Plus, how Henah now feels 8 months in.
Sometimes we all need a little nudge to make the best financial decisions for ourselves. In this week's episode, Henah recounts how Katie helped her max out her 401(k) contributions, overcome her psychological hangups about "making less per paycheck," and how she's feeling about it now.
Welcome back to #RichGirlRoundup, Money with Katie's weekly segment where Katie and MWK's Executive Producer, Henah, answer your burning money questions. Each month, we'll put out a call for questions on the MWK Instagram (@moneywithkatie). New episodes every week.
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Katie:Welcome back, Rich Girls and Boys, to the Rich Girl Roundup weekly discussion ofThe Money with Katie Show. I'm your host, Katie Gatti Tassin, and every Monday morning we're gonna dig into an interesting money discussion, as determined by us whether or not it's interesting. So here is a quick message from our sponsors before we dive into this week's.
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Katie:Before we get into it, this week's episode is our big Traditional versus Roth deep dive. So it's gonna get super nerdy. We're gonna explore why I think a traditional 401(k) almost always makes more sense, and how to structure your 401(k) and IRA strategy such that you have hundreds of thousands of dollars more in the future. So get excited and tune in on Wednesday. All right, onto the Roundup. Henah, how you doing today?
Henah:I'm good. I'm especially excited for that episode because I get to play devil's advocate the whole time, so you'll definitely have to hear how we bounce off each other for that ep.
Katie:Yeah, you're gonna get to hear Henah's voice twice this week. Aren't y'all lucky?
Henah:Yes. How are you doing, Katie?
Katie:I'm good. And I am excited to talk about today's topic, because it's a little bit different. Henah, why don't you introduce the concept, cause this was your idea to do this.
Henah:Sure. Last week I was talking with a friend who makes well into six figures, and they were asking me, you know, “I don't necessarily feel comfortable enough to actually max out my 401(k). Is that a thing I can really afford?” And I was like, “Yes, yes you can, and here's how I know.” And so I personally went through this process with Katie and I thought that it would be a helpful conversation for us to bring to the Rich Girl Roundup, because I think that there's a lot of psychological hangups, if you will, that stop people from maxing out the 401(k) or making the best money decisions that I personally myself have been through, that I'm seeing other people go through. So yeah, that kind of sets the table. Katie, is there anything you wanted to add before we dive into our little retelling of how this all went down?
Katie:Love the table setting. Yeah, we'll get into the math on Wednesday, so all of the tax math and the, hey, this is why it's worth your time; don't sleep on this. That's gonna be Wednesday's episode and it'll be on social all this week. So if you are…the off chance that you listen to this podcast, you don't follow on Instagram, go ahead, follow Money with Katie on Instagram 'cause we're gonna have a lot of additional content that's gonna help really drive this home. But a few months ago we sit down, we look at Henah's finances together, and it was a bit of a gut check just to be like, “Hey, I obviously know how much you make. I know what you have. Let's talk through how we can maybe put some tweaks in place that are going to just supercharge the situation a little bit.” And as I was looking at her numbers, I was thinking, “Henah, you can afford to maximize that 401(k). I can see what you're spending, I can see what you're taking home. You got this; why are you not doing this?” And so, I want you, Henah, to share the background on why you felt like you needed a lot of convincing, because to your point, it is quite psychological.
Henah:Yeah, so I've talked about this in the show before, but I worked in nonprofits before I switched over to the dark side, and I really didn't make that much money. I think the most I ever made outside of my current role was like $60,000. And that is incredibly difficult to live on in high cost of living areas. So for me it was never a question of “Can I do it?” It was like, even doing $200 a paycheck felt like too much. So then when I started here and I started getting more money per paycheck, I was still kind of living with that scarcity mindset of, I'd rather hoard my money and know that I have enough, than try to put some in an account that I cannot touch. Who knows when this is all gonna turn to shit? I might lose my job or I might have to go with another pay cut the way we did when Covid hit. You know, 'cause we are in sort of a weird economic environment. There was just a lot going on psychologically where I was like, I don't feel comfortable putting money aside that I cannot really access, and I don't know what my pay is gonna be after I put that amount in.
