Category: Frugal Living

Compound Interest Calculator

Compound interest is one of the most important concepts to understand in investing. It’s something about investing that many people aren’t familiar with, but it plays an essential role in making investments profitable. 

If you’re curious about compound interest and how it works, good for you — you’re on the right track. In this post, you’ll find a compound interest calculator that can quickly and clearly show you how much money you might make by investing in an account that delivers compound interest. 

Use the calculator below to get a sense of your potential earnings, then read the sections below to gain more insight into how you can make money through compound interest. 

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Compound Interest Calculator
First, tell us about your investment plan by filling in the fields below.
Investment Plan:
Starting Amount:
Amount of initial investment: Total amount you will initially invest or currently have invested toward your investment goal.
Years to Accumulate:
Years to accumulate: The number of years you have to save.
Contribution Amount:
Periodic contribution: The amount you will contribute each period and the frequency at which you will make regular contributions to this investment.
Every WeekEvery Two WeeksPer MonthPer QuarterPer Year
Rate of Return:
Rate of return on investment: This is the rate of return an individual would expect from their investment. It is important to remember that these scenarios are hypothetical and that future rates of return can’t be predicted with certainty and actual rate of return can very widely over time.
Compound Frequency:
Compound frequency: Interest on an investment’s interest, plus previous interest. The more frequently this occurs, the sooner your accumulated interest will generate additional interest. You should check with your financial institution to find out how often interest is being compounded on your particular investment.
DailyMonthlySemiannuallyAnnually
Years to Accumulate:
Years to Accumulate: This is the amount of time until you withdraw or use your investments.
Your Investment Results:
Ending Amount: $0
$0
Total Investment
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Compound Interest Earned
$0
Simple Interest Earned
Investment Growth Over Time
Investment Breakdown
Total Investment
Compound Interest Earned
Simple Interest Earned

  • How to use a compound interest calculator
    • Investment definitions
  • How does compound interest work
    • Compound interest formula
  • Compound interest accounts
  • Compound interest FAQs

How to use a compound interest calculator

Using the compound interest calculator is simple. Follow these steps to see what you might earn through compound interest investing. 

  1. Enter your initial investment. It can be any value that you like, but it’s helpful to make it a realistic amount. For instance, if you’re saving up to invest right now, you can put the amount that you plan on investing once you’ve saved up enough. 
  2. Next, enter the amount you plan on adding to your investment portfolio each month. This can also be any value you like, but it’s most useful if you enter an amount that you can budget for. Even if that’s just an extra $10 a month, it makes a difference. 
  3. Choose whether you want your interest compounded annually, compounded monthly, or compounded daily. (If you don’t know what that means, stay tuned for the definitions below.) 
  4. Input the estimated rate of return. This can vary considerably, but index funds and similar investment vehicles can yield between 2% and 10% returns. 
  5. Input your time horizon — the amount of time until you withdraw or use your investments. 

Once you’ve filled out the calculator, you should see an estimate of the amount you’re likely to have when the period of compound investing is up. If you’re a little confused about how we got this number, or what you need to do to grow your money in this way, check out the definitions, guide, and FAQs below. 

Investment definitions

  • Compounding: This occurs when the money that is made from an investment is reinvested, increasing the total amount of interest yielded the next time your interest is compounded. 
  • Index fund: Index funds are bundled investments that roughly track the growth of a market index, which is a collection of publicly-traded companies. They are often considered lower-risk investments.
  • Interest: The money you make on your investments; essentially, the money you earn for investing in the success of a company, a government bond, or a fund.
  • Principal: The amount of money that you start out with when you begin investing.
  • Rate of returns: The rate at which you accrue interest — for example, 3% returns would mean that, for every $100 invested, you would earn $3. 
  • Returns: The money that you earn on your investments. 
  • Time horizon: The amount of time that you plan on investing.

Now that you have a few key compound interest definitions in mind, we can explain how it works. 

How does compound interest work

Having more money can help make you more money — that’s the principle behind compound interest. Here’s how that breaks down. Let’s say that you have $1000 to invest. You put it in an account (let’s say a money market account) that yields 2% interest, compounded monthly. At the end of the first month, you’d have $1020. So far, so good.

