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Who is this FICA Person?
I’ve been receiving a steady paycheck for about a month now. Every week, my earnings are directly deposited into my checking account. But I’ve noticed that someone (or something) is stealing a bunch of my cash before it gets deposited.
The nerve!
As you can see in the scan below, FICA is taking a decent amount of money from me every single week.
I’ve blurred my city to keep the Internet predators away…
I’m not a fan of people taking my money, so I started an investigation. Thanks to the Internets, more specifically – Wikipedia, I discovered that FICA is actually an alias of Uncle Sam – A.K.A the Federal Government.
It turns out that FICA stands for Federal Insurance Contribution Act. This act allows for a tax to be levied in order to pay for Social Security and Medicare. Some people argue that it’s not really a tax because you get your contributions back when you start collecting benefits. Whether or not you agree with this assessment is another topic completely…
Here are some quick facts and figures related to Social Security, Medicare, and FICA:
- Accounts for 37% of government spending
- Estimated to keep 40% of Americans over the age of 65 out of poverty
- FICA is calculated as 6.2% of your earnings, up to $106,800. This means that anything you earn over that ceiling is not subject to FICA
My Thoughts:
1. While 37% is a large chunk, I think it’s appropriate to spend a lot of money to keep the elderly from being stuck on the street and without medical care. Honestly, I think the priorities for government spending should be (in no specific order), health care, education, defense, and awesome stuff. Awesome stuff includes NASA, high way system, high speed Internet, etc. I do think we spend a tad too much on defense though. Just a thought….
2. I can’t believe that so many people are completely dependent on Social Security. I mean, I’ve always viewed SS as simply being one part of a retirement plan. Really, I think of it as a bonus because I have a strong feeling that the whole FICA, SS, and Medicare mess will go through a huge overhaul in the coming decades. Personal responsibility plays a hand in this too. Everyone should be saving something in a retirement account.
3. Just thinking out loud here, but would raising (or gasp, eliminating!) this cap help solve the budget crisis? I honestly don’t know and I’m not an economist so I can’t say with any certainty, but maybe we should look at the possibility. Perhaps eliminating it would allow for a true national health care system where everyone was covered? I know, I know – the horror. What would it be like to not have to worry about health insurance companies denying claims or being able to quit your job and start a business without the lack of health insurance benefits holding you back?
How do you feel about FICA? Friend, Acquaintance, or Foe?
Do You Know What Net Worth Means?
There are a lot of terms in the world of personal finance that many people don’t understand or even know exist. This is especially true for high school and college students. Because of that, today I’d like to talk about a pretty basic, yet also important, topic:
Net Worth
In the simplest terms I can think of, the definition of net worth goes something like this: a single number that describes your entire financial situation. Generally, you arrive as this number using the following formula:
ASSETS – LIABILITIES = NET WORTH
Assets are things that have a monetary value – items like a house, car, and the money you have in savings, checking, and investment accounts. Liabilities are debts such as credit card balances, student loans, or a mortgage.
As an example, here is my current net worth:
Since I don’t have any debt, I have zero liabilities and my net worth must be a positive number. In a few months however, I’ll be taking out loans for school. Let’s say I sign for a $10,000 student loan. My net worth changes accordingly:
As you can see, net worth is simply a number that measures what you’re (financially) worth. A positive number is (typically) better than a lower number. I say typically because, like I mentioned above, my net worth is going to go substantially down in a few months. However, it’s for a pretty good reason – college. The degree I earn there should help me to make more money later on in life.
Some people don’t include their car or home when calculating net worth because those assets can’t usually be sold without a substantial lifestyle change. In my case, I feel that it artificially inflates my net worth. Really, I only have a few hundred in liquid assets. Selling my truck would net me some cash, but at the expense of not being able to drive to work – or anywhere.
That, in a nutshell, is what net worth is all about. With just a few quick calculations, you can see how you’re doing and make an adjustment for the next month if need be.
The Art of Paying Yourself First
If there’s one personal finance lesson or skill that everybody should learn as early in life as possible, it’s this one.
The skill? Paying yourself first.
What Is Paying Yourself First About?
Once you enter the Real World, expenses can start to add up. Your parents stop paying for your car insurance, if they were paying it to begin with. Any allowance you were receiving suddenly dries up. But the cell phone bill won’t pay itself. Student loan interest payments are expected to be made.
