I would personally advise against taking advice from Reddit beyond simply basic answers about various financial products and maths.
My problem with larger communities on Reddit is that prevailing opinions seem to emerge, and anything that questions or disagrees with them gets downvoted to hell. On the personal finance subreddits these include ideas like "You should always have 18 months of expenses saved" and "Any more than $10,000 for your wedding is a reckless and gross waste of money" and "Look how smart I am for having a mega-backdoor roth ira instead of a regular 401k like all the idiot sheeple."
I still think having a relationship with a financial advisor you trust is better than taking advice from strangers on the internet.
Financial literacy is pure garlic to every common vampire financial advisor.
I have a couple friends right now that do not want wage raises because "it will knock them into the next tax bracket". Believe me, I've tried to explain how the simple concept of income and taxes work.
I trusted my financial advisor years ago when I started my career. It took me a couple years to realize I was the product, not his client with his best interest in mind. Strangers, especially from more disciplined subs and without skin in the (your own) game, have been more valuable many, many times over.
Everyone who takes what is said literally and in verbatim would be a fool. Validate what is said as it applies within your own context.
Dunno about the US, but in the UK there are a few wage points where a small rise can lead to a reduction in net income. Specifically moving into the higher tax bracket, which removes £200 off their personal allowance if they were using the pooling allowance option -- i.e. a £100 tax rise could lead to £46 extra income but £201 extra outgoing, a net reduction of £155
There are more perverse options with housing, childcare and income benefits being removed which I believe can lead to a negative income.
In the US the Benefit Cliff is real:
"There is this issue of the benefits cliffs, where some programs are designed so just a very marginal increase in earnings can result in a loss of a very important benefit. And a lot of states, unfortunately, have structured their childcare subsidies programs that way," explains Skinner.
"Typically, pay rises, income rises, but at some point you lose eligibility for a subsidies all together and it's an abrupt reduction in that family's resources," Skinner says.
Does the US not have marginal tax brackets? That seems really odd and dumb. The benefit cliff you cite is real, but for actual income taxes, there's no such thing as a reduction in income from higher earnings. Going to a higher tax bracket just means you pay higher taxes on money over a certain threshold. So if bracket A is 20% under $50k, and bracket B is 30% over $50k, if you make $51k, you'll pay 20% of 50k, plus 30% of 1k. It's never disadvantageous to make more money (except if you're on government benefits as mentioned, where there are some weird effects).
Strangely, a lot of people don't understand this at all.
There are special benefits provided for those under low incomes in many jurisdictions. If you go from $24,999 to $25,000 you may see some supplemental food income benefits go from $400 a month to $200 a month (not an actual example- but you get the idea). Generally though, these cases are not common and are really overstated as a problem IMHO. They also tend to overlook that its far more beneficial to take the raise and whatever temporary setback that might come with it to move yourself up the wage scales.
Why it comes up in these discussions as something meaningful always confuses me. To me its akin to explaining to someone that squirrels are not harmful to humans and we should not walk around terrified of them and having someone come by and say "but actually, they could have rabies...." I mean, you aren't wrong, but you are essentially spreading misinformation by implying that this is common instead of exceedingly rare and something people should be wary of as they walk down the street every day. Its the exact type of misinformation that politicians use to make disingenuous arguments to steer people into supporting their policies, and the HN crowd should be above that IMHO.
US does have marginal tax brackets. There is the benefit cliff. But there are also tax credits that phase out progressively with higher incomes. Though I doubt, but don't know, than any of those produce net negatives. They may be closer to net neutral.
The OP was describing the same thing as you. People don't understand marginal tax brackets and do silly things like not want raises for tax reasons.
Marginal tax brackets yes, but there are also benefits that you lose access to based on income. The linked article is about food stamps, but imagine something like subsidized health insurance for people making under $50,000. Going from $49,999 to $50,0000 is much more costly than the taxes you paid on that dollar.
The Netherlands has this issue as well, points of income where your marginal gain is negative, ergo losing net money when making more gross money due to losing benefits. There are also indirect problems such as losing access to certain services (cheaper housing being one).
