The Wesabe blog

This post is part of Allese’s (Community Manager at Wesabe) blog series detailing her journey into the real world of finance. Check it out and send her your tips!

Nearly two months ago, the HR woman dropped by my desk and asked what percentage of my paycheck I’d like to contribute to my 401(k). I stared up at her with a blank face, mentally linking 401(k) with retirement and said,

Allese: “Yeah.. umm so what’s the deal with that? That’s saving for retirement right?”

HR: “Yes, we use Vanguard.”

Allese: “Right… and that’s like an investment company?”

HR: “Yes.”

Allese: “I see. So I have to, like pick places to invest in?”

HR: “Well you can if you want, or you can pick a fund and go from there.”

Allese: “A Fund. And that’s a…. ?”

HR: “Well, it’s a place you can invest you’re money for retirement in, you know like shares, stocks, bonds.”

Allese: “So I put part of my paycheck in this fund that I pick, which is part of a stock market and so then it, it, it well, well… what exactly happens then?”

HR: “Well it’s pre-taxed, so you know.”

Allese: (No, I don’t know. In fact, I have absolutely no clue what this woman is talking about. In an attempt to salvage my dignity, I reply): “Yeah… I am going to have to do some googling. But I will get back to you. Thanks!”

Now, I consider myself a fairly intelligent, capable individual. That said this conversation left me highly suspicious of these qualities. Looking to redeem my self worth, I turned to my ever-faithful friend, Google, for a simple breakdown of this 401(k) issue.

Google:

The 401(k) plan is a type of employer-sponsored defined contribution retirement plan under section 401(k) of the Internal Revenue Code (26 U.S.C. § 401(k)) in the United States, and some other countries. A 401(k) plan allows a worker to save for retirement while deferring income taxes on the saved money and earnings until withdrawal. The employee elects to have a portion of his or her wage paid directly, or “deferred,” into his or her 401(k) account. In participant-directed plans (the most common option), the employee can select from a number of investment options, usually an assortment of mutual funds that emphasize stocks, bonds, money market investments, or some mix of the above.

Riiiighht. And now I know a 401(k) has something to do with income taxes, mutual funds, company stocks, bonds, and… participant directed trustees? Since when does this qualify as a definition?

I am going to spare you the gory details of my journey into the depths of the retirement. It was long and frustrating. In the end, I did figure it out what a 401(k) as well as why it is so very important to start saving for those elderly years at a young age… yes, everything they say is true. Saving for retirement is very important, so important, that you should stop what you’re doing and start today. And trust me, I am the last person to jump on the saving bandwagon; when someone attempted to describe it’s merits to me, “if you contribute to a 401(k) you will be rich” my reply was, “Yeah, ok. Rich when I’m OLD”.

So, today I am going to breakdown exactly what a 401(k) is. Please let me know if I am missing anything, this is all information I have gathered from blogs, investment banking websites and calling a lot of investment banks and having very, very long chats with the people they pay to know this stuff and answer your questions. A special thanks to Ben at Fidelity, and Mike at Vangaurd. Yup, true story, companies like Fidelity, Schwab and Vangaurd all pay people to sit by phones and answer all your questions about money. They’re very nice and will talk to you as long as you like. I really think you should try this.) In my next post, I am going to talk about why, beyond the evidence presented below, saving for retirement at a young age is a really smart things to do.

A 401(k)’s 411:
A 401(k) is a way to save for retirement. It is not an account in itself but a plan that offers different ways to save the most money possible over a long period of time Because the stock market is the biggest long-term money making machine out there, most 401(k) plans offer you a range of ways to save in the stock market. These varying ways to save are thus called investments and come in forms like mutual funds, bonds, stocks and money market funds (more about these terms later).

401(k)’s are generally available through your work, this is why they’re called employee-sponsored retirement plans. All this means is that your company has a general 401(k) plan that they offer to all their employees. The federal government created these plans for businesses back in the eighties as an attempt to get the most people possible to prepare for retirement.

The money you put in your 401(k) is taken out of your paycheck before it’s slapped with taxes. This one of the reason’s that people get so friggin’ excited over the 401(k). Here’s why:

Let’s say you make $2,000 each paycheck. If you put 5% of your check, that’s $100 into your 401(k), then you only pay taxes on $1900. This means two things.

1. You pay less in taxes.

• If you’re making $2,000 and are taxed at 25%, then you pay $500 each paycheck in taxes. Yes. I had the same reaction.
• If you contribute $100 of your $2,000 to a 401(k), you are only taxed on $1900, meaning you only pay $475 in taxes.
• So, by contributing $100 each paycheck you not only save $25 in taxes, but come April 15, you pay taxes not on $48,000 (your salary if you make $2,000 twice per month) but $45,600 salary.
• This also means that extra $100 you stashed away each paycheck, is growing, free of taxes and this brings us to part two.