But the most important obligation is usually forgotten. That obligation is you.
Paying yourself first means that before you pay your phone bill, before you send in a student loan payment, and before you go to the movies with friends, you take part of your paycheck and set it aside to save.
Why Should I Pay Myself First?
1. It makes “you” a priority. You are the most important thing in your life. Your cell phone bill? Not so much. We typically pay for things that are valuable. If you think you are a valuable person, then you should pay yourself first.
2.You get in the habit of saving. Most people use any income they receive in the following order: bills, fun shit, savings. The problem of course is that there’s barely going to be any savings left. After bills are paid, people think “Oh, wow, I’m so responsible. Time to buy the PS3 that I deserve“. The actual order should be: savings, bills, fun shit.
3. It keeps your options open. When you set aside money for you, you build freedom. The freedom to spend a year traveling the world. The freedom to retire with an impressive nest egg. The freedom to not worry about unexpected financial emergencies.
How Do I Pay Myself First?
1. Start putting money away in an emergency fund. Start small if you must. Just add $25 every month. If you sign up for an ING Direct savings account through this page, you’ll receive $25 just for opening the account. That’s free money.
2. Open a Roth IRA. This is a killer place to invest money especially if you’re young because you probably don’t pay much, if any, in taxes. That means that the money you put in a Roth IRA will never be taxed!
3. Contribute to your company’s 401k. This option won’t be available for high school or college students, but many companies offer a 401k plan where they will match your contributions, up to a certain amount or percentage.
By paying yourself first, you setup a strong foundation from which you can make strong and sensible financial decisions.
6 Awesome Resources Teens Can Use to Learn About Money
Finding good information about personal finance and money can be difficult. Parents are sometimes guarded and don’t always jump at the chance to teach good money management skills. The Internet is full of get rich quick schemes and scams, so it’s hard to find truly reputable information. Because of this, I’ve put together a list of some of the best financial resources.
1. Your Parents - Ask your parents how they manage a family budget (if they use one). Carefully, ask if they have credit card debt. Genuinely be interested in what they have to say. Realize that while your parents aren’t perfect, they can provide valuable insights into how to handle your finances. If they won’t budge, don’t bagger them.
2. Your Friends - Peers can be a great way to see both what you should be doing and what you should not be doing. For example, are you working a part-time job to save a bit of cash up? Are you going to a pricey college just because you want to impress your friends?
2. Blogs - There are literally thousands of blogs discussing personal finance and how to mange money. Here are some of my favorites:
- Get Rich Slowly is perfect for understanding the nuts and bolts of personal finance.
- The Simple Dollar has solid, truthful information on just about every financial topic imaginable.
- The Digerati Life is geared towards those comfortable with technology and no non-sense advice, so it’s perfect for young people.
- I Will Teach You To Be Rich is a fantastic blog for a younger generation. There’s funny jokes and even some swearing. You just can’t lose…
- Frugal Dad will provide you with some great insight into how parents handle money.
3. Bank Rate - This website has fantastic calculators that allow you see just how much credit card debt can cost you or how long it’ll take to pay back a car loan. Some of the charts can be pretty eye opening. My favorite is the retirement calculator.
4. Your Bank - Don’t be afraid to call your bank up if there’s something about your account you don’t quite understand. When you’re opening an account, ask questions and make sure any terms or fees are clear.
5. The Library - There are all kinds of personal finance books out there with great advice and information. Best of all, you don’t have to spend any money on them. Some titles geared towards teens and young adults include: I Will Teach You To Be Rich
6. The Motley Fool - This website has tons of information on investing, along with some basic personal finance content. There’s even a specific part of the site designed just for beginning investors.
I’m 18! What Should I Be Doing With My Money?: Planning For the Future
Eighteen is a unique time in your life. High school is most likely coming to a close and legally, there isn’t much you can’t do. But yet you’re probably still living with your parents and have to obey many of their “house rules”. Financially, you aren’t independent and must still depend on Mom and Dad for many of life’s necessities.
But don’t let the downsides depress you. This is a great time to figure out what exactly what you want out of life. Start thinking, seriously, about career options and what you want to accomplish with your time on Earth. Think about personal issues. Do you want to get married? Have kids? Stay a bachelor forever? Become a nun?