Obviously, this shouldn't be the case. Making more money gross should result in equal-or-more money net, without disadvantages, otherwise the incentive is gone.
It's in Dutch, but the most important columns are the first (gross income), the second to last (net income, including benefits) and the last (effective tax rate on the 1000 gross income increase).
Note the last column tells us that making 1000 gross extra will increase your net income about 100 between 32K and 31K gross income. Going from 31K to 32K will even make you lose money.
> It's never disadvantageous to make more money (except if you're on government benefits as mentioned, where there are some weird effects)
It's never disadvantageous except when it is? That sound like the classic anchorman citation: 60% of the time, it works every time
Sure your tax bracket won't directly means less returns, but switching from a tax bracket to another may means having access to less benefits, which may means a higher effective tax rates.
I just saw that I was downvoted... I have no idea what's wrong with my comment. That downvote button should definitely force to comment and explain why you downvote.
Thanks for the input, you do bring an excellent point. I wouldn't agree that they are equivalent though, one is formed specifically to give the impression that it's never disadvantageous, while the other isn't. Parentheses aren't used to bring essential information, which in this case, it is essential.
This is why I would have less problem with the second one. I would still precise that some of theses benefits aren't really a choice, they are tax break that just happens to be offered because of your income, so sure if you already went beyond that income, you aren't on that government benefit... but at one point you weren't beyond that income and you did made less money once you went beyond.
The benefit cliff affects one demographic, and while affecting net revenues, isn't a tax issue. Software engineers fretting about moving into a higher tax bracket is another demographic, and is a tax issue.
These are different phenomena, generally affecting different people. While (a hypothetical I) could certainly lose out his social security medicaid by going from $0 income to non-0$ income, I'm not the person worried about going from the <80k$ bracket to the >80k$ bracket.
IME, the people who worry about making more money and moving into a new tax bracket are not people who are eligible for any meaningful subsidies to begin with.
Most important part of that picture: "The single mom is better off earning gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income & benefits of $57,045."
I've always been a bit sceptical of things like a citizen's income, but a negative income tax instead of things like universal credit seems to be quite an elegant solution to dealing with benefit cliffs.
I considered going into financial advisement once, in the distant past. A family friend was in the field, and took me in for a round of advice. He was quite open that it was eat-what-you-kill, with a serious focus on people with impaired judgement (e.g., elderly), because that was the only way to make up the bulk of your revenue. He said that he hadn't had a peaceful night's sleep since he'd started, due to the guilt of day-to-day work.
In the UK (and, AFAIK, across the EU) we have IFAs (Idependent Financial Advisors) who follow rules, such that they are nit permitted to get kickbacks from investments. Does such a thing not exist in the US?
In Canada we have fiduciaries, but most people aren't that financially literate. If you walk into a bank and ask for a financial advisor they're just going to pass you to a sales rep. Enjoy your TD e-Series!
(Although, admittedly, mutual fund MERs have dropped substantially with the rise of low-cost ETFs...)
I'm right at the cusp of Roth IRA contributions being taken away. If I were angling for a raise, I would make sure I made just under the limit for this year (old salary and new salary combined in proportion to time worked under each) and try to negotiate for more time off. That's about the only time I would forgot a wage raise and it would probably only be worth it for a band of 3000 around that limit.
I think it's more that getting knocked into the next tax bracket is better than making less money. Because you inherently still make more money due to how tax brackets works. I'm guessing this is an allusion to how many people don't understand how tax brackets work and think that you can make more money, get taxed more, and then end up with less than if you never made more money.
Tax brackets do, but what I was insinuating is that those select friends (bless their heart) believe that all of your income is taxed in the highest singular bracket that you reach.
So many people don't understand how tax brackets actually work. They think if they make one more dollar they pay X% more tax on every single dollar they earned.
It's actually terrifying to me how little understanding the average person has of finance.
It isn't that black and white. For example, in Canada, I can contribute a certain amount into a tax-free savings account each year.
TFSAs can be created to hold ETFs, Mutual Funds and other types of investments. I can contribute $6k for 2020, and the total I can hold in TFSA is $69,500. I can contribute more annually as long as my total is under $69.5k.