2. You don’t pay ANY taxes on the money you contribute to your 401(k).

• Let’s say you plan to save $100 but in a savings account or CD account. If you’re taxed at 25%, that $100 is really $75. Meaning you actually only have $75 to invest. However, if you put $100 in a 401(k), it’s not taxed, meaning you have a full $100 to invest.
• Over time, that extra $25 makes a really big difference. Check out this graph by Ramit of www.iwillteachyoutoberich.com, to see just how big. Ramit writes a very good guide to retirement, called “The World’s Easiest Guide to Understanding Retirement”, see it here.
  

The difference between the blue and orange bars, is the difference between a taxed savings account and a non-taxed savings account, (i.e. a 401(k)) add a significant interest rate to this… and wholey moley… imagine the possibilities.

The Other HUGE advantage to a 401(k): The Company Match

If you put money in your 401(k), there is a chance that you’re company might also put money in your 401(k). This is called a company match. This means that for every dollar you put into your 401(k), you’re company will contribute a dollar to your 401(k), up to certain point. This means if you’re saving $2,400 per year, and your actually saving $4,800 per year. To find out if you’re company has a matching program, talk to your HR or admin person.

So essentially, by contributing a small amount of money per month into a 401(k), you are:

1. Saving more money than you could anywhere else because the money you put towards a 401(k) just grows and grows without being taxed. It is however, taxed, upon withdrawal.

2. Paying less in taxes per year but still making the same amount of money. Remembering our example above, even though your still making $48,000/year, you’re only paying taxes on $45,000 of it, so you’re actually saving more money.

So this is the basic breakdown. Obviously, if you save in a 401(k), you can save a lot of money. Again, let me know if I am missing anything… this is my first pass. Tune in next time as I discuss why it’s worth it to save money that you essentially can’t touch for a very long time…

(Allese is the community manager at Wesabe and is going to be posting on Wheaties a couple times a week. Tune in to read her journey through the vast world of finance and money, starting with why the ever ominous, ‘why manage your money?’ question).

Money has never been my thing. From understanding why the NASDAQ goes up and down to maintaining any sort of savings, the dollar and I have never had much of a lasting relationship. That said I am 23, freshly graduated from UC Berkeley and about two months into my first full time salaried position. So up until this point, terms such as college student, early twenties, and art history major could well enough excuse the glazed look that rolled over my eyes when I came into conversations with words like hedge fund, market sentiment and diversified portfolio.

However, having officially entered this thing people my age coin “the real world,” any application for my killer understanding of Marxist theory or kick ass paper writing abilities is quickly drying up. Further, when it comes to everyday practicalities like my FICO score or the Business Day Section in the New York Times, I am out in the cold. For the past several years, my financial philosophy has been something like “money comes and goes, get it while it’s hot”; while a savings account sounded lovely in theory, sacrificing experiences and wanderlust for one has never really occurred to me. Up until this point, I sincerely believed that financial irresponsibility went hand in hand with those “crazy early twenties” I had heard so many talk about. I assumed I’d figure out the details later; I have come to realize that later, is like, now, and it’s staring me directly in the face.

This all said, I don’t think my experience is that unique. Different vices and indulgences perhaps, but the larger majority of our population struggles with money. Most financial relationships are filled with a whole lot of mistakes (why didn’t I put $50 a paycheck into a savings account?), regrets (what was I thinking when I spent $300 on that dress?) and shame (I am so embarrassed that I spend way more than I make!), and it’s often easier to ignore this all, than it is to deal with it.

But money is one of those things you either learn to deal with or it deals with you. And since I like to write, I decided to blog about it, so here it goes:

I graduated free of student loans, with minor debt, have a great job and an apartment, essentially meaning I am (1) lucky and (2) at a great place to start making good financial habits. I believe that where you spend your money tends to reflect the things you value. I’d like to describe myself as thoughtful and intentional, not frivolous and mindless, yet my past spending behavior has been more of a contradiction than a reflection of this. That said, personal finance isn’t exactly an easy thing to get excited about, the term seems more pocket-protector than prosperity and often seems written in some foreign dialect: Roth IRA, CD account, dividend reinvestment plan, mutual fund, blah, blah, blah. Where is a college grad to begin? My company answered that question for me when our HR woman stopped by my desk and asked me how much I wanted to contribute to my 401(k) … contribute to a-whata? Why on earth I should be saving for retirement at 23? I guess I’d better figure that out.