And so I think for 2023 the max was $22,500. So if you get paid twice a month, which is how we operate, that nets out, I think, to maybe $800 bucks a paycheck to max it out by the end of the year. And to me that felt like such a staggering amount of money, even knowing that there might be a match, even knowing that it's pre-tax money so it's not gonna feel as impactful. It just felt like so much that I couldn't wrap my head around it. So I could really empathize with my friend who makes probably one and a half times what I do and still was having that sort of hesitation.
But Katie, you forced me to do it. You were like, “Hey, let's try this out and see how it goes, and if you don't feel comfortable with it long-term, you could take it off or you could stop or reduce the amount.” So what was going through your mind, I guess, when I'm giving you all of the reasons I shouldn't do it?
Katie:I was listening to you tell me all the reasons you shouldn't do it, as I was looking at the numbers in black and white in front of me that showed me you very easily could do it. So my rationale was, okay, I need to do a couple things here. A, I need to show her the difference between what she's actually taking home right now in the state of California—heyo, really high state taxes, even more beneficial to benefit from an up-front tax break. You're gonna get even more money back than just at the federal level. I need to talk her through how much she's spending on a monthly basis, and show her this giant number and say, look at how much you're saving. Look at how much you're just putting into savings every month. You can more than afford this. Look at how much buffer we have.
And you were receptive. You were like, oh, I guess that's true. We talked about it, we were probably on the phone for about an hour and we were on FaceTime with the screen share so I could see your face, and we had your 401(k) portal open and I think what we did was we plugged in the joint income in your household in the smart asset income tax calculator, and we plugged in the amount of the deduction for the 401(k), and I said this is how much you're gonna save in taxes. This is how much it's gonna lower your paycheck. Let's estimate what your new take-home pay is gonna be. And you were still kind of hesitant or a little bit like, ah, I don't know, because to your point, it is a lot of money. It's not just that it feels like a lot of money. $900…I looked it up, it's $937 per paycheck. That is a lot of money; that is substantial. But we were sitting there on the final screen where we had plugged in the percentage and the contribution amount, the holdings, and your hand was just hovering on the button.
Henah:I couldn't do it.
Katie:And I was like, “Do it. Do it, Henah. Press the button. Press the button.” I was like, even if it sucks and you do this for two months and you realize, “Okay, we were way off, the math was super wrong, I can't do this, I need to taper back,” big deal. It's not a permanent decision. And that was eventually how we came to the conclusion that you were gonna try it. So you tried it. How do you feel now?
Henah:It was positive bullying, if that is a thing. I feel really good. I think that I was really pleasantly surprised at the way in which I thought it would take a much bigger chunk out of my paycheck, but it actually didn't; yes, it was several hundred dollars lower, but it wasn't $930, whatever that amount was, which is huge. I think that having the visual of you saying, hey, you weren't able to save a lot in your twenties, but if you do this for 20 years, you can retire early and you're not gonna miss, you know, a couple hundred bucks extra paycheck because of my save rate, which I think is like 35 percent. And that was the catalyst that allowed me to finally click it. And now I think we're what, eight months in? The money comes out; I don't necessarily notice it. I then go open my retirement portal every day, just like, you know, this is still your money. Even if you can't touch it, it's still your money and it's growing, and it's because I leveraged the employer match and it's not a ton, but it adds up. It's really cool to see that I've, you know, if you calculate whatever $900 times eight months would be, I think it's like $17,000, $16,000 bucks. And it feels really cool to know that I've saved that much money without really doing anything differently, without really feeling like I've diminished my lifestyle in any way to get there.
