Personal finance is a taboo question in American society and the FI community seeks to break that. I have been constantly impressed with the openness of members to be vulnerable in an effort to improve their financial life.
One of the members in the local ChooseFI group that I admin asked this question recently.
To fill in some background information, the member is a mid-20 male working in digital marketing. In his free time, he has a blog, a youtube channel, and a podcast on personal development.
“I make 50k in salary. I’ve been taking 20% off my salary for 401k for years now, but since I have a modest income… I’ve realized it takes more of a toll than I thought. You see, tack on 21% tax and I’m left with ~60% ($2k) which is barely enough to pay rent ($1k), my blog/business fees for my passion project ($200), gas ($300), and food / misc. expense. With tiny side hustles (fluctuating, not always sustainable) and saving, I still manage to net positive and build my cash savings miraculously.
I’ve been dwelling over the years too much about not maxing my 401k and not doing more than 20%, but maybe the truth is that this is where I’m at and I should consider doing less.
Question: Should I pause the 401k? The extra $800 a month I get could mean a lot if I stay disciplined and use it for a better apartment which can give me a chance to cook more often and stay healthier, stay cleaner, have peace of mind/security. Current apartment is cramped, shared, and isn’t ideal. But then again, not sure if an apartment will really solve those issues.”
This is my response below: (my answer is strictly entertainment only. Don’t try this at home).
Looking at your Linkedin profile you have worked in your current job for close to 4 years. From my conversation to I believe you are fairly intelligent, so the first question I would ask you is, “has your w-2 income caught up to your value?” If you do not believe so, “how can you improve your w-2 income?”
Radical Personal Finance has a great podcast about that.
Making yourself valuable would be the surefire way to being paid more. Then my question to you is, “are you valuable enough?” and “do you need to invest in yourself to be more valuable?”
If you are valuable enough then you should, in due time, request for pay increase or move on, unless you are content/happy at your current position.
If you aren’t valuable enough, then you may need to direct time and money to build more skills.
If you decide that you are comfortable with your w-2 income, then my next question is, “how can you improve your side hustle income?” You have a well-established blog and podcast with a loyal following, so can you monetize them by writing e-books or building courses? That’s for you to answer. However, I have found that income is what keeps people passionate about their passion projects. At a certain point, you need to monetize or you will burn out.
Also, can you freelance? You appear to have a very valuable skill set (SEO marketing) that many small businesses should want to contract out as they don’t have the budget to take on a full time employee.
In terms of scaling back your 401k contribution, there is only one financial reason where it would make sense. Can you get a better return than the 6%-7% projected average return in index fund by investing in yourself and your business? Will you use the money to increase your w-2 income, to help you monetize your blog, or to build a freelance side hustle?
However, finance is only one small part of life. If the current contribution is affecting your happiness, you should lower your contribution. The journey to FI is a decades-long endeavor. If you aren’t happy, you will burn out faster.
I would like to thank you for spending your time reading my response to his question. Click here if you want to know know a little more about me. Click here if you want to why I started the blog. Click here if you want to know why I picked this name.