Think about things about you may want to buy…someday. A nice home? A sport scar? A medical degree? You don’t have to make any concrete decisions right now, but it’ll help tremendously if you have a certain “life plan” you can look at for direction.
Why is this important financially?
The world, as they say, revolves around money. Almost any decision you make will have a monetary consequence, good or bad. Try to figure out what things/people/experiences you enjoy spending money on. This is where your financial priorities lay.
For example, I’m most likely going to a cheaper university than I had originally planned because I’ve decided that I really want to travel during college and after. Instead of spending money at an expensive we-rape-you-because-you-are-out-of-state school, I’d prefer to spend it traveling the globe, or at least parts of it.
Travel is important to me, so I’m OK with not driving the nicest car possible or renting a luxurious apartment when I graduate.
What is important to you? What are you OK with?
Once you’ve figured this out…
Cut costs like it’s your job on things you don’t enjoy, but spend generously on the things you love. Don’t let other people tell you what is worthwhile. Assuming it won’t get you into debt or prevent you from achieving your saving/investing goals, go ahead and buy the Escalade. Go out and party. Hard. If that’s what you want, by all means, go for it. But just know that it’s what you really desire.
Keep in mind that debt is the enemy when trying to figure out what you want out of your life. Besides getting an education or buying a house, there aren’t many, if any, good reasons to go into debt. And even for education and housing, there’s a fine line between acceptable and ridiculous.
I know, this topic is intense. But just think how helpful it will be to think it all out. Just remember that nothing is 100 percent yet. You’re just trying to imagine what want out of life.
Eighteen is a wonder opportunity to “start” the game of life. Don’t waste it away!
If you’d like, you can jump back to the previous post in this series: Saving for Retirement.
I’m 18! What Should I Be Doing With My Money?: Saving It For Retirement
Today’s post is a continuation of this week’s series: “I’m 18! What Should I Be Doing With My Money?“
Next up in this series, we’ll tackle what’s probably the last financial issue on your mind. Nonetheless, it’s extremely important:
Retirement!
Yes, I know none of us will be retiring anytime soon. But interestingly, we are the ones who benefit the most by saving. Those who wait to start saving will lose out on THOUSANDS, if not hundreds of thousands, of dollars by not starting as soon as possible.
Just one $2,000 dollar deposit in a Roth IRA (Individual Retirement Account) when you are 18 can grow to over $74,000 dollars by the time you are 65 (assuming an 8% return).
Invest the same amount when you graduate college at 21 and you’ll only have $59,000. Three years of waiting just cost you fourteen-thousand dollars!
Note: You don’t have to deposit $2,000 dollars if you don’t have that much. This is just to illustrate the benefit of starting as soon as possible.
Saving for retirement is easy. You just need to open a Roth IRA (Roth IRAs have numerous tax benefits that make them perfect long-term investing) and contribute money to it. Once it’s there, you can purchase investments like stocks, mutual funds, and index funds. To open the account you just need:
- Your social security number
- Your home address
- Your phone number
- And some money
If it helps, don’t consider this a retirement account. Consider it a freedom or opportunity fund. It’s purpose is to provide you with financial security when you are older and may no longer want to work. It simply gives you options later in life.
If for some reason you desperately need the money in a Roth IRA, you are free to take out whatever you have deposited. You cannot, however, take out your earnings until you are 59 1/2 unless you want to pay a penalty.
You can open a Roth IRA through many different companies and brokerage firms. I chose to open mine at E*TRADE. They don’t have any minimum account balance requirements, which is great for those of us who don’t have a huge cash reserve built up.
Saving for retirement is not something you want to wait around to do. There’s honestly no reason why you can’t open one the day you turn 18. I’m “only” funding my Roth with about $50 bucks, but it’s a start.
If you’d like, you can jump back to the previous post in this series: Learning the Basics of Money Management.
I’m 18! What Should I Be Doing With My Money?: Learning The Basics of Money Management
Today’s post is a continuation of this week’s series: “I’m 18! What Should I Be Doing With My Money?“
Turning 18 is a good time to really get your finances in order. Whether your future plans involve college, trade school, or just simply entering the workforce, it pays to have your financial “house” in order.
Here’s the foundation:
- Savings account
- Checking account
These two accounts will form the basis for your finances. You might even have these already.