With a raise, I can accelerate my contributions and continue to enjoy tax-free gains on it. My personal average income tax rate might go up, but that's offset to an extent by whatever returns I'm making through my portfolio.
> I can contribute $6k for 2020, and the total I can hold in TFSA is $69,500
As of 2020, the total you can contribute into a TFSA over your lifetime is $69500. But it's not a limit of what can exist in your account. Gains you make in the account do not count toward your limit.
No, that's not how it works. It is a marginal tax bracket. If you get in the higher bracket, it's only the new money that gets taxed at the higher rate, not your full salary.
It has absolutely nothing to do with your contribution to retirement accounts. You can invest more and contribute more to your tax free retirement accounts with a higher salary (up to a point) but even if you didn't, that wouldn't make a difference.
I'm aware of how marginal tax rates are applied. That's why I said "while my average tax rate may increase" (in a hypothetical situation), I can still net more overall due to increase in the absolute $ return on the TFSA portfolio.
I'm responding with respect to the OP's comment about beign bumped into a higher marginal tax bracket. Just because you are, doesn't mean you'll automatically end up with less discretionary income.
I feel like I'm misreading this, but regardless of whatever investments you have, you'd come out with more as your income increases into higher marginal tax brackets correct? As in, if I was making 94k and got a raise to 98k, I'd come out with more regardless of what's in my TFSA.
It absolutely is. See also: the "death tax" in the US. I 100% guarantee you that the number of people who think they're subject to it exceed the number who are by at the very least 10x.
While I think some of your points have merit, you are misrepresenting the subreddit quite a bit here. On the topic of emergency savings funds, the community tends to recommend sizing these to cover roughly 3-6 months of expenses[1]. Larger emergency funds are useful for edge cases. The community tends to recognize that anything more would simply be better served towards high-interest debt or retirement savings.
Not everyone on the subreddit is quite so passionate about avoiding expensive weddings or financial advisors at all costs. In fact, fee-only fiduciary advisors are perceived quite positively[2].
I think if you're going to go against the conventional wisdom, then you have have some good justification for doing so. People who think they've found a 'clever' new way of doing something often (a) have not considered all the ramifications, and/or (b) got lucky with respect to the particular circumstances of their success (e.g., investing in TSLA instead of SPY).
> I still think having a relationship with a financial advisor you trust is better than taking advice from strangers on the internet.
Depending on the "advisor", the strangers may actually give you more objective advise.
>I still think having a relationship with a financial advisor you trust is better than taking advice from strangers on the internet.
What financial advisor is going to be able to make a living telling people to buy and hold a target date retirement fund from Vanguard/Fidelity/Schwab?
It's all pretty common sense advice, that hopefully one can verify is correct with some basic arithmetic. And advice for 90% of people should be spend time and energy to figure out how to increase income.
> What financial advisor is going to be able to make a living telling people to buy and hold a target date retirement fund from Vanguard/Fidelity/Schwab?
The kind you pay for by the hour and for whom it would be a criminal violation of fiduciary duty sell you an expensive whole life insurance that they get a commission for.
It would be the opposite of financial advice to pay someone to walk you through that flow chart and click a few buttons to invest it in the lowest cost index funds. I also don't recommend people hire a plumber to fix their toilet. Just youtube it. Do a few simple searches online, and you will find that you don't need to pay an "advisor", as much of their role has been obviated.
First, that most people don't need a financial advisor doesn't mean nobody does.
Second, your "few simple searches online" or "youtube it" could just as well land a financially naive person in the clutches of the worst kind of exploitative financial predator, or some disaster prophet telling them to put everything in physical gold, or some hype train telling them bitcoin will make them rich.
It takes a certain amount of knowledge to recognize good advice, especially when it's boring.
For the vast majority of people, paying someone $100/hour to tell them to buy and hold a target date retirement fund from Vanguard/Fidelity/Schwab is a much better option than the likely alternatives (going to a commission-based "free" advisor, or taking advice from random people in the internet).
