Start now on saving for the future! If you have a 401k plan at work - sign up now! Even if you can't put in very much - just do it. Get started TODAY.
I was talking to a 27 y.o. man last week about this very topic. When I said "If you sign up to put in $100 per month, your paycheck will only go down by about $80 because your tax withholding goes down too." He said "Really?" NO ONE HAD EVER EXPLAINED IT TO HIM. So here it is:
If you put money into a deductible retirement account at work - 401k, 403b, 457, etc. the contribution comes "off the top" BEFORE federal income tax withholding. The contribution (technically called a "deferral") reduces your taxable income. Lower taxable income equals lower tax withholding. Your HR person should be able to show you how your paycheck would change with a given contribution amount. Pretty easy to ballpark it for yourself though:
- Pick up your last paycheck stub.
- Find the amount for Federal Income Tax withholding.
- Find the amount of your Taxable Income.
- Divide the withholding amount by the taxable income amount (as my mom used to say: divide the "little number" by the "big number" to get the ratio). The result will be close to 10%, 15%, 25%, 28%, 33% or 35% - these are the withholding rates.
- Take the result and multiply the amount you will put into the retirement plan by that percentage.
- Subtract that number from the contribution.
- The result is the amount by which your net paycheck will decline.
The point here is that it doesn't cost $100 to save $100.