The i401k (also known as the Individual 401K, one participant 401k, or Solo 401K) is the 401K plan for Independent Contractors or sole proprietors. Just as a traditional 401K offers myriad benefits for employees like tax deferred retirement savings and the benefit of lowering your tax bill, the i401K plan was set up to offer the same benefits for independent contractors and individual business owners. The IRS defines it here.
Tax Savings for Independent Contractors
Since I’ve worked as an independent contractor for several years, the i401K allows me to contribute in two ways:
as an employee, making salary-deferred contributions of up to $19,000 in 2019
On Monday I shared the first half of our year in pictures, everything that happened in 2018 from January to the end of June, just before we officially became location independent. Today, here’s a visual post on what our lives have looked like in the second half of the year, from July to December, since moving to North Carolina and enjoying more location freedom.
Hi there! I know it’s been a while, but I have another Wednesday installment of our Your Three Year Experimentguest series, featuring people who are sharing their own three year experiments–their plan to engineer the life of their dreams over the next three years.
Today we’re featuring the story of someone who has some quite amazing self-discipline in the spending front, spending less than $18,000 per year while earning a six-figure salary! In this interview, you’ll learn:
How A Purple Life increased her salary to six figures by age 27
What her annual spending has been for the last four years
How and where she decided to move for the lowest COL/highest salary combo
Tell Us About Yourself
Hi! I’m A Purple Life. I’m a 29 year old who lives in Seattle and works in marketing. I’m in my 5th year of my financial independence journey and I’m aiming to retire next year at age 30.
What’s your background? Early years, education, married, kids, jobs?
I was born and raised in Georgia and after graduating college I moved to Manhattan with my partner and started working in ad agencies. My partner and I are coming up on 10 years together and we are a bit unique (or so my friends tell me). We are not getting married, never having kids and do not combine our finances in any way. I’m reaching for early retirement with just my own money based on my spending alone. We’re very independent people.
How did you come to the realization that something needed to change in your life?
I’m embarrassed to say that it actually took me YEARS to come around to the idea of financial independence. My partner introduced me to the idea and on a bus from Manhattan showed me the math behind it (I suspect he chose that moment because I couldn’t run away). At the time I was barely saving any money because of how little I was making combined with Manhattan’s insane rent. I didn’t think it was possible.
We all need a little help in life. When it comes to staying on track with our goals, friends and partners can make a huge difference in your success rate.
For example, I’m currently training for a half marathon. A college friend reached out to me to see if I wanted to sign up with her. We live about 40 minutes apart, so we can’t train together, but we text each other our stats.
On Saturday, I needed to run 8 miles. I’d arranged with another neighborhood friend to run early Saturday morning. The night before, Friday night, a friend had a get-together. If I had to run those eight miles by myself, with no one to support me or keep me on track, I’m sure I would have stayed way too late at the get-together and would have found a reason not to get up the next morning.
Inspired by Tanja Hester’s post of her first year of retirement adventures, I thought I’d create a similar post of the ThreeYears’ 2018. After all, it was a big year for our family. We became location independent, we bought a new house, we went on several big trips, and the kids started new schools. As I was putting the post together, I realized that we had a lot of pictures! So I decided to break our year up into our pre- and post-location independence, which happens to fall right in the middle of the year (so handy!).
Here are the ThreeYears’ adventures from January to June of last year.
We started off 2018 in Chile, in the last week of our three-week long trip to visit Mr. ThreeYear’s family in Santiago. We also took a side trip to northern Chile, to the San Pedro de Atacama desert. That trip took place in the final days of December, so I won’t include pictures here, but read all about it in this post.
We bought lots of fresh fruits and veggies (because it was summer in Chile!) at the feria, the local market two blocks from our apartment.
I started this blog in 2017 (okay, technically it was the end of 2016) as a three-year experiment. I planned to spend 2017, 2018, and 2019 with a very focused goal in mind–to double our net worth and become location independent. In an absolutely shocking turn of events, our family became location independent last year, mid-way through the experiment.
Our location independence looks a little different than I envisioned, but it’s been a great decision for our family. We live in one place, in an idyllic small town in North Carolina just north of Charlotte. Mr. ThreeYear and I both work remotely. Our kids attend the great public schools here, and we travel as much as we can during breaks and summer. Most importantly, we are close to our family and the weather is a lot warmer.
Now that we’ve reached one goal (and it was, truly, the main goal), where does that leave us in 2019? Of course, we still have to double our net worth, and unfortunately we have almost 50% more to go, due to losing equity in our house and a market downturn at the end of last year.