I think one of the problems is that many reddit users deploy downvotes against people who have a different subjective opinion than them. That is the lever that drowns out dissent from the majority. I have been thinking about that for a while now, what is the proper time to use a downvote? My MO is that it is only to be deployed against those who are arguing in bad faith or being disrespectful. Differing opinions should be allowed to exist.
For me I'll only downvote if they're derailing the conversation or being a jerk. I won't even downvote if I think they're objectively wrong or just don't agree with them. I'll upvote good arguments.
I do this because of how downvoted comments get hidden and they only show the added total of votes. If one person has this view then others must have the same view. And let's be totally honest here, people aren't going to go through an entire thread to unhide every single comment in every thread they visit. Hiding wrong comments are a missed opportunity to set other people straight. I've learned so much more from the old forums from the early to mid 00's where wrong comments were quoted and set straight further down the page than on Reddit where all those comments were hidden. And because of that back then it was far less of an insult to be called out when you were wrong, because it was natural and normal.
Now when people downvote subjective things, that's where it really destroys the community. Say the up/down vote split on a comment was 900/1000. This is obviously a hotly contested issue with a small percentage of people thinking negatively of it. But if you were to only see the total (how the site does it now) you'd see -100 and the comment is hidden. Looking at this now if you didn't have an opinion before you might think this person is "obviously" an idiot and people start calling them a troll. This isn't just a ding to that commenter either but the other 900 people that up voted their comment. Do this enough and that other 900 people will start looking elsewhere. Now if the sub is some fanclub for something that's another story. But there's subs that are suppose to be more broad that have succumbed to being dominated by a side and drove away any opposing views.
I'll gladly upvote someone I disagree with as long as I believe they're arguing in good faith.
But when you have bad faith commenters (Like echoing Charlie Kirk's claim that Bernie wants to tax everyone making over $29K 52% [0]), or people being just downright rude, I'll downvote, even if they're posting opinions I agree with. Discourse only moves forward if people are civil and truthful. In more extreme cases of rudeness, I'll report/flag.
> - Vote. If you think something contributes to conversation, upvote it. If you think it does not contribute to the subreddit it is posted in or is off-topic in a particular community, downvote it.
> - Consider posting constructive criticism / an explanation when you downvote something, and do so carefully and tactfully.
> - Actually read an article before you vote on it (as opposed to just basing your vote on the title).
> - Moderate based on quality, not opinion. Well written and interesting content can be worthwhile, even if you disagree with it.
DON'T:
> - Downvote an otherwise acceptable post because you don't personally like it. Think before you downvote and take a moment to ensure you're downvoting someone because they are not contributing to the community dialogue or discussion. If you simply take a moment to stop, think and examine your reasons for downvoting, rather than doing so out of an emotional reaction, you will ensure that your downvotes are given for good reasons.
> - Mass downvote someone else's posts. If it really is the content you have a problem with (as opposed to the person), by all means vote it down when you come upon it. But don't go out of your way to seek out an enemy's posts.
> - Moderate a story based on your opinion of its source. Quality of content is more important than who created it.
> - Upvote or downvote based just on the person that posted it. Don't upvote or downvote comments and posts just because the poster's username is familiar to you. Make your vote based on the content.
> - Report posts just because you do not like them. You should only be using the report button if the post breaks the subreddit rules.
The official reddit rules for using the downvote are similar to your MO. The problem is you can't expect people to read and abide by rules on when to use such a simple feature, and they're impossible to enforce anyway.
I can’t tell which of the ideas you think are crazy.
- 18 months in low risk savings (not invested) - seems like overkill.
- I personally think any money spent on a wedding is overkill - we went to the courthouse and saved a ton of money by having a smallish reception (in fairness we were in our mid 30s and on our second marriage)
- 401K - I have no opinion either way. I haven’t thought about the pros and cons.
I don’t trust financial advisors. Unless you have a reasonably complicated situation the standard advice you can find from reputable sites like Vanguard would take you a long way.
The 1st and 3rd seem like clearly bad advice, there's no reason a mega backdoor roth should replace a 401k unless your company's matching policy / investment options for 401k are atrociously terrible.