But here’s where it gets really interesting. That 2% rate of return now applies to the $1020 total, not just the principal investment of $1000. So, after the end of month 2, you’ll have $1040.40 — an added $0.40 compared to the previous month. 

That might not sound like a lot, but it starts to add up. Have you ever rolled a snowball down a hill? The same idea applies. As your money grows and adds to itself, the amount that it can add to itself the next time your interest compounds is more. It may not be a get-rich-quick scheme, but it’s a reasonably secure way to start building your net worth in the long term. 

Plus, you’re not limited to money market accounts with rates as low as 2%. If you’re willing to put a little more risk on the line, you can get returns as high as 10% in some cases. We’ll cover that more in a later section. But first, time for a little math homework (just for those who are curious!). 

  • Looking for a longer explanation? Check out our full-length guide to how to earn compound interest. 

Compound interest formula

Compound interest is really mathematically interesting. Here’s the formula: A = P(1 + r/n)(nt)

If you want to try to see what’s going on behind the scenes in our calculator, here’s how to do the math yourself using the compound interest formula. 

  • The A in the formula is the amount you’ll end up with; this comes last. 
  • The P in the formula above stands for your principal, that’s the amount that you start with. 
  • Multiply P by 1 + your interest rate r (given in a decimal; so 4% would be 0.04) divided by n, the number of times your interest is compounded in a given period. 
  • Raise all of that to the power of n times t, where t is the number of time periods elapsed. 
  • For example, if you’re investing for 12 months, and your account interest is compounded daily, n would be roughly 30, and t would be 12 if you want to know how much you’ll have in a year. 

Try the formula out yourself, and see what result you get compared to the result in our calculator to check your work!

Compound interest accounts

Now that you understand the basics of compound interest, you’re probably wondering how you harness it to increase your net worth. The key is to use accounts that offer compound interest. Here are a few examples:

  • High yield savings and money markets. These are essentially savings accounts. They aren’t investment accounts (which we’ll discuss in a minute), but they do use a similar principle to grow your money. Rates on these can be fairly low compared to other options, but your money remains accessible, so you won’t have to worry if you need access to your cash fast in an emergency.
  • Retirement accounts. If you have a 401k or IRA opened right now, good news: you’re already accessing the power of compound interest. Most retirement accounts use a diversified and stable portfolio to grow your money over time, investing in index funds, government bonds, and dividend stocks to help you build your nest egg. 
  • Investments. Of course, one of the most aggressive and effective ways to utilize the power of compound interest is to start investing. There are a number of different ways you can invest — be sure to read our guide to investing for beginners for a more thorough explanation — but all can involve compound interest. For example:
    • Dividend stocks sometimes allow you to reinvest the payout from your dividends, increasing the amount of your dividend the next time there is a payout. 
    • Index funds, like mutual funds and ETFs, also often allow investors to reinvest their earnings, harnessing compound interest in their favor. 
    • If you invest directly in stocks, you can always use the money that you earn to reinvest or invest in another stock — be aware that this is a riskier option, however. 
    • Whether you choose an in-person brokerage or a trendy new robo-advisor, you’ll likely be able to use the power of compound interest to grow your capital. 

Compound interest is a mathematical force that can help you build your net worth over time. You can get started today by finding the right investing or saving vehicle for your personal finances. And don’t forget to download the Mint app, where you can conveniently track your investments all in one place. 

Compound interest FAQs

How do I calculate compound interest?

You can calculate compound interest in one of two ways: you can use the formula listed above to calculate it by hand, or you can use the compound interest calculator to figure out your total more quickly. Just be sure you know the necessary variables:

  • The principal amount
  • Your interest rate
  • How often it’s compounded
  • The number of compounding period that will occur

What will $10,000 be worth in 20 years?

That totally depends on how much interest your account produces and whether you invest more as time goes on. 

Let’s assume an average return rate of around 7%, and assume that you don’t add in any more money. In that case, your $10,000 could turn into $40,547 — still an impressive amount. That’s the power of compound interest. 

How do you calculate compound interest monthly?

To calculate compound interest monthly, simply set the “compounding frequency” setting on the calculator above to “monthly.” Alternatively, you can use the formula above and set n equal to 1 and t equal to 12 to find out how much money you’ll have if interest is compounded monthly for a year. 

Sources

Wealthsimple | Investor.gov

The post Compound Interest Calculator appeared first on MintLife Blog.