Join my journey into the world of retirement on Friday…

We’re really pleased to have been named as one of the top 100 Internet innovators by The Industry Standard. The next phase of the IS 100 Awards is community voting, where one winner is named in each of 10 categories. If you have a minute, we’d sure appreciate your vote. Just head on over to the Standard’s web site and click on the Commerce category. Polls are open until October 3.

A lot of Wesabe members bank at and highly recommend USAA — including me. The biggest frustration I hear from people about USAA is that they aren’t eligible to open an account there. So, some of you might be happy to see that USAA has widened its eligibility requirements. From their announcement, people in the following groups may now join USAA:

• Military retirees who served honorably, regardless of when they retired
• Military personnel honorably discharged on or after Jan. 1, 1996
• Widows and widowers of military members killed in action while eligible

USAA estimates that adding those groups will allow three million new people to become members. The full list of eligibility requirements is here.

I posted yesterday on Twitter about a new report that US consumers increased their credit card debt by $14.33 billion last month. That’s right, billion, and yes, last month alone. As I said in the tweet, “Makes me feel like we’re not doing enough. Tell a friend in debt.”

When I first started talking about the idea of Wesabe, one of the common reactions I heard was, “Doesn’t Quicken own that market?” I would always respond the same way. “How can Quicken possibly own this market when the national savings rate is negative, credit card debt has soared, and people list money as their single greatest stress? Owning this market would mean having a measurable effect on consumer budgets at the national level, and I don’t see that from any product with the personal finance label.” Quicken was fantastic for me over ten years of use in making it easier for me to pay bills and see where my money had gone — but what I want for Wesabe is to do more, and to measurably improve the net worth of our members, at a level that everyone can see the effect. If our users aren’t succeeding, we may well have other outward measures of success, but we won’t have reached the goal we all share for this company.

I will feel that Wesabe is succeeding when national governments start reporting on the positive effect we’re having on the economy as a whole. That may seem overly ambitious to you. Really, though, if that’s not our goal, why the hell would we even bother trying to build Wesabe? Companies affect the economy all the time, and I fully believe we have the opportunity to do the same, by giving consumers better information, support, and tools to make managing their finances easier and to make them better off.

I really meant it when I asked that you tell a friend in debt. Tell anyone that you think could benefit from joining the Wesabe community. Of course, I’m asking for this in large part because it helps Wesabe as a business and because it will help us continue to grow and improve the services we offer. I also believe, though — for Wesabeans more than for the members of any other personal finance site — that when you bring someone into the Wesabe community, you’re helping yourself and all the other members of the site as much or more than you’re helping us as a company.

Wesabe is the only site of its kind where the community gets smarter, the reports become more helpful and more informative, and the positive effect on everyone’s budget increases with each new member who joins, jumps into Groups, and starts tagging and rating the merchants where they shop. I see this happen on our site all the time. I love it when Wesabean BS0408 tells us he saved half his budget on an engagement ring based on advice from other members. I love it when Wesabean GQ tells us that after finding himself deeply in debt despite a high salary, he was able to work his way completely out of debt with advice from our members and others. I love it when Wesabean Bzzzz tells us that after using Wesabe for a year, “I had no idea how powerful doing [so] would be…I’ve saved more than I ever have before.” We don’t believe, and have never believed, that it is our job to simply show you your own data and let you figure things out from there. Instead, we aim to find the best strategies, the best tips, the best advice, and the best support for consumers everywhere, and to share that with all of our members.

I sometimes see our competitors talk about how mortgage foreclosures are simply the fault of consumers, or how easy it is to avoid overdrafts if you just put $10,000 in a savings account, and I think, wow, are they out of touch. Cynically, I think they must care far more about lining their own wallets than they do about lining the wallets of their users. No one ever gets hired at Wesabe with that attitude or approach. We’re inspired instead by what our board member, Tim O’Reilly, recently wrote as a challenge to Web 2.0 startups everywhere:

[W]hat good is collective intelligence if it doesn’t make us smarter? In an era of looming scarcities, economic disruption, and the possibility of catastrophic ecological change, it’s time for us all to wake up, to take our new “superpowers” seriously, and to use them to solve problems that really matter.

One of our engineers, Coda Hale, put our view of this most succinctly a while back: “We’re not in this to get money. We’re not in this to get users. We’re in this to get money for users.” He’s absolutely right. I know as the CEO of Wesabe that if we succeed at that goal, all of the other kinds of success will follow for us as a business. In fact, I think there’s no better approach to business success than to put your customers’ needs first.