The 2nd: I think splurging on a wedding is a frequently valid personal choice and I wouldn't belittle someone for doing it unless they did something insanely irresponsible.
I just have to think this through because now I’ve heard both positions!
...if you put $1,000 in the 401k and it’s matched up to to $2,000 and then it grows to $20,000 and you’re in a 25% tax bracket then you’ll pay $5,000 in taxes on the $20k, leaving you with $15k.
...in the Roth IRA you put $1,000 and it grows to $10,000. You only pay $250 in tax though, so you’re left with $9,750. But that’s far less than $15k.
So, seems like if there’s a match you should take it!
After the match is used up, the next $1,000 in the IRA grows to $10,000 and you pay $2,500 in taxes on that... 10x more than the Roth.
So it sounds like the rule is use the Roth after the match is used up. (Although that will depend on your tax bracket both at the time of investment and up it expected bracket for retirement)
Is it possible you’re confusing the traditional-401k vs. Roth 401k question, with a Mega-backdoor Roth?
Mega-backdoor Roth does not need to be an alternative to a traditional 401k.
AFTER you’ve maxed out your tax advantaged opportunities (mostly, employer 401k), if your employer offers the necessary pre-requisites (of which there are many), a mega-backdoor-Roth is a way to put another $30-40k into a tax advantaged account every year.
It’s an absurdly regressive tax expenditure for the 1%, but if that’s where you’re at, I can’t blame anyone for availing themselves of it.
Not much. Much less than $10K. A family member gave us the pictures for free (professional photographer) and a friend of hers did the catering as a gift.
But, my now wife and I met at work. The company shut down and we had to scramble to find jobs. She found a job with benefits that paid less and I got a contract that paid more from a firmer customer of the company we worked for.
She suggested we get married four days after I proposed so we could save money on my health insurance I was paying out of pocket.
And I had the great idea of giving her money instead of selling my real estate property. Because my real estate property was definitely going to appreciate.
This was around 2007, what could possibly have gone wrong...
> You should always have 18 months of expenses saved
I've never seen this sentiment on r/personalfinance. It's typically no more than 6 months, usually a 3-6 month range. Your money is (on average) better invested and the only reason to go beyond 6 months is if you really, really need that for some extra peace of mind and numbers/data don't mean anything to you.
> Look how smart I am for having a mega-backdoor roth ira instead of a regular 401k like all the idiot sheeple.
This is also uncommon.
> I still think having a relationship with a financial advisor you trust is better than taking advice from strangers on the internet.
Why not encourage people to do their own research? How much more can you really eek out from a financial advisor?
My father is a financial advisor and holds my account. I wouldn't give him up simply because I trust him more than any human on the planet. Even so, I constantly seek out other sources and bounce my ideas about stocks, the market, the economy, politics, science and technology, so that he is exposed to thinking outside his bubble of finance and so that I can have his expert perspective to give me context on how professionals navigate with their knowledge, intuition, and analyst reports.
I disagree with your last paragraph but wholeheartedly agree with he first 2. One of the things that bothers me about the advice given there is a seemingly irrational aversion to bankruptcy or walking away from a debt. Sometimes that’s the financially wise option.
I really think "You should always have 18 months of expenses saved" (assuming this is in savings) isn't universal. If you're fairly young, single and have a new source of disposable income then a few months savings seems prudent and paying down debt seems like the best course of action. I remember diligently building a large emergency fund knowing I could scale down drastically if I lost my job and seeing interest accrue in accounts I could have paid off. If you have kids, a mortgage, and a single household income you really have to be more risk averse.
I do think bankruptcy should be thought of more as a business decision than a personal decision.
I think most people who have read the PF subreddits came to the same conclusion that you can't live life eating lentils and driving a 93 camry forever.
That approach is usually advised when one begins to build a "nest egg", and is not that different from the one pursued in business books, like "Rich Dad, Poor Dad".
The point is to build predictable passive income stream on top of whatever else you're earning. Getting a general idea around predictable expenses will provide a "magic number" where your basics would be covered by passive income alone.