Source: mint.intuit.com

The ABCs of Financial Empowerment

A quick Google search of ‘financial literacy’ will yield thousands of results, listing an infinite amount of do’s and don’ts that should (and shouldn’t) be followed to guide you along on your financial journey.

However, when you think of financial empowerment – what comes to mind? As defined by Merriam-Webster, empowerment is “the act or action of empowering someone or something: the granting of the power, right, or authority to perform various acts or duties.” No matter what your current sentiments are related to your finances, we will explore three key areas to not only embrace; but to help you prepare for a strong financial future.

Awareness

Now more than ever, we all have a laser-sharp focus on our money and where it’s being spent. The pandemic has generated a hypersensitivity to how we treat our finances while also determining what essential expenses look like and where they fit into our budget.

Before life as we knew it to be shifted, many of us don’t have to look too far back to remember a time where we didn’t check our accounts as often, our savings plan would fluctuate month-over-month or our emergency fund was used to bail us out of some impulsive spending.

To make sure those days are forever of the past, make it a habit to take inventory and audit all of your accounts. Take at least 15 – 30 minutes to review over any transactions and deposits across all active accounts. Not only does this help improve your self-accountability, but you are also able to make any disputes if anything appears incorrect and resolve quickly.

Another small but impactful tip is to acknowledge your financial health. What top three areas will be your main point of focus? If this is something you don’t know offhand, review your transactions from the last three months and categorize them. How much of your money went to impulsive buys or things that could have been purchased at a later date? Are you seeing an influx in overhead expenses or credit card payments? Are there any spending patterns you can explicitly see? Allow this exercise to serve as an eye-opening experience.

In order to determine where you want to be, you must first truthfully acknowledge where you are. This sets the blueprint and overall expectations with your personal finance journey. Knowing where you are may not feel pleasant but avoidance will lead to bigger consequences.

Betterment

Even though we don’t like to admit it, there’s always room for improvement and our finances are no exception. The first thing that guarantees mastery is actually following the budget that’s created. This serves as a guardrail – it’s used to keep us on track so we can greet our financial destination with open and inviting arms.

Once that’s in motion, explore ways to enhance your financial experience. Begin by automating recurring expenses, such as cellphone service or utility bills. That’s why it’s so important to be as honest and accurate as possible when setting a budget. Nothing should come to you as a surprise outside of any emergencies. When you trust yourself and the financial work you’ve put in, your finances have no choice but to follow suit.

If you haven’t already (or need to get back on track), work to beef up your emergency fund and savings account. Emergency expenses have a tendency to appear out of nowhere, so you want to dedicate a set dollar amount or a percentage every pay period. Setting up an automatic transfer to these accounts establish a routine while putting your mind at ease in the process.

Is there a hobby or skill you’d like to put to use and monetize? No matter how grandiose or small, this can definitely expedite achieving your financial goals. The money earned from a passion project can go toward savings, paying off debt or simply getting back to a place of comfort financially. Vacation funds or prepping for large purchases such as a car or home can also fall within this category. If you want to seek the assistance of a professional, search for financial advisors or coaches that could help you with reaching your goals. Preparation is key and your future depends on it!

Confidence

The foundation has been laid and you’ve been committed to crushing your financial goals. The budget and savings goals are in motion; so what’s next? It’s time to celebrate! Walk into your financial future with your best foot forward. When times seem bleak, remind yourself of your goals early and often.

Reinforcement such as daily reminders on your phone, having goals posted somewhere in your home you can see daily or reciting positive financial affirmations will serve as a second wind when you want to throw in the towel. Be sure to celebrate wins along the way such as debt payoff, reduction or hitting a new savings goal. Never been able to invest before and now you have the additional income to get in the game? Celebrate that!

The best way to generate excitement is to rally your family and get them involved. Create family challenges to get your children excited about saving funds and reallocating money. Come up with creative ways you all can commemorate knocking out a goal by ordering from your favorite restaurant or saving for a family staycation.

In order to walk in confidence, you have to build up the courage to begin no matter where you are or how many times you’ve had to start over. Each step counts – each successful budget, savings goal and consistent reduction of overall expenses. Be sure to keep in mind, financial freedom looks different for everyone and has the ability to pivot over time. While some may want to vacation throughout the year, save for their children’s college fund or wipe debt out completely, all are significant and take sacrifice. What is the key to achieving such a pinnacle level of confidence? Time.

