Darren Straniero, CFP® OnPlane Financial Advisors
- 16100 Riffle Ford Road , Darnestown, MD 20878
- (703) 856-7979
About Darren Straniero, CFP®
My professional purpose changed when my wife and I were blessed to go from having 1 child to 5 children in just 2.5 years. That wasn’t built into our financial plan!
Today, I help parents and families make sense of and maximize their financial lives. What I’ve found is that even some of the smartest people make small, consistent mistakes with their finances. And over time, these mistakes – if left unchecked – can cost you thousands of dollars in excess taxes, fees, and opportunity cost.
By providing direction and accountability in my clients’ financial lives, I help them get the right answers to their questions before problems arise. In short, I manage the financial future for you, so you can spend more time today focusing on the other meaningful areas of your life.
I’m a Certified Financial Planner® professional who has spent the last 10+ years in the financial services industry. My practice revolves around three key phrases:
-Life is NOT a straight line (see above: 4 kids in 2.5 years!)
-Focus on factors YOU can control
-Do well. Be well. Financially
You’ll find me talking about these a bunch in my blog.
There’s more to life than work, though.
My wife, Jill, and I were married in 2008. We have five kids: Jackson, Thomas, Charley, AnnaMay (twin girls), and Sutton. We love watching our kids play sports and both Jill and I coach their teams – sometimes we even coach together! We also love to go the beach and we spend time in the summers in Rehoboth Beach, DE.
If I’m not managing the future for clients or with my amazing wife & five kids, you might find me coaching, cooking, golfing, or playing cribbage.
Earlier this year we talked about investment options if you're already making the maximum contribution(s) to your 401(k) and still want to save money elsewhere. We also covered the importance of contributing to your employer's 401(k) plan in order to get the full matching contribution…aka compensation.
Today we're talking 401(k) again and I want to show you why it's important to understand how your employer matches your contributions.
I'm pretty confident saying most of us know if our employer makes matching contributions to the 401(k).
I'm not as confident in saying most of us know how the matching contributions work.
One major problem can show up when we don't know how our employer matches our 401(k) contributions. The problem? We might not be getting our full matching compensation, even though we’re contributing enough to get it.
Yup, it's true.
You might not be paying attention so here's me snapping my fingers saying "pay attention" because you could be missing out on compensation that's earmarked for you. And be sure to read to the end where I give you six steps to help you figure out how to get your FULL 401(k) matching compensation.
When it comes to 401(k) matching contributions, some employers make matching contributions based on the amount you contribute each pay period. In this scenario, you could max out your 401(k) over the course of 5 months and receive the full match - because they match based on how much you contribute and run their matching formula that way. The timing of our contribution is not as important as the amount we contribute.
Many employers will only match during pay periods when you're making a contribution to your 401(k). In this scenario, both how much we contribute and when we make our 401(k) contributions determines how much of the matching compensation we could receive.
What does that mean? It means if we aren't careful with how we time our contributions, we could miss out on our full matching compensation.
Confused? No worries, I have a story to tell so let's keep going.
We have two companies, Company A & Company B and both have an excellent 401(k) matching program.
Company A matches $1 for every $1 we contribute, and they match this up to 3% of our salary. They also match $0.50 for every $1 we contribute on the next 2% of our salary. Their matching contributions are spread out over the calendar year, or over 26 pay periods in this example.
Company B has the exact same match. However, they match based on the amount the employee contributes and it doesn't matter if the employee makes his/her contributions over the course of the calendar year, or over 4 months. The match is based on the contribution amount, not how/when the employee makes contributions.
Now let's figure out what the full matching compensation would be. We’ll use an annual salary of $250,000.
In our “dollar for dollar up to 3%” match scenario, $250,000 x 3% = $7500. This is Part 1 of the match.
Part 2 of our match says $0.50 up to the next 2% of our salary, so $250,000 x 2% = $5,000, and $5,000 x 50% = $2,500.
Total match = 4% of our salary.
At $250,000 salary, our full matching compensation = $10,000. This is true for both Company A and Company B.
We know we have to contribute at least $10,000 to receive our full matching compensation. That's important. What's more important is how or when we make those contributions.
It doesn't matter how or when we make our contributions for Company B. We could do it in one lump sum contribution or spread our 401(k) contributions out over the course of the year. For Company B we simply have to contribute at least $10,000 to get the full match in this example. Easy peasy.
Company A is a different story so we're going to focus on Company A. This is where, if we're making 401(k) contributions to at least get the full match, we can leave our "free money" on the table.
Remember, if you work for Company A, you need to spread your 401(k) contributions out over the course of the year in order to receive the full company match. This is because they match only during pay periods when employees make a contribution.