But, because we know that we’ll eventually reach that goal, and it’s not quite as pressing now as it was when we thought we’d be leaving our jobs for several years, what should be our focus in 2019?
Each year of the experiment, I’ve picked a theme, a “word of the year,” before it was a thing.
In 2017, I picked one new habit each month to get better at, so we could improve our productivity with investing and earning.
In 2018, I focused on spending 20% less, each and every month, at the grocery store, so we could save more.
In 2019, I thought about a lot of behaviors we could focus on. We want better relationships, better health. But we still struggle with over-spending, too. And our spending experiments have worked pretty well to change our behavior.
So 2019 is the year for money experiments.
Each month, we’ll perform a different money experiment to see how we do.
Over the last several years, household debt across the world has been slowly increasing. That debt includes mortgages, car loans, and credit card debt. China’s household debt now stands at 49.1% of GDP, relatively low compared to many developed nations, but worrisome because of its 30 percentage point increase in the last decade. Shockingly, Switzerland leads the world with household debt at 127.5% of Gross Domestic Product. That means, for every $100,000 of GDP a household produces, they hold $127,500 in debt!
The average citizen in Switzerland, which has traditionally been an extremely wealthy country, has substantial assets (net worth) underpinning this debt, or at least four times more assets than the average American.
Even so, Switzerland, as well as nine other economies including Canada, Finland, and Australia, have debt levels that are high and rising quickly, at a pace that mirrors that of the US right before the housing bubble.
About this time every year, I get the travel itch. It’s the feeling that I need to book a trip for my family so we can go somewhere we’ve never been before, see something new, or just get out of the daily grind. Winter feels long, and the beautiful beach pictures in Instagram are calling me.
Yesterday, my friend sent me a picture of the little town in Northeastern Spain they’ll be visiting this summer. I. want. to. go.
However, our family just moved 1000 miles away to a new state last year, we bought a new house, and we have spent plenty of money on it. Plus, I’m not bringing in a steady income, since I’m taking a year off teaching to help us get settled, so it’s hard to justify setting aside thousands of our savings for a big trip (how much should you spend on travel, anyway? Answers here).
I’m not giving up so easily, however. Here are five ways I’m planning to save up for travel.
1. Save the Extra
This is about as obvious a tip as they come, but it’s not always easy to follow. This year, every single extra check, refund, tutoring payment, or gift is going straight to a fund called “Trips.”
In our Capital One Savings account, we have several subaccounts where we save for different goals. In our “Trips” fund, I’ll be saving all of the extra money we get, immediately, before I even have a chance to think otherwise.
I deposit any checks using my mobile app, then immediately transfer that amount from my bank to our Capital One subaccount.
The trick is to deposit the money immediately into an account or fund you can’t access or won’t let yourself touch.
It’s too easy to put the money in your general account, and attempt to save what’s left over at the end of the month. But in my house, that money will get spent, so I need to set it aside as quickly as possible to save for travel.
I have a problem. Yes, I’ll admit it. If you know me IRL, I’m sure you’ve heard me talk about it as it plagues me frequently. The problem is this: I occasionally panic because I think my kids aren’t doing enough activities.
I’ve suffered through the same conversation with myself for years (What? You don’t have conversations with yourself in your head?). It goes something like this:
Me: The boys aren’t signed up for any activities right now.
Myself: That’s ok, they’re doing deeply creative things at home.
Me: But X’s kids are on swim team. My kids should be on the swim team! They’ll learn discipline there, and focus, by being a part of something difficult that will stretch them. And both of them love swimming!
Myself: You’re doing it again.
Me: I KNOW! But Y’s kids play in tennis championships. The boys should join our tennis academy. It’s a family sport that they can play forever! I want them to be good at something, to have a skill. What kind of parent am I if I haven’t helped them develop a sport they love to play?
Myself: There’s still time.
Me: They’re getting older. I didn’t really play a sport when I was young. But I started running with my dad when I was 9! I haven’t run with the boys at all. They’re inside too much. They play too many electronics!
Myself: Junior ThreeYear has climbing.
Me: I know! But that’s only once per week. And is he really learning anything there? It’s a very basic group. Can I help him get better? Should he be going more? Now what do I do? More climbing, swimming, tennis? Which one to pick? They’re all so expensive. And they take up a lot of time. Maybe I’ll start with tennis lessons? Maybe karate would be a better choice…