 

Be kind to yourself and understand mistakes should never be equated to failures. Your commitment to this financial journey will always be rewarded.

The post The ABCs of Financial Empowerment appeared first on MintLife Blog.

Source: mint.intuit.com

Mint Money Audit: Managing Money When You Make Enough

Anna’s email requesting help with her finances began with a unique confession.

“Farnoosh, my money problem garners little sympathy,” the 32-year-old wrote. “My issue is that I make too much of it.”

Now, THIS is interesting, I thought. I immediately followed up with many questions.

Here’s what I learned through our conversation:

The Denver-based Mint user earns $220,000 per year as an engineer. Anna’s also benefited from years of big bonuses and her net worth, not including her home equity, is close to a million dollars.

After paying taxes and health benefits and maxing out her 401(k), Anna takes home between $8,000 and $10,000 each month. Her expenses mainly consist of a $1,200 mortgage payment, car insurance, gas, food and utilities, amounting to maybe a few thousand dollars per month.

The rest either goes into savings where she stashes about $5,000 to $10,000 for unexpected expenses or into a brokerage account where she has roughly $800,000 invested. A wealth management firm manages that portfolio and charges, she says, an annual 1% fee.

Anna has no consumer debt, besides her mortgage, which amounts to about $338,000. It’s a 30-year fixed rate loan with a 2.85% interest rate. The home has appreciated in recent years with about $100,000 in equity (including Anna’s initial 20% down payment).

So, what is the problem, exactly?

“My big worry is that I don’t have the habits to manage money well,” Anna told me. Her sizeable bank balance has her feeling financially free, although she worries about getting carried away with spending sometimes.

“When I see money in my bank account I rationalize that ‘yea, that vacation is doable. I don’t hold back on the things that may seem frivolous,’” she says. But It seems she wants more financial grounding and to be able to evaluate expenditures and price tags more critically.

Anna’s situation may be unique, but I think relatable in the sense that we all would like to feel more thoughtful with how we spend, save and invest. And while some may do well with earning money, it should not be assumed that they can also manage that money well.

I applaud Anna for wanting to be sure that, even with an impressive net worth, she is actually making wise financial decisions.

Here’s my advice.

Take a Deep Breath

No need to panic when spending on things and experiences that you enjoy. From what I can tell Anna’s prioritizing the serious financial stuff first like contributing the max to her 401(k) and saving all of her annual bonuses in a brokerage account. She has no credit card debt and pays all her bills on time. That’s terrific.

Sometimes we just want to hear that we’re on the right track with our money and I have a very simple way to measure this:

If you manage each paycheck by saving, investing and paying all your bills first, then by all means, you’re entitled to have fun with whatever is left without any fear or regret. Am I right?

If you’ve done the good work of taking care of your future with your money, then don’t hesitate treating yourself and others with the remaining funds today. Splurge away and enjoy your hard-earned money. And remember to enjoy the moment.

Ditch Your Money Managers

I do think Anna could find a better home for her investments.

Paying one percent of her managed assets to this firm may not seem that high of an annual fee. But when you think about Anna’s balance of $800,000, that’s $8,000 this year. What about next year and the decades after that as she contributes more to the account? That fee, compounded over the next 30 years, will amount to – conservatively – over one million dollars. Ouch.

That doesn’t even factor in the expense ratios for each mutual fund that’s in her portfolio.

If all Anna seeks is investment assistance, she may be better suited stationing her money with an automated wealth platform or robo-advisor where her money is largely invested in low-fee index funds or exchange-traded funds (ETF) and the portfolio management fee is typically 0.50% or less.

Of course, breaking up with your financial advisor is not always so simple. It’s especially hard for Anna, as she equated her money managers to “father figures.”

If I were Anna, I would just explain to my advisors over email something like, “I want be more conservative with my money and that includes being extra mindful of the various fees that I’m paying. To that end, I’ve decided to manage my money more independently. I’m sure you can understand. I appreciate your help over the years. Please let me know next steps.”

Planners know the drill and are used to having clients end relationships.  Stay strong. Nobody can really argue with the fact that saving money is a good thing!

