Comment by alexmingoia | Hacker News Reader

Comment by alexmingoia | Hacker News Reader

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My radically simple approach to finances is a result of simple living. I spend maybe 1-2 hours a month thinking about money and finances.

- I don’t budget.

- I don’t use spreadsheets or finance apps.

- I don’t have any credit cards, loans, or debt. I don’t care about my credit score because I’m not ever going to get a car loan, electronics lease, or mortgage.

- I don’t own a car. If I did I would buy it with cash and purchase only what was necessary to get from point A to point B safely, with the best gas mileage.

- I have reduced expenses as much as possible, and only buy essentials: Rent, utilities, health insurance, and groceries. I don’t spend money on new gadgets, entertainment, or other things. I read books from the library, I go to the park instead of the movies, etc. I don’t go “shopping” whether online or offline. I don’t buy a new laptop or phone unless my old one breaks and cannot be easily and cheaply repaired (still using MacBook from 2014).

- At the beginning of the week I go to my bank and withdraw cash, and only buy things with this cash. I don’t buy much online except toiletries and cooking oil.

- Instead of budgeting food, I have a simple rule that if I’ve eaten out already in that week, I avoid eating out until the next week. I avoid buying groceries until I’ve eaten most of what’s in the kitchen.

- At the end of every month I log into my bank, check how much money came in, and subtract how much went out. I then invest whatever I feel like out of that month’s profit into a mutual fund. I choose mutual funds as my method of saving because they are liquid, free of management, and simply taxed (capital gains). I have them setup to automatically reinvest earnings. I don’t use IRAs.

- I’m happy with my income now, but in the past when I felt like I didn’t have enough money, I simply focused on the easiest way to earn more money (changing jobs, learning a new skill to change jobs, taking another job, etc.).

I was with you until you mentioned you don't use IRAs. Tax advantage is important!

I don’t use IRAs mainly because they aren’t liquid. I can’t withdraw without a penalty.

An IRA is not necessarily tax advantageous because gains are taxed as income when withdrawn, which is higher than capital gains. The choice to use IRAs is not straightforward. It's also hard to plan for any of this because tax rates can and do change. Capital gains and income tax rates may change, so I generally prefer to pay taxes earlier than later where possible.

I have generally found it more financially rewarding to focus my time on increasing income rather than on finagling my finances to save money. Same reason I don’t own a credit card just to get the cash back or other incentives.

> I have generally found it more financially rewarding to focus my time on increasing income rather than on finagling my finances to save money. Same reason I don’t own a credit card just to get the cash back or other incentives.

Diverting some of your income into a tax-deferred investment account will not significantly affect your ability to focus on increasing income.

They're not mutually exclusive.

My approach largely resembles yours, but there's no effective difference between increasing income and reducing how much of it is taken from you in the form of taxes. If your priority is to increase your income, deciding to throw some of it into a tax-deferred investment account can be seen as a very efficient use of your time spent increasing your income.

Tax deferring doesn’t necessarily equate to reduced taxes. IRAs just mean paying taxes later, at an unknown rate.

All income from IRAs are taxed, principle and gains. A traditional IRA has gains taxed as income, which is higher then long-term capital gains on ETFs. Assuming tax rates don’t change, a traditional IRA will cost more taxes if the withdrawal and contribution taxable income is over roughly 40k, correct me if I’m wrong. That’s assuming income tax isn’t higher in the future, which is quite a gamble as historically income tax has been going up, and historically there’s just been more and more taxes.

Don’t forget that deductions for contributions don’t matter, because you will pay income tax on that principle when you withdraw. If tax rates increase, the tax cost of deferring could be even worse. It really depends on if you’re going to be earning income when you withdraw and how much is going to be withdrawn. It’s complicated and practically impossible to estimate total final tax obligations at retirement. IRAs are not a cut and dry “just put money in an IRA” decision.

Another problem with IRAs is the lockup. If you withdraw before retirement there’s a hefty 10% penalty unless it’s for a mortgage or health insurance.

Aren't you ignoring the advantage of being able to invest the money you would have paid in taxes for the entire time you've left it all in the tax-deferred account?

I don't get why you're assuming you'll have to withdraw the money prematurely and incur the penalty. That's a rather pessimistic attitude, and it's not like you'd be putting all of your investment funds down this path.

You have to withdraw at some point (after age 59-1/2 unless the law changes), and you’ll pay income taxes on principle and gains then. Taxes on principle will be paid either way. If you give to your children, they will pay taxes on the principle + inheritance tax.

The idea with tax deferral was that when you retire, your fixed withdrawal income will have a lower income tax rate than when you contributed, but as capital gains and income tax are now, that isn’t necessarily true depending on your contribution and withdrawal income.

Roth IRA was then created as a response to the well founded concern that income taxes will rise negating any tax advantage to deferral, but Roth wasn’t able to pass the legislation without severe compromises like contribution limits, and gains taxes as income on withdrawal.

You pay tax on it eventually, like you said with the lower tax rate when your income will be presumably lower.

But in the mean time, which can be a very long time, you're free to invest those deferred tax dollars. That can add up to a significant amount, over a large number of years.

It's not something to trivially dismiss.

You can also do a Roth IRA which allows you to pay tax on it now.

Sure, and IIRC like a traditional IRA gains are taxed as income. So there’s not necessarily any tax benefit versus a traditional savings account invested in ETFs, depending on withdrawal and contribution incomes.

"I don’t use IRAs mainly because they aren’t liquid. I can’t withdraw without a penalty."

I'm not a registered tax advisor, so this is not tax advice, but my impression is that you can take money out of a Roth IRA whenever you want, as long as you don't take more than you put in; the profits/returns are tax advantaged, but the original money is after-tax.

The reason why people will argue this is a bad thing to do is because you can only put so much money in per year, like $6,000 currently, and if you take money out, that doesn't add to the contribution limit.

In my mind Roth IRAs will only be advantageous if income tax rates are higher in the future. But that’s true of money kept in savings as well, since it’s already taxed. And Roth IRA gains IIRC are taxed as income at withdrawal, which is higher than capital gains right now. I might be wrong about that though.

I don’t see how a Roth IRA is really any different than keeping money in a traditional savings account, besides the withdrawal rules.

Roth IRA gains are not taxed as income at withdrawal when you're retired - that's the whole point.

To first order, if tax rates don't change, and your investment return is the same, then I believe that you end up paying the same with a Roth IRA as a non-Roth IRA, which in turn is significantly less than a taxable account.

But Roths do have some other incidental advantages like I think you don't have a RMD. And if you have uneven income, you can do (partial) Roth conversions whenever your income is low. Which also gets around the contribution limit.

I like the approach of focussing on increasing the income. I do budgets myself and set goals. If they do not match up with what i make, i go back to trying increasing the income.

JFYI:

https://news.ycombinator.com/item?id=14594858

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