Nate and Danielle discuss Danielle’s new job and how it impacts their budget along with some choices that they had to make. Two listener questions are also answered relating to borrowing from a 401K and how to budget for gas when your job pays you for driving.
- Danielle got a new job and a pay increase
- We had two options for her retirement money:
- A type of Roth IRA that is post tax
- A traditional 401K that is per-tax
- We get a 5% match no matter which one we picked but the match money goes into the 401K account
- We decided to roll over Danielles previous 401K to the new one and obviously get the match in there. Then we put 6% of her income into the Roth IRA thing. She has a 4% pension and we also contribute 5.5% of our income to our normal Roth
- Right now our goal is to have as much tax free money as possible when we retire. If we ever need to reduce our taxable income, we can contribute money to the 401K.
- Our overall budget doesn’t change because she is now paid 26 times a year instead of 24, so her actual paycheck is basically unchanged, except twice a year we get an extra paycheck.
Listener Question #1:
Would you borrow money from your 401k and pay yourself back with interest?
No, we would not take out of our retirement for a couple of reasons.
- A 401K is money for later in life, as such, we don’t want to touch it now because that’s not what it’s for
- You pay a lot in taxes and penalties. If you take out before 59.5 you get hit with a 10% tax along with any additional income tax that you would owe. Depending on your tax bracket, it could be very costly.
- We would not want our retirement to be treated as a piggy bank. If we need to dip into it at any point and promise to pay it back with interest, the likelihood of us actually doing that is very low. By the time your pay yourself back with interest and account for the tax losses, it’s a very expensive way to get money. You could take out a personal loan at a far lower interest rate than what you would get with taxes
At the end of the day, we don’t want to sacrifice our future income for a current problem.
Listener Question #2
I know gas is a necessity, but for my job I have to drive about 100 miles a day. But I get paid for it and I end up making money. How would you factor gas money into my budget considering I end up making more money?
If gas is not costing your money and you are actually ending up with more that’s a problem that I wish that we had. The reason this usually happens is that the gas reimbursement rate is usually designed to not only account for the cost of gas, but also for wear and tear.
In your case, we wouldn’t have a place for gas in our budget. What we would do is put any “income” we get from your gas reimbursement into savings to pay for car maintenance.