Establish Short and Long Term Goals

Anna wants to spend and save with more conviction. I think having some concrete, tangible goals can help.

For example, she shared that she’d like to get married, have a family and own two homes – one near her office downtown and another in the mountains as a getaway.

So, the next step is to understand what these goals cost. What are, say, the going prices on a vacation home in her state? How much might she want to stash in a separate account for the future down payment on this property? Knowing the underlying costs of her goals can better direct how much to spend elsewhere.

Next time she’s planning a vacation, she may be more inclined to price compare or hunt down better deals, as opposed to just judge whether the trip is financially “doable” by the amount of money in her bank account. Now she’ll have the image of that second home and its costs and will make a more informed choice.

Contribute to a Cause

Last but not least, when you feel you make more than enough, like Anna does, this is a great opportunity to be extra charitable. If she’s seeking a way to give her money more meaning and feel purposeful in her financial life, this is a truly wonderful way to go about it. Discover a cause that you’re passionate about and make an impact as a volunteer and donor.

Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at farnoosh@farnoosh.tv (please note “Mint Blog” in the subject line).

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.

The post Mint Money Audit: Managing Money When You Make Enough appeared first on MintLife Blog.

Source: mint.intuit.com

Financial Lessons Learned During the Pandemic

2020 has shaped all of us in some way or another financially. Whether it is being reminded of the importance of living within our means or saving for a rainy day, these positive financial habits and lessons are timeless and ones we can take into the new year. 

While everyone is on a very unique financial journey, we can still learn from each other. As we wrap up this year, it’s important to reflect on some of these positive financial habits and lessons and take the ones we need into 2021. Here are some of the top financial lessons:

Living Within Your Means

It’s been said for years, centuries even, that one should live within one’s means. Well, I think a lot of people were reminded of this financial principle given the year we’ve had. Living within your means is another way of saying don’t spend more than you earn. I would take it one step further to say, set up your financial budget so you pay yourself first. Then only spend what is leftover on all the fun or variable items.

Setting up your budget in the Mint app or updating your budget in Mint to reflect the changes in your income or expenses is a great activity to do before the year ends. Follow the 50/20/30 rule of thumb and ask yourself these questions:

  • Are you spending more than you earn?
  • Are there fixed bills you can reduce so you can save more for your financial goals? 
  • Can you reduce your variable spending and save that money instead?

The idea is to find a balance that allows you to pay for your fixed bills, save automatically every month and then only spend what is left over. If you don’t have the money, then you cannot use debt to buy something. This is a great way to get back in touch with reality and also appreciate your money more. 

Have a Cash Cushion

Having a cash cushion gives you peace of mind since you know that if anything unexpected comes up, which of course always happens in life, you have money that is easy to liquidate to pay for it versus paying it with debt or taking from long-term investments. Having an adequate cash cushion this year offered some people a huge sigh of relief when they lost their job or perhaps had reduced income for a few months. With a cash cushion or rainy day fund, they were still able to cover their bills with their savings.

Many people are making it their 2021 goal to build, replenish, or maintain their cash cushion.  Typically, you want a cash cushion of about 3- 6 months of your core expenses. Your cash cushion is usually held in a high-yield saving account that you can access immediately if needed. However, you want to think of it almost as out of sight out of mind so it’s really there for bigger emergencies or opportunities that come up.

Asset Allocation 

Having the right asset allocation and understanding your risk tolerance and timeframe of your investments is always important. With a lot of uncertainty and volatility in the stock market this year, more and more people are paying attention to their portfolio allocation and learning what that really means when it comes to risk and returns. Learning more about which investments you actually hold within your 401(k) or IRA is always important. I think the lesson this year reminded everybody that it’s your money and it’s up to you to know.

Even if you have an investment manager helping you, you still need to understand how your portfolio is allocated and what that means in terms of risk and what you can expect in portfolio volatility (ups and downs) versus the overall stock market. A lot of people watch the news and hear the stock market is going up or down, but fail to realize that may not be how your portfolio is actually performing. So get clear. Make sure that your portfolio matches your long term goal of retirement and risk tolerance and don’t make any irrational short term decisions with your long-term money based on the stock market volatility or what the news and media are showcasing.

