<prompt> Human: Yes, its me...back with a second installment in our series, ELI22. This assumes you read ELI18 even the links...youll learn 10X more from the links! and have done things pertaining to your situation. The 22 here means youre done with full-time education, have a career with meaningful income, and are responsible for your own support. Some people start this at 18, some at 26; age is not important. Specifics pertain to the US in some cases. This assumes you are a single childless renter employee; ELI30 will cover marriage, home ownership, and children.You have money now, congratulations! Read this excellent summary of how to handle it. Heres a ginormous flowchart showing what to do first: bills? loans? investments? Good self-study! Well highlight three Big Ideas to get you started.- Taxes. Your employee income is taxed withheld like so: 7.5 of the first 118K goes to social securitymedicare taxes We hope you will benefit in the future, too! Then your income is taxed at higher rates as you make more. Assuming no special deductions, 0 for the first 10K due to standardish deductions. Then 10 of the next 9K, 15 of the next 28K, and then 25 tax rate kicks in; this is your rate from 48K to 102K gross income, so a popular rate. Its only 28 up to 200K, as well. This is your tax bracket marginal tax rate. Most states also have state income taxes of 6ish but they vary a lot. Higher brackets only affect your additional income; you always come out ahead even if more income means a new top tax bracket. You reduce your taxes with credits and deductions Big Idea 1 is: reduce your current taxes by making less of your income taxable.- Debt. You borrow money now so you can spend it, yay! But then you have to pay it back, and typically pay back more than you borrowed, boo! Youve lost money as a result. The extra amount you repay is determined by the interest rate the annual rate is called APR. 3 APR student loan? Youll pay 30 annual interest on 1000. Not bad. 12 APR car loan? Youll pay 120. Not good. 23.9 APR credit card? Youll pay 239. Yikes! Never do this!You repay the money you borrowed, too; thats called principal. The longer you take to repay the loan, the smaller each payment, but the more interest youll then pay. Its a tradeoff. Big Idea 2 is: reduce the amount of interest you pay by getting lower interest rates, and avoiding quickly repaying higher interest debt.- Investing. In ELI18, I noted bank interest wont make you rich. The good news in ELI22 is: investments can make you current millionaire rich The catch is: it takes decades, and you must regularly invest significant sums. This why you start at 22! The ELI22 introduction to investments is based on the Target Date Fund wherein you buy shares of a mostly stock-based index fund designed to be worth a lot more when you retire at a target date 40 years in the future. Historically, these accounts gain about 6 annually after inflation, though it varies significantly year to year. Your money doubles every 12 years, and goes up by 10X in 40 years. All numbers are after taking inflation into account. So that 5000 you put aside at 22 could easily be worth 50,000 of todays dollars at 65. But, there could be years where you temporarily lose 10, 20, even 30 of your savings. Do not panic! It will come back eventually. Big Idea 3 is: invest early and often for your future, especially your retirement. Got the the Big Ideas now? Good! Lets see how we combine them for some meaningful benefits for your 22-year-old self.- Retirement contributions. You are going to retire someday. Invest and perhaps reduce current taxes by letting your employer contribute a percent of each paycheck to your 401k account or similar things with different names for government employers. A recommended investment percentage is 10, but its up to you; more is better, the annual maximum is 18,000. The cardinal rule is Take The Match if you have one. A typical employer adds 3 of your salary when you contribute 6, so thats like Free Money. Take The Match. Your actual match depends on your employers rules. The money is invested for you, available penalty-free when you retire after age 59.5 usually. If you change jobs, the money can go with you. A 401k can only invest in what your employer offers. Most employers have target date funds, so choosing one is an easy decision. If you need or want to, you can sometimes achieve an even better result by picking other available choices.