The savings account is the place where you will keep your money that you don’t need day-to-day. Your emergency fund should be here along with money you might be saving up for a car or college textbooks.
Your checking account will be used to store money that you need on a daily or weekly basis. You can pay bills out of this account using checks or a debit card. The part of your paycheck that isn’t used for savings should be deposited here.
These accounts can be opened up at your local bank or you can use an online bank like ING Direct. Wherever you decide to do your “foundation” banking, make sure it’s convenient and fee-free. Look for student checking and saving accounts; they don’t usually have high balance requirements, if any, and they rarely charge BS “maintenance” fees.
The purpose of these accounts is to allow you to run your finances with safety and efficiency. Keeping all your money in paper bills under your mattress is not safe. It’s just plain dumb. Writing checks or using a debit card will provide you with an easy to read record of how you’re handling your money.
Once these accounts are setup, you need to start:
- spending less than you earn.
- paying yourself first.
The first one is simple: don’t run up credit card debt. You can use a credit card for purchases if you’d like, as mentioned in the last post, just make sure you don’t swipe more than what you can pay for. Going into some student loan debt is acceptable, but should be avoided if possible. Exhaust financial aid like grants and scholarships before taking out loans.
The second is simple too, yet millions of Americans don’t do it. Pay yourself first means that you automatically save a portion of your income. You set aside this money before you start spending on other things. Think of pay yourself first as a bill you send out to your own savings account. This bill always gets paid. It doesn’t have to be much. Can you find $20 dollars a month to save? $50? $75? $100? Start small. As they say, Rome wasn’t build in a day.
Follow the ideas outlined in this post and you will be miles ahead of where other new adults (and many older ones) are.
If you’d like, you can jump back to the previous post in this series: Open a Credit Card or jump forward to the next post: Saving for Retirement.
I’m 18! What Should I Be Doing With My Money?: Open a Credit Card
Before concerned parents and people whose lives were “destroyed” by credit cards start freaking out, realize that I’m simply advocating that an 18 year old open up ONE credit card, not eight. Also, only people with an income should be opening one.
Why Open an Account?
Having a credit card is beneficial for a variety of reasons. Here are a few:
- You begin building a credit history (something that banks use to decide whether or not to give you a loan)
- They’re convenient; just sign and go.
- Allows you to easy monitor what you spend money on; remembering where you spent cash can be difficult.
- Safe. Card stolen? Call up the bank and tell them. Charges will be reversed.
- Rewards and cash back. (Only applies if you pay off the balance in full every month.)
Why Kind of Card Should I Get?
There are hundreds, if not thousands, of different cards available. 18 year olds should probably stick to a student card or store card, for now.
I’d recommend just getting a simple, no frills student Visa or MasterCard that you can use almost anywhere. Opening up a store credit card (a card that can only be used at a certain store, like a Macy’s or Kohl’s card) can also be a good way to enter the world of credit, but they aren’t super flexible.
A better idea might be to open up a “branded” card. This is a card that’s offered by a certain company as their own card, but it still displays the Visa or Mastercard logo and can be used anywhere those cards are accepted. Gas stations often have these types. For example, I currently have a Mastercard that’s branded by SpeedWay (I’m an authorized user on my dad’s account) that I use to purchase gasoline, but I could also use it somewhere else in an emergency.
These types of credit cards are a good way for young adults to build credit because you can ease into using them. Just charge your gasoline to the card and pay the bill off as soon as possible. You’ll build credit, but won’t pay any interest and you’ll get comfortable paying the bill.
You want the following in any card you open:
- No annual fee.
- Widely accepted. American Express and Discover aren’t quite there yet.
- Cash back, if possible. (Note: DO NOT BUY STUFF TO JUST GET POINTS! Cash back is for things you were going to purchase anyway, even if you didn’t have the card.)
What if I Notice Myself “Shopping Until I Drop?”
STOP USING THE CARD. IMMEDIATELY.
If you’ve rung up a bill that you can’t pay in full within the current billing cycle, cut up the card or literally freeze it by putting it in a zip-loc bag filled with water.
To prevent this from happening in the first place, you might want to let your parents or someone else you trust take a look at your bill. You might not have realized that you started buying iTunes songs like it was your job. A responsible third party will.
After you’ve have time to beat the shopping bug, carefully re-introduce credit into your life. Buy just one, small thing every month and pay the bill as soon as you get home. Self-control can be difficult to master, but it can be done.