Right Insurance Coverage

We have all been reminded of the importance of health this year. Our own health and the health of our loved ones should be a top priority. It’s also an extremely important part of financial success over time. It is said, insurance is the glue that can hold everything together in your financial life if something catastrophic happens. Insurances such as health, auto, home, disability, life, long-term care, business, etc. are really important but having the right insurance policy and coverage in place for each is the most important part.

Take time and review all the insurance coverage you have and make sure it is up to date and still accurate given your life circumstances and wishes. Sometimes you may have a life insurance policy in place for years but fail to realize there is now a better product in the marketplace with more coverage or better terms. With any insurance, it is wise to never cancel a policy before you a full review and new policy to replace it already in place. The last thing you want is to be uninsured. Make sure you also have an adequate estate plan whether it’s a trust or will that showcases your wishes very clearly. This way, you can communicate that with your trust/will executor’s, beneficiaries, family members, etc. so they are clear on everything as well. 

Financial lessons will always be there. Year after year, life throws us challenges and successes to remind us of what is most important. Take time, reflect, and get a game plan in place for 2021 that takes everything you have learned up until now into account. This will help you set the tone for an abundant and thriving new financial year. 

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Source: mint.intuit.com

What’s the Difference Between 401(k) and 403(b) Retirement Plans?

Investing in your retirement early is the best way to ensure financial stability as you age, especially when it comes to understanding various retirement options. Getting started may feel overwhelming — luckily we’re here to help. We help break down the difference between 401(k) and 403(b) accounts, and how they can impact your financial life.

You may already know the value in adjusting your budget to make saving for a rainy day a priority. But are you also prioritizing your retirement savings? If you’re just getting started in the workforce and looking for ways to invest in yourself, 401(k) and 403(b) plans are great options to know about. And, the main difference between a 401(k) and a 403(b) is the company who’s offering them.

401(k) accounts are offered by for-profit companies and 403(b) accounts are offered by nonprofit, scientific, religious, research, or university companies. To understand the similarities and differences between plans in depth, skip to the sections below or keep reading for an in-depth explanation.

How a 401(k) Works
How a 403(b) Works
The Difference Between 401(k) and 403(b)
The Similarities Between 401(k) and 403(b)
5 Ways to Grow Your Retirement Savings
What is a 401(k) and 403(b)
$19,500 with your employer matches. Plus, most retirement funds have required minimum distributions (RMDs) by the time you turn 70. This essentially means you have to take a minimum amount of money out each month whether you want to or not.

In most cases, employers will offer 401(k) matching to encourage consistent contributions. For example, your employer match may be 50 cents of every dollar you contribute up to six percent of your salary. For example, with this employer match on a $40,000 salary, you would contribute $200 and your employer would contribute an additional $100 each month. This pattern would continue until your annual contributions hit $2,400 and your employer contributes $1,200.

Employee matching is essentially free money. You’re monetarily rewarded for your retirement payments. Be sure to pay attention to vesting periods when setting up your employer match. Vesting periods are an agreed amount of time you need to work at a company before you receive your 401(k) benefits. For example, some companies may require you to work for their team for a year before earning retirement benefits. Other employers may offer retirement benefits starting the day you start working with them.
403(b) accounts include school boards, public schools, churches, hospitals, and more. This type of account is also known as a tax-sheltered annuity plan — they allow pre-tax income to be invested until taken out.

Employers that offer 403(b) retirement plans may offer a pool of provider options that undergo nondiscrimination testing. This allows employers that qualify for this account to shop around for plans that offer the best benefits and don’t discriminate in favor of highly compensated employees (HCEs). For instance, some 403(b) accounts may charge more administrative fees than others.

Employers are able to offer employee matching on 403(b) accounts if they decide to. To cut costs for nonprofit companies, 403(b) retirement plans generally cost less than 401(k) accounts. Costs associated with starting up these accounts may not affect you, but it may affect your employer.