So today, I want to ask you for your help, because I believe that help will in turn help you and everyone who uses Wesabe. We’ve launched a new feature called “Tell a Friend,” which is available at the top of every page on Wesabe (you have to be logged in, so that it can’t be used for spam). Thanks to Matt at Wesabe for doing a great job putting this together for us. Of course, you can send a friend an email however you want. We wanted to make doing so easy and obvious, and we wanted to ask you to do it while you’re on the site.

Thank you again to everyone who makes Wesabe what it is. We get all worked up about new graphs and features from time to time, and those are certainly fun and very useful, but what makes Wesabe what it is are the people. You. Thank you.

My friend Matt Haughey and his cofounder Paul Bausch just launched Fuelly, a site for people who want to track their fuel usage and figure out ways to save on gas. Matt is a wizard at designing social sites — he’s the guy behind MetaFilter, and he gave me a ton of great feedback about Wesabe when we launched — and he and Paul have done a fantastic job on Fuelly. The site features tools for easily tracking how much you spend on gas and how many miles to the gallon you’re getting, tips on how to save money on gas and use less of it overall, and a forum for people to discuss fuel and transportation issues.

Gas spending comes up all the time as a topic in personal finance these days, including in Wesabe Groups. I’m really psyched to see what Matt and Paul have built. Go sign up, or learn more about it from the review on Lifehacker. Congrats, guys.

(By the way, they’re planning on adding an API, and when they do, we’ll look to integrate it with Wesabe.)

I’ll be speaking at the Start Conference tomorrow in San Francisco about entrepreneurship. I’m really looking forward to it — there are a ton of great speakers and it looks like it will be a fantastic event. If you’re in town, please drop by and say hello. Hope to see you there.

I wrote a post for CNBC’s “On the Money” blog about commuting for free with Casual Carpool, a great system for sharing rides and saving money that’s very active in the San Francisco Bay Area and the Washington, D.C./Arlington, Virginia area. I’ll be contributing posts to their blog regularly but will cross-post them here and on Twitter.

Does anyone know of Casual Carpool-like systems in other areas? I saw reports of rides organized in Houston and Seattle, but I couldn’t find web sites listing pick up locations. Anyone know?

If you’re a fan of Twitter like we are, you’ll be happy to hear you can now add transactions to your Wesabe cash account through Twitter. This is a great way to keep track of you spending on the go — just text Twitter the details, and it will show up automatically in your accounts. Or, use whatever other Twitter client you like.

To set this up, head over to https://www.wesabe.com/connections and identify your Twitter account for us (so we know we’re getting transactions for you from the right place). You can send transactions to us with direct messages, so only Wesabe will see them, or you can send an “@wesabe” reply if you want to share an interesting expense with your friends (and the world, if your Twitter feed is open to all). For either kind of message, start out with the amount and the payee (in whatever order you want). You can also add tags by putting them into parentheses at the end (including tag splits, if you want). Here are some examples:

d wesabe $2.95 Starbucks (coffee)

@wesabe Camino $27.95 (restaurant oakland yummy)

Right now, the transactions will be added to your first cash account, but our hardy testers have asked for a way to choose the cash account, which we’ll add shortly. Also, note that Twitter is not a banking site, so you shouldn’t consider it to have the same privacy protections Wesabe provides — use this for not-very-private purchases only (as I say in the docs, if you’re posting bail, wait until you get home to enter that .

Have at it, and let us know what you think. I’m in New York for the CNBC show (which was awesome), and it’s been great to be able to add cab fare to my “toexpense” tag as I run around town. Thanks, Brian, for another awesome feature.

I will be appearing on a new CNBC personal finance show, On the Money with Carmen Wong Ulrich, this coming Monday, August 4th, at 8p Eastern/5p Pacific. I’m really looking forward to the show — Carmen gives people very down-to-earth, sensible advice, and has done a huge amount to make sure she’s getting people accurate and realistic information about their finances.

One of the things they do on the show is answer questions from viewers about their personal finances. If you have a question you’d like to see addressed on the air, send it to us at carmen@cnbc.com. As we’ve been developing the shows, I’ve been completely impressed with how the questions are handled.

One of the reasons they’re having me on the show is to talk about the experiences of the Wesabe community, so I feel like I’m acting as a representative of everyone in Wesabe Groups. Thanks so much for sharing your stories, worries, and successes. I think you should all be proud that a channel like CNBC would want to feature this community on the air. It speaks to what an incredible job you all do of supporting each other. So, take a bow! Hope you have a chance to catch the show.