A Better Way to Manage Your Everyday Money - Book - Page 112
Using gross and net income
You can set aside part of your gross (before withholdings and deductions) or net (after
withholdings and deductions) income for long-term savings. Here are examples of both
approaches.
Employee Savings Plans (ESP) – An employee savings plan is a pooled investment account
provided by an employer that allows employees to set aside a portion of their pre-tax wages for
retirement savings or other long-term goals, such as paying for college tuition or purchasing a
home. Many employers match their employees’ contributions up to a certain dollar amount, or by
a certain percentage. The most popular ESP in the U.S. is the 401(k) retirement plan.
Participating in an employer’s savings plan is attractive because:
● you don’t see your pre-tax contribution in your paycheck,
● the employer’s matching funds are extra income, and
● there are tax advantages.
Individual Retirement Account (IRA) – Popular tax-deferred savings accounts for net income
are traditional, Roth, SEP, and SIMPLE IRAs. An IRA allows you to save money for retirement
with tax-free growth or on a tax-deferred basis. An IRA can be set up at a bank, credit union, or
financial institution. Withdrawing money before age 59-and-a-half normally results in a 10
percent penalty. There are income limitations for contributing to Roth IRAs and for deducting
contributions to traditional IRAs.
For current information on IRAs as well as other tax-deferred saving options, visit your bank or
credit union or talk with a financial advisor.
Investing – Investing is the act of allocating resources, usually
money, with the expectation of generating an income or profit.
You can invest in endeavors, such as using money to start a
business, or in assets, such as purchasing stock or real estate in
hopes of reselling it later at a higher price.
Growing your net income by investing in stocks, bonds, and
property comes with risk. The money you invest may grow, but
your investments can also decrease in value. The best edge for
minimizing your risk and successfully building wealth is to
learn all you can about your chosen investment path and to seek advice from an accredited
financial advisor.
Starting to invest does not require a great deal of money as is commonly believed. As with any
savings program, you can start small and build on your portfolio (all of your investments). The
sooner you get started, the longer your investments will have to grow.
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