Wrap Up
Credit cards can be dangerous, sure. Some people will abuse their lines of credit. But you don’t have to. I look at credit cards as a tool. Hammers can certainly hurt people, but they can also help craft a home. There are good and bad qualities in almost everything. But opening a credit card can be a great step into the adult world. You can become responsible with credit now, without learning the painful lessons of interest charges and late payment fees that so many others faced. You’re an adult. Be responsible.
If you’d like, you can jump forward to the next post in this series: Learning the Basics of Money Management or jump back to the previous post: Grow Up.
I’m 18! What Should I Be Doing With My Money?: Grow Up
The title isn’t meant to insult anybody, but more to just wake everybody up to the fact you are in fact a legal adult. Your parents no longer have to provide you with anything. Legally, you’re held accountable for any crimes you commit. When it comes to planning your future, it’s your decisions that count.
Turning 18 is about taking responsibilty for the choices you make. Run up $20,000 dollars are your new, shiny Visa card? You are paying it off. Agree to a $400 dollar per month car payment? You are responsible for sending in the payment every month. Decide to take out students loans to go to a pricy private school instead of your public state school? You will be paying for it.
The point of this isn’t to scare you, but to inform you. While you are free to do all of the above, you are also free to do things differently. You can start saving for retirement at a young age, building credit wisely, and creating a better future.
So I ask of you to wake up and realize the world is yours for the taking. By not getting into debt, you can pursue opportunities you wouldn’t otherwise have. You can put yourself before payments to a bank. You can get a jump start on success by doing the things your elders wish they would have done sooner. It’s time to plan for the future and make decisions that you think are best, not ones based on what other people think.
As an example of my last point, I’ll explain why I opened a savings account at ING Direct even when my dad said I shouldn’t. My father, while an awesome guy, does not get technology. Sure, he uses the computer for email and Google Maps and well…that’s about it. So when I told him I wanted to open up a savings account at an online bank, our conversation went a little something like this:
Dad: “An online bank? With no branches? All done using the Internet? Haha! It’s probably a scam. They’re going to steal your money!”
Me: “Yes, Dad, an online bank. They have some branches…four or five in major U.S. cities. But yeah, day to day banking is done through their website. It’s not a scam. They can offer higher interest rates because they don’t have to build branches or employ tellers. They aren’t going to steal anything…”
Dad: “Still sounds like an Internet scam.”
Me: “Whatever.”
But I didn’t just throw my hands up in the air after that. I researched ING Direct more. I found tons of bloggers who had accounts there and they loved it. No con had been pulled off. Then, I found out that ING Direct had been around since the year 2000 and their parent company had been around for even longer. They were one of the 1st online banks and they seemed to be doing it right.
My dad still wasn’t completely swayed, but he nonetheless allowed me to sign up for the account (I was 16 at the time and had to open a joint account with someone 18 or over).
My dad wasn’t lying to me, but he just isn’t a huge fan of online banking. To him, banking is something you do at a physical office. Everybody, including parents, has their own set of experiences and views. These might not always align with the best option for you.
Financially, remember that you no longer need your parents permission to do anything. You are free to open up a savings, checking, and credit card account. This is an important realization to make because it appears that so many adults still rely on their parents for financial advice and are afraid to figure out things for themselves. Ask your mom or dad for advice sure, but don’t accept it blindly.
Take home message: You’re an adult now and can finally live your life according to how you see fit. Don’t mess it up.
If you’d like, you can jump forward to the next post in this series: Open a Credit Card.
Introducing the “I’m 18, What Should I Be Doing with Money?” Series
Today is my 18th birthday. This birthday is arguably the most important one yet. I’ll finally be an adult! But as Spider-Man’s Uncle Ben cautions: “With great power, comes great responsibility.” When finances are concerned, this adage is especially important.
Eighteen is the age where you’re allowed to smoke, chew tobacco, buy pornography, and make financial decisions on your own. The 1st three were tempting choices, but I’ve decided to focus on the last one. When you turn 18, you have the freedom to make almost any decision relating to money that you choose. These choices can be good, bad, and downright ugly. I thought a series explaining the best money moves to make when you’re 18 would be really beneficial to a lot of people.
Check back later today for the first post: Grow Up