Some people might choose to forego active earning opportunities at that point, but it's hardly a requirement.
Mega backdoor roth (MBR) can be done in addition to traditional/roth 401k. When people discuss it on Reddit, usually MBR comes after maxing traditional 401k. The suggestion of being a replacement isn't a fair characterization of the going narrative.
Weddings are monumental, memorable, and fun events for family and friends. They add a richness to life. People in my family still talk about weddings from literally decades ago and it's a great way to bring people together and make memories. You don't need to spend $50k on a wedding. You also don't need to go uber-frugal. There's a happy medium out there for most people.
It really depends on your financial situation. What if you have no student loans and a six-figure income?
A $10k wedding (or a $50k one, for that matter) is only a waste of money if you don't value big fanc events where you're the center of attention, and it's only a financially unwise decision if you cannot afford it.
Many lucky individuals from wealthy families (in the USA at least) do not pay for their own weddings out of pocket, since it is tradition for the bride's family to pay for the wedding and the groom's parents to pay for the honeymoon.
>"Look how smart I am for having a mega-backdoor roth ira instead of a regular 401k like all the idiot sheeple."
Maybe you mean "traditional IRA" instead of 401k. The way I understand it, the backdoor Roth IRA depends on you using a company 401k so that you don't have any money in a traditional IRA, and can then contribute cash into an empty traditional IRA, and then "convert" it (move it) to a Roth IRA in the same financial institution. But it doesn't work if you have a traditional IRA with money in it, because then you have to enter the total value of that IRA on an IRS form and you end up paying double taxes on the conversion.
The wedding thing is totally understandable. If you care a lot about saving money, it seems rather reckless and wasteful to spend $50k on a one-day event when you have a ~50% chance of getting a divorce anyway. Sure, if you're a multi-millionaire, that kind of money is no big deal, but if you earn $80k, I'm sorry, but it's not financially smart to blow that much money on a wedding, even though so many Americans do for some reason.
You are referring to the backdoor Roth IRA, which has a contribution limit of ~$6k/year.
A Mega-backdoor Roth is an even more extreme tax loophole, specifically involving employer 401k plans, which has a similar taxation structure just managed by your employer, and offers $30-40k of additional tax advantaged opportunity.
> prevailing opinions seem to emerge, and anything that questions or disagrees with them gets downvoted to hell.
I've noticed this too. Also the general bias there is toward asking for help/answers. So if your post or reply indicates that you are encouraging subjective, open-minded experimentation, especially if there is any risk involved, you are flirting with a total freak-out.
It's annoying but there's also a lot of good to be found there.
> prevailing opinions seem to emerge, and anything that questions or disagrees with them gets downvoted to hell
Hmm... sounds like another community we all know. This is not a unique problem to Reddit or large communities. It's inevitable in any forum when you try to use crowdsourcing to moderate/curate content.
Yes, but there is also public knowledge of HN’s biases, people comment with them in mind and are often self-aware when they express dissenting opinions. Some of the best comments open by admitting they run counter to the prevailing wisdom.
You have to go in with the mentality that lots of communities have been infected by exaggerated groupthink. The core values and typically accepted wisdom is usually pretty decent, but people become zealots for it and the subreddits become more like weird experiments in enforcing ideological purity.
I agree. If quartz is telling you something it's likely the opposite or about to end anyways. If there was value to be found on Reddit its just as easy to drown out as anywhere else.
Agreed. Their prevailing opinion is good on average and is probably better than someone with absolutely no knowledge about personal finance winging it.
But, like the infamous Air Force "Average Pilot" program [1], there are many things that will end up being wrong for the individual.
My problem with larger communities on Reddit is that prevailing opinions seem to emerge, and anything that questions or disagrees with them gets downvoted to hell. On the personal finance subreddits these include ideas like "You should always have 18 months of expenses saved" and "Any more than $10,000 for your wedding is a reckless and gross waste of money" and "Look how smart I am for having a mega-backdoor roth ira instead of a regular 401k like all the idiot sheeple."
I still think having a relationship with a financial advisor you trust is better than taking advice from strangers on the internet.