Account Type 401(k) 403(b)
Yearly Contribution Limit $19,500 $19,500
Employer-Issued Packages For-profit employers:
Corporations, private establishments, etc. and sole proprietors
Non-profit, scientific, religious, research, or university employers:
School boards, public schools, hospitals, etc.
Minimum Withdrawal Age 59.5 years old 59.5 years old
Early Withdrawal Fees 10% penalty, tax, and additional fees may vary 10% penalty, tax, and additional fees may vary
Source: IRS.org

 

The Differences Between 401(k) and 403(b)

Both a 401(k) and 403(b) are similar in the way they operate, but they do have a few differences. Here are the biggest contrasts to be aware of:

  • Eligibility: 401(k) retirement plans are issued by for-profit employers and the self employed, 403(b) retirement plans are for tax-exempt, non-profit, scientific, religious, research, or university employees. As well as Hospitals and Charities.
  • Investment options: 401(k)s offer more investment opportunities than 403(b)s. 401(k) accounts may include mutual funds, annuities, stocks, and bonds, while 403(b) accounts only offer annuities and mutual funds. Each employer varies in retirement benefits — reach out to a trusted financial advisor if you have questions about your account.
  • Employer expenses: 401(k) accounts are generally more expensive than 403(b) accounts. For-profit 401(k) accounts may pay sales charges, management fees, recordkeeping, and other additional expenses. 403(b) plans may have lower administrative costs to avoid adding a burden for non-profit establishments. These costs vary depending on the employer.
  • Nondiscrimination testing: This form of testing ensures that 403(b) retirement plans are not offered in favor of highly compensated employees (HCEs). However, 401(k) plans do not require this test.

 

The Similarities Between 401(k) and 403(b)

Aside from their differences, both accounts are set up to aid employees in retirement savings. Here’s how:

  • Contribution limits: Both accounts cap your annual contributions at $19,500. In the event you contribute over this limit, your earnings will be distributed back to you by April 15th. If you’re under your retirement contributions by the time you’re 50 years old, you’re allowed to make catch-up contributions. This means that, if you’re eligible, you can contribute $6,500 more than the yearly contribution limit.
  • Withdrawal eligibility: You must be at least 59.5 years old before withdrawing your retirement savings. In the case of an emergency, you may be eligible for early withdrawal. However, you may be charged penalties, taxes, and fees for doing so.
  • Employer matching: Both retirement account options allow employers to match your contributions, but are not required to. When starting your retirement fund, ask your HR representative about potential benefits and employer matching.
  • Early withdrawal penalties: If you choose to withdraw your retirement savings early, you may be penalized. In most cases, you need a valid reason to withdraw your funds early. Eligible reasons may include outstanding debt, bankruptcy, foreclosure, or medical bills. In addition, you may be charged a 10 percent penalty fee, taxes, and other fees. During a downturned economy, as we’ve seen with the COVID-19 pandemic, fees may be waived.

5 Ways to Grow Your Retirement Savings
retirement plan options and their benefits. When employers offer retirement matches, consider contributing as much as you can to meet their match.

2. Set up Monthly Automatic Contributions

Save time and energy by setting up automatic contributions. You may feel less interested in contributing to your retirement as your payday approaches. Taking time to set up a retirement fund and budgeting for this change may be holding you back. To meet your retirement goals, consider setting up automatic payments through your employer. After a while, you may not even notice the slight budget adjustment.

3. Leverage Employer Matching

Employer matching is essentially free money. Employers may put money towards your future for nothing but your own contribution. This encourages employees to consistently put money towards their retirement savings. Not only are you able to earn extra money each month, but this “free money” will grow with interest over time. If you can, match your employer’s contribution percentage, if not more.

4. Avoid Early Withdrawal

Credit card balances, student loans, and mortgages can be stressful. Instead of withdrawing early from your retirement fund to pay for these, consider other debt payoff methods. If you’re eligible to withdraw from your retirement early, you may face penalty fees, taxes, and administrative expenses. This may hinder your savings potential or push back your desired retirement date.

5. Contribute Your Future Raises and Bonuses

If you’re saving less than $19,500 to your retirement fund this year, consider contributing more. If you earn a bonus or a raise, stick to your current budget and consider increasing your contributions. Ask your employer to increase your retirement payments right before you receive a bonus or raise. The more you contribute, the more interest you’ll accrue over time.

Whether your retirement funds are established through a 401(k) or a 403(b), these accounts offer you the chance to build your financial portfolio. Consistently funding your retirement account may better your financial plan and set you at ease. As your contributions age, so do your interest earnings. You’ll be able to make money on your pre-taxed income and set your future self up for success. Get started by checking in on your budget and carving out a specific amount to put towards your retirement each month.

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Source: mint.intuit.com