reduce the impact of your taxes. Hopefully, this post gives you some ideas.
Disclaimer: I am not a tax professional and anything I say here is not tax or legal advice. Talk to a professional for your own specific situation.
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