When we recently introduced the Annual SAVINGS tool, we foreshadowed this post dedicated to walking through using it to plan one’s Annual SAVINGS.
Annual SAVINGS tool
Our Annual Savings tool (bogle.tools/saving) builds on top of Bogleheads.org’s Prioritizing Investments wiki, which is a fantastic and in-depth resource. Unfortunately, that wiki requires detailed reading and perseverance.
We started building our Annual Savings tool with the goal of making it as SIMPLE as possible to enact the advice in the Prioritizing Investments wiki.
It is a tool that assists users through 10 steps to simplify the process. It also provides helpful content from and links to the steps of the Prioritizing Savings wiki for in-depth coverage of topics.
Annual Saving - Main Page, Prerequisites
Navigating to the main page, you’ll find some prerequisite background data that the tool will need to help prioritize your savings: target year, tax filing status, age, employer, annual salary, adjusted gross income, monthly expenses, and income tax paid.
In this first walkthrough, we’ll use the example of Sam, a 28 year-old, single tax filer with a $120k salary who uses bogle.tools/savings in their web browser on their IPhone 12 Pro.
Target Year: Sam chooses 2023. One can choose last year or the current year and based on year choice, the tool will use the appropriate IRS data (limits for retirement contributions, and more.)
Tax Filing Status: Sam chooses Single.
Age: Sam chooses 28. Precise age only impacts tool calculations if 50 or over for retirement catch up contributions — or if 55 or over for HSA catch up contributions.
Employer: Sam enters Starbucks. She works for Starbucks corporate headquarters. (the tool uses employer name to look up benefit information, currently the has benefit information for Amazon, Boeing, Microsoft, Starbucks, Walmart). Don’t worry if you work for some other organization, you can enter their benefit details later.
Annual Salary: Sam enters 120,000.
Next, Sam works on the Incoming/Savings Budget section.
Estimated Adjusted Gross Income (AGI): Sam enters $112,000. They found their Adjusted gross income for the previous year from her 1040 tax form, line 11. Sam contributed to her 401k the previous year, so her adjusted gross income is less than her annual salary. AGI is used by the tool to calculate IRA/Roth IRA contributions that are allowed by law.
Monthly Expenses: Sam enters $4,500. This includes rent, food, and all other expenses, but not savings.
Annual Income Tax Paid: Sam enters $10,000. She calculates that amount by looking at line 24 of form 1040 of her most recent federal tax return and her state tax returns.
Money in Taxable Fund (to help invest more): Sam enters $0. This is an advanced scenario that we’ll describe some other time.
Planned Savings: the tool calculates that Sam will have about $56,000 to make part of her annual savings. $54,000 go towards annual expenses, plus $10,000 towards taxes - for a total of $64,000. $120,000 salary - $64,000 = $56,000 left over for savings.
Next, we’ll walk through the Prioritized Steps to determine Sam’s best Annual Savings plan.
Steps 0-10 Overview:
After filling out the prerequisite information, the tool can already figure out many things.
Since Sam works for Starbucks, the tool knows the retirement account details (401k matching and more). Step 0 says “Found Starbucks benefit details”. A future scenario walkthrough will cover the case where employer benefit information needs to be entered by the savings tool user.
Incomplete steps - Bold text on steps mean that Sam needs to go through each of those steps where it will help determine emergency fund (step 1), debts (step 3, 8, and 10), HSA (step 4), and Mega Backdoor Roth (step 7).
Step 2 - 401k matched contributions - the tool already calculated that the first $6,000 of 401k contributions that Sam makes will be matched by Starbucks, since their benefit data says they match 100% for the first 5% of salary.
Step 5 - Roth IRA - the tool calculated that $6,500 can be contributed by Sam towards a Roth IRA. This is because her adjusted gross income of $108,000 is less than IRS’s 2023 published amount of $138,000 where allowed Roth contributions begin to be limited.
Step 6 - 401k contributions - the tool calculated that the IRS would allow Sam to make $16,500 more contributions to her 401k after her initial $6,000 of matched 401k contributions from step 2. That will mean, she would meet the maximum 401k contribution allowed in 2023 of $22,500 (step 2 & 6 combined)
Step 9 - before completing details about the incomplete steps, the tool says she’ll have $27,000 of her $56,000 planned savings to put into taxable accounts.
Next, we’ll go work on the incomplete (bold) steps.
Step 1 - Emergency Fund
Clicking on the pencil in the blue button for step 1 - Emergency Fund, will show the Emergency Fund step in the tool:
Each step in the tool discussed the topic and has links to more background information from the bogleheads.org wiki. Clicking on those links will open a new tab with that page from the wiki.
Current Emergency Fund: Sam enters $6,000. She has $6,000 in her savings account. The tool calculates that she has 1.3 months of emergency fund. The recommended amount is at least 3 months.
Navigating back to the savings main page will show that it is recommended that step 1 of her savings plan for the year should be to save an additional $7,500 in her savings account (or another place for her emergency fund). This will mean that her emergency fund will have $13,500 saved — or 3 months x $4,500 per month.
Steps 3, 8, 10 - High, Medium and Low-Interest Debt
Clicking on the pencil in the blue button for steps 3, 8 or 10 will show the Debut Information step in the tool:
Here there are 2 tasks to do:
Debt free: Sam chooses false.
List of Debts: Sam clicks the + button and enters details about each debt she has:
college — $8,000 — 3.5% rate
car — $12,000 — 2.9% rate
The tool classifies each debt as high, medium, or low interest rates.
Navigating back to the savings main page, will show:
step 3: she has no high-interest debts
step 8: she has $8,000 in medium-interest debt
step 10: she has $12,000 in low-interest debt
At this point, she still needs to complete step 4 and step 7. However, the tool now suggests that the $7,500 for step 1, and $8,000 for step 8 should come at a higher priority than taxable savings in step 9, so step 9 is now reduced to $11,500. Her $12,000 of low-interest debts are lower priority, and the tool recommends paying that debt off no faster than needed.
Step 4 - HSA
Clicking on the pencil in the blue button for step 4 - HSA, will show the HSA step in the tool. Sam reads the content and then works on the choices in the Prerequisite and Person 1 section:
Has High-Deductible Health Plan from Employer: Sam leaves this unchecked. She doesn’t not have a High-Deductible plan from Starbucks, even though one is offered. She reads the details about HSA plans and considers switching to the High-Deductible plan next year, as most employers let employees choose health plans once a year.
(She doesn’t need to choose contribution levels from employer, or HSA level yet. “ChoiceNeeded” isn’t ideal right now, but improvements to the tool will be forthcoming, and this section of the walk through will be updated.)
Sam should navigate back to the main page knowing that she won’t contribute to an HSA this year but might make health care changes to allow it next year.
Step 7 - Mega Backdoor Roth
Clicking on the pencil in the blue button for step 7 - Mega Backdoor Roth, will show this step in the tool. Sam reads the content. There are no choices for her at this step, because Starbucks doesn’t appear to offer it to their employees.
Evaluating the recommended Savings Plan:
Once you have attempted to complete all the incomplete steps, navigating back to the savings main page, will show the overall plan recommended for Sam:
The tool collects the necessary information from Sam to help recommend which steps are possible for Sam to save with, how much for each step, and recommends in which order she should save.
The tool uses the Planned Savings amount calculated earlier to determine how far the Planned Savings budget will go. In Sam’s case, she will do step 1, step 2, step 5, step 6, step 8 and step 9 before she runs out of Planned Savings budget.
Sam is getting a great start on her Annual Savings!