- What do you mean perhaps reduce current taxes? Retirement savings are wery wery complicated. Thank your congresspeople. A traditional 401k reduces your current taxes because it exempts your contributions from your taxable income. You pay taxes when you take the money out, deferring the taxes, but you still pay something. If you would prefer, you can reverse this if your employer offers a Roth option. In that case, you pax taxes on your 401k contributions , but no taxes when you take the money out. The best choice is complex; for those below the 25 bracket, Roth is usually better. - Yet more retirement options: IRAs. Individual Retirement Accounts are do-it-yourself 401ks. You set up an account with a company like Vanguard, Schwab or Fidelity, and give them up to 5500 annually to invest for you. You have more investment choices, target date funds plus other options. Depending on your income level and whether you have an employer 401k, you open a traditional or Roth IRA, with tax treatment equivalent to the previously described 401k types. IRAs are your go-to option if you have no employer 401k, but you still may and even should want to use an IRA, especially a Roth IRA, even if you have one. You can tap IRA and 401k resources before retirement for certain allowable reasons, though its not usually recommended because you lose future gains and might owe current taxes. A Roth IRA is the best choice for raidable retirement savings because contributions can be taken out at any time without taxes or penalties.OK. That was a lot of information! Ready to repay student loans Lets find out: - If you do have student loans, the interest rate clock is ticking. Loans are typically 10 year repayment, so youll owe about 1 of the loan balance each month for ten years. If you owe 20,000, thats 200month. Like a car payment. Not terrible. If you owe 100,000, that will be 1000month. Like a mortgage payment, only without the house. Not fun to pay. You have to pay these back unless you get them forgiven. You have several approaches available for repayment:- Pay them back on schedule. It sounds crazy, but it just might work! If your income supports it, pay the minimum on low-interest 4 loans. If you have even more income, repay them faster with extra payments, especially on higher interest loans, and save by paying less interest than you would over time. This is your primary option on private loans. If you have high-interest private loans, look into refinancing them; if you have good income and credit, youll qualify for lower interest rates. - If you have a lot of federal loans but little income, look into reduced payment plans like Income-Based Repayment IBR and Pay-As-You-Earn PAYE plans. Youll pay less even nothing each month, based on your current income, but youll pay longer, and ultimately pay more over time in many cases. - If you are really in a deep hole, maybe over 100K federal with only 40K annual income, give a special look into Public Service Loan Forgiveness PSLF. This program allows you to work for ten years in public service, make minimal payments, then your unpaid balance is magically forgiven, which is a really sweet deal if you can get it. This differs from forgiveness programs for IBRPAYE that will charge you taxes on any amount forgiven in the future.Enough about student loans. Lets wrap up with a few other topics of general interest to 22 year olds:- Grad school can be a good idea, but can also be a very expensive idea. If you are sure this is for you, try to get someone else to pay for it, whether the school via scholarships stipends, or your employer, if they do education reimbursement. Med school is worth the money no matter who pays. Law school and MBA return on investment is iffier these days. Going to grad school because you are not sure what else to do is probably a big mistake, especially so if you have to pay for it.- You may be responsible for your health insurance You could be on your parents plan until age 26 in many cases, though that may cost them something. If your employer will pay for it, thats your best option. They may offer a lower-premium High Deductible Health Plan HDHP, where you pay routine costs, but insurance kicks in for major expenses. This is a good choice if you have good health and make few claims. You should take advantage of a Healthcare Savings Account HSA with an HDHP. This lets you deduct contributions to pay for out-of-pocket medical expenses, with other unique features that make them attractive. You can contribute 3350 annually to your HSA. Some employers pay some of this for you as more free money. - If your employer doesnt offer health insurance and you cant use your parents plan, youll want to get an individual plan such as those found on healthcare.gov You can only sign up at certain times, including open enrollment in November December. If you dont have health insurance of some form, you could pay a penalty of up to 2000 at tax time, unless you have an exemption - With more income, you can rent a nicer place within the same 30 of takehome guideline. You may not even want a roommate! Of course, any money you spend on housing is money you dont have for other things. Living with your parents is still a viable option if you want to save, e.g. to pay down student loans. Please make sure you have renters insurance, its well worth the small cost. Note that we assume you are not yet ready to buy a house; you may not yet be sure where you want to live long-term, have limited work history, or have insufficient down payment. - You can also afford a nicer car, since you have better credit, and lower insurance rates. You dont have to upgrade your car, and youll save money if you dont. Paying cash is still an option, but if you qualify for a 2 car loan, consider taking it to free your money for purposes like retirement investments and loan repayments. A good target price is perhaps 15K, with a 10K loan, which works out