Grown Up Money

You have figured out adulthood. You vote, have a job, a mortgage, a family. When it comes to finance though, you may feel like you are a kid again. What does grown-up money look like?

Bank Accounts: You have a job!

This is the bare bones of grown-up money. You get a paycheck. Some goes to taxes, the rest you put in your bank. This money is kept in cash, some banks pay you interest, some don’t. You have a checking and a savings account, one for bills and everyday spending and the other for rainy days.

Retirement Accounts: Love your old self!

You have a bit extra after you pay all of your bills, have fleshed out an emergency fund and controlled your debt. The retirement account is the next bucket to start filling.

The government wants you to save for your old age, so they incentivize you through tax breaks. One type of break is in the beginning, where they allow you not to pay taxes today. Instead, you pay taxes when you begin taking the money out, during retirement. These accounts are individual retirement accounts (IRAs) or company-sponsored retirement plans (401k, 403b, etc.) You contribute pre-tax money, (either your work does not withholding on your deferral, or you receive a tax deduction if you use an IRA).  In these accounts you hold investments, (stocks, bonds or mutual funds). The after-tax break is when you use a Roth IRA. You invest just like a regular IRA or 401k, but with these you don’t have to pay tax on the earnings when you retire. You can buy and sell what you want in retirement accounts without worrying about taxes but you cannot take the money out of the accounts until you turn 59 ½, or you will have to worry about taxes and penalties.

Investment Accounts; You have checking, savings, and retirement accounts and still have a bit extra. Horray!

These accounts are like bank accounts, but instead of cash you open one of these to buy stocks, bonds and mutual funds. They can be opened at individual mutual fund companies (such as Vanguard) or at a brokerage firm (such as Charles Schwab). You do not have to have an investment advisor.

When you open an account you deposit money and you buy securities (stocks, or bonds, or mutual funds). You pay transaction fees (trading fees). Your stocks, bonds or mutual funds grow (or shrink). When you sell one of your securities, you “realize” either a gain or loss. If you made money “realized a gain” you will have to pay tax on the profit. If you lost money, you can use that loss to reduce your overall taxes for the year. You have to pay taxes on any gain regardless of whether or not you withdraw the money from the account. For example, if you buy a stock for $100, sell it for $150; you will have to pay tax on $50. Not a bad tax problem to have, unless you didn’t know about it and already spent the whole $150 in celebration. The tax ramifications on these accounts are important because unlike retirement accounts, the tax consequences are as you go, not when you retire.

Knowing which investments to buy in your accounts is also part of being a grown up, but knowing how they work is your first step.