Sunday, May 12, 2013

Why $50,000 Wouldn't Change My Life

So many people think that a sizable sum of money would change their lives.  Perhaps it would, or perhaps only for a time.  But after some contemplating, I came to the conclusion that if I suddenly came into possession of an extra $50,000, it wouldn't change my life all that much.

Why?  Because of what I would do with it.  Here's the summary.

Tithe:  I would give at least $5,000 to my church.  Balance: $45,000.

Retirement Savings:  There are two major reasons why it would be wise to maximize the amount of this part of the windfall.  First, to mitigate the tax consequences of my sudden jump in income.  Second, because it is the wise thing to do.  Ideally, I would like to retire before I die.

Since my wife and I are still well short of the age of 50, we can each put a maximum of $5,000 into an IRA, and we would do so.  Furthermore, I would immediately, and for the rest of the calendar year, sharply increase the amount I put into my 401(k) at work, compensating for a smaller paycheck by drawing from the windfall.  Depending on the time of year, I could possibly see $15,000 moved into tax-sheltered retirement savings.  Balance:  $30,000.

[Note: Some of you might be wondering whether my wife and I would use traditional or Roth IRAs; conceivably, we could each open a different kind.  I don't know.  I would consult people more knowledgable than myself.  The suddenly-higher marginal tax rate for the windfall year would make me lean toward a traditional IRA, but further research would be required.]

Taxes:  The amount of the $50,000 subject to income tax (both state and federal) would be diminished by the tithe, the amount going to the 401(k), and the amount going into traditional IRAs.  Even if it dropped all the way to $30,000, I would plan about $10,000 for taxes.  Balance:  $20,000.

Big-ticket Items:  Most likely, the balance would be going toward one or more big-ticket items.  A new car.  A remodeled kitchen or bathroom.  A hot tub on the patio (in my dreams).  A daughter's wedding.  Consequently, most of the remaining $20,000 would be put into savings until such time as it is needed.

Anything Else?  Sure.  We'd probably take a week's family vacation somewhere we would really like to go.  And a celebratory dinner at Olive Garden.  I might get a new suit.  But really...not much else.  To fritter the final $20,000 on a miscellaneous wishlist of not-really-needed items would be wasteful.

And I certainly wouldn't quit my day job.