So I think the obvious caveat is you have to make sure that the amount you're making and the amount you spend lends you to have that kind of contribution. I think if you are listening and you're someone like my friend who's making that much, well into six figures or even at the six figure mark, and you're not convinced that it's something you should do, I say just try it, the way that Katie got me to try it. I think the nudge was the one thing that I needed. I don't know that I would have ever gotten to the math and done it myself had you not sat down and looked at the computer with me. So I would say too, if you know someone in your own life that will empower you to do it, that was a huge…
Henah:Yes, it was a huge help.
Katie:You don't even have to tell them what you need to be bullied for. You just say, Hey, I'm gonna get on the phone with you. I just need you to keep repeating “Press the button, press the button.”
Henah:I feel like I’m onLost. Did you ever watchLostwhen it was on?
Henah:Oh, there was a button that you had to press like every 108 minutes. That's what it feels like.
Katie:The other piece that we looked at on your plan, too, was it wasn't all just positive bullying: Hey Henah, save more. It was, hey, you're actually saving at a really aggressive rate and if you do this, let's look at what it's gonna turn into. Okay, great. Now the money that you're taking home, you don't have to feel this implicit pressure and guilt that you need to be saving measurably more of that money. It's like, you know that your goal is going to be reached just in this one simple move. So what you're actually taking home now, hey, by the way, you can spend a little bit more than you're spending right now. You can afford to do some of these things that you're not allowing yourself to do, which obviously is a whole 'nother conversation, but kind of highlights how powerful it is to automate that piece of it and get the tax break and let it get set on Easy Street and just cruise.
Henah:That's an amazing point, too, because I said to Katie, you know, I'm taking this much home per month and I'm always trying to save this much. And then she was like, well, if you just do your two contributions, you're basically at the save rate you wanna be, so you could spend the rest. And I still have a hard time with that. Like when I don't see the balance in my checking account go up, that stresses me out. But I also have to remember, well, there's still $1700 whatever bucks per month going into this other account. So I would say that it's a really great supplemental benefit of doing it. But at the end of the day, knowing that if I just stay on this course and I live a similar-ish lifestyle, even a little bit nicer of a lifestyle, but I'm still saving, that I can retire in, I think, what is it, 19 years or something?
Katie:It was not that long. I mean it was pretty good.
Henah:Yeah, it was not long. And I'm already eight months into the first year, so 18 years and some, so I'm quitting today, Katie. Yeah, sorry, I'm retired.
Katie:You're practically there. Sign up for AARP.
Henah:They already sent me my membership. It's at the front door. But yeah, I will say publicly, thank you, Katie for empowering me to do it. But I think having anybody in your life that will just help you nudge yourself over is really impactful.
Katie:To close out this story, do you remember, Henah, the timing of when we did this? Because you were like, “What if the market tanks after this? What if…”
Henah:Oh yes, this is the craziest…
Katie:We basically did it at the bottom. We timed it so perfectly that your return three months in was like plus 20% or something. I was like, “I'm in the wrong, I need to start like gotta open an IRA or something because this is amazing.”
Henah:Our new business is pushing people to do it. That's what you’ll get on the phone with us. We'll be like, “Do it.” Yeah, it was amazing 'cause I think I screenshotted it to Katie. I think even up until like two months ago, it was saying like 15% returns, and I was like “Wow, we timed it just perfectly,” which I had no idea. I don't know. But yeah, that was really…
Katie:But I was praying that it wasn't gonna go down further. I was like, it's gonna suck if I tell her to do this and then she loses 20% immediately. We're gonna cover that scenario in Rich Girl Roundup. So heyo, keep an eye out. But yeah, I was really happy that you ended up getting really good returns 'cause I was like, ah, this just makes my case even stronger.
Henah:It did. It would've done more psychological damage had it just immediately diminished. But thankfully it worked out, and you know, as you always say, it's the long game. So that's what I keep trying to tell myself.
Katie:Yep. All right. That's all for this week's Rich Girl Roundup. We will see you on Wednesday to tackle the ultimate Traditional versus Roth 401(k) strategy. We will dig into this a little bit deeper, and if what Henah is saying is resonating with you, why don't you go bump up that 401(k) contribution, and we'll see you in a couple days.
Henah:You won't regret it.