to 4 years at 220month. Your total cost-of-car would be about 5K annually. Selling your old car privately should get you 20 more than you would by trading it in to a dealer. - With more expenses, budgeting becomes much more important. Youll want to have a bigger emergency fund; we recommend at least three months expenses, to cover that bad day when you lose your job and your car breaks. With more expenses to track, look into a program like You Need a Budget ynab or Mint to help keep track of where your money is, and where it needs to be in the future. Look for ways to economize where you can, whether by cheaper cell-phone plans, learning to cook so you want to eat at home, or taking advantage of employee discounts. - While you dont have a lot of tax deductions yet outside of retirement HSA savings, take a look at possible tax breaks for student loan interest, moving expenses associated with a job change, and certain tuition expenses American Opportunity Tax Credit You dont have to itemize to take advantage of these, but income limits apply in some cases.Whew! That was a long one. I think that does it for this week. ELI 30 next week: marriage, children, home ownership, life insurance, job changes. Assistant: This would be a great subreddit.ELI25: This is how a mortgage worksELI25: How to calculate your tax withholdingsELI25: What is a 401k vs 403b vs IRAELI25: How to find a lawyerELI25: You are 12 of a pregnant couple...now what?These 90s00s babies need our help!!!EDIT: A special thanks to ugetddt who has created reli20 aka explain it like Im 20 aka Lifes Curriculum. Its in its baby stage, but with all of your help we can have a great subbreddit! Thank you again ugetddt!!!Human: Id love to understand mortgages and being 12 of a pregnant couple...now. : :Assistant: Theyre honestly relatively straightforward. A mortgage is a loan to you. Because its a lot of money, the bank will require collateral--something that they get if you dont make your payments on time. In the case of a mortgage, the house itself serves as that collateral: a lot of people think that the bank owns the house when you have a mortgage on it, they dont, you do. But if you dont make your mortgage payments, the bank will take the house away from you foreclosure.Because the house itself is the collateral, the bank has a big risk that something bad will happen to the house e.g. it burns down, so that if you default on your loan they cant recoup their losses by taking ownership of it. To mitigate this, banks require you to get homeowners insurance when you get a mortgage. That way, if something happens to the home, the bank wont lose all the money they loaned you. If the house is located in a floodplain, youll likely also need to buy flood insurance.Banks charge a premium for loaning you money--theyre not charities. This is in the form of interest, or a proportion of the amount outstanding added to your payment each month. If you make payments ahead of time, your outstanding loan amount goes down, causing the interest to decrease. Long term, making early payments can save tens of thousands of dollars.Even with a house as collateral, banks dont like foreclosures. As such, they charge more a higher interest rate for people who are more likely to default. A lot determines this, one of the biggest factors being your credit score. A high credit score indicates a reliable individual who is unlikely to default, so results in a lower rate.Another factor that determines interest rate is the term the length of the loan. Longer loans represent greater uncertainty from the banks perspective, so the interest rate is going to be higher to compensate for this. Adjustable rate mortgages also reduce the banks risk, as they can adjust the rate to reflect the current market interest rates. Because of this, adjustable rate mortgages ARMs will be slightly cheaper, but also riskier for the borrower. You also have the ability to decrease the interest by buying points. This is when a borrower pays the bank money in exchange for a lower interest rate.Banks want to see that you have a down payment it correlates with financial stability, reduces their risk exposure in the event of foreclosure, and incentivizes you to make your payments by having a larger equity stake in the house. If you dont have at least a 20 down payment, the bank will make you buy insurance in case you default PMI--private mortgage insurance. Until you pay off 20 of the houses value, you also have to pay for this insurance. This is why you really want to have at least a 20 down payment--youll have another cost if you dont.Finally, the US government wants people to own homes. To encourage this, they let you deduct your mortgage interest on your taxes you dont pay taxes on an amount of your income equal to the amount you paid in mortgage interest. This deduction is one of the strongest reasons for home ownership being financially beneficial in the US.I think that hits all the major points. Theres some simplification, but its reasonably accurate.Human: I should steal this for next week :  <response>: If it would make your life easier go for it. I think your series on age-appropriate financial literacy is awesome. 