That last sentence is important. Here's why:
Employee #1 works for Company A. She's an aggressive saver and likes to max out her 401(k) as quickly as possible. She contributes 15% of her paycheck to her 401(k) starting January 1. By her 14th pay period, she's already maxed out her 401(k). High five to her for being such an aggressive saver. The downside is she's only received $5384 in matching compensation. We know she's eligible to receive $10,000 in matching compensation. Unfortunately, her aggressive savings habit results in her missing out on nearly 50% of her matching compensation.
Company A matches employee contributions only during pay periods in which employees make a contribution. If the full match is $10,000 then we divide our full match by the number of pay periods in the calendar year.
Company A has 26 pay periods, so $10,000 / 26 = $384.62
$384.62 is the matching contribution Company A will contribute each pay period.
Since Employee #1 maxed out her 401(k) in just 14 weeks, she received the following matching contributions:
$384.62 x 14 = $5,384.62
If this is us, if we work for Company A, we could literally be leaving $4615.32 (or more) of compensation that's been earmarked for us…on the table.
That's just for one year. If we don't pay attention, this starts to negatively compound and work against us. Over the course of 20 years, we could potentially lose out on nearly $160,000 of additional retirement money (invested at 5%). May not seem like much, but that's more than 60% of Employee #1's annual salary. Raise your hand if you're okay with this happening to you?
Nah, didn't think so.
“But Darren, I like to max out my 401(k) early in the year. Then I take the additional money in my paycheck after I’ve maxed out and use it for [insert financial goal here].”
I hear you. First, great work. Love the fact you’re keeping money on your balance sheet and using it for another financial goal vs consuming it via lifestyle. You can still do that. It simply involves a re-framing or adjustment to your savings plan. If you contribute to your 401(k) over the course of the year to get the full match, you’re still putting away the same amount of money vs. if you max it out earlier in the year. The timing of it is simply different. So use the differential in your paycheck starting on January 1 and automate that savings right away. At the end of the year, you will (assuming you’re diligent about it) have the same amount of money for [insert financial goal here].
Going back to Employee #1, she should contribute $19,500 (the maximum amount for 2020) over the course of the year. To make this happen, she simply adjusts the percentage of her 401(k) contributions so they’re spread out over 26 pay periods. Instead of 15% for 14 pay periods, she should contribute 8% of her salary for 21 pay periods and 7% for the rest of the year.* She still contributes the same $19,500 and she gets 100% of her matching compensation - an additional $4615. Over time, we know this adds up.
If Employee #1 is also saving for [insert financial goal here], she can…wait, no. She should adjust her automatic savings to grab the difference in her paycheck (the amount between 15% and 8%/7%) when she gets paid every two weeks.
If you're entitled to matching compensation via your employer's 401(k) plan, do yourself a favor. Set aside some time to be 100% certain you're receiving 100% of your matching compensation. This is a smart use of Money Value of Time.
How To Get Your FULL 401(k) Matching Compensation
Understand how your company matches your 401(k) contributions - are they like Company A or Company B?
Use your company's formula to determine what your full match would be:
If you work for Company B, easy peasy - contribute at least enough to get the full match over the period of time that works best for you. You can skip Steps 3-6.
If you work for Company A, keep reading.
Using a recent paystub, a recent 401(k) statement, or even in your 401(k) provider's website, your contributions and your employer's contributions should be separated somewhere in the paycheck, statement, or online. This tells you how much your employer "matched" year to date, last year, etc.
Compare your numbers from #2 and #3 above.
If they don't match up, then it's time to do some research.
Not sure how to figure it out on your own? Reach out to your Human Resources Department or a fee-only financial advisor and they can help you.
*some 401(k) providers only allow you to contribute in whole percentages; if you can contribute dollar amounts, you might not have to adjust your contribution amounts.
If you've been following along with the blog, you've probably figured out a few key themes I like to use when it comes to financial planning. Themes like: Focus on Financial Factors You Can Control, Life Is NOT A Straight Line, Rate of Savings > Rate of Return, Planning > The Plan, etc.
And where your money goes, and why.
That's what we're talking about this week.
No, no, no. Not budg*ting. We've overhauled that one already via our 6-Step Simple Spending Plan. But I do believe it's important for us to know where our money is going…and why. What purpose(s) is hiding behind our spending/saving habits? Are we really living the life, financially, that we want or are we just saying we want it?
For most of you reading this, you're working and saving and walking what can feel like a very fine line between saving for the future while still trying to enjoy and experience your life today. And that makes sense because when you die, you can't take any unspent money with you, right? But the flip side for those of us still working and saving is this: the future will always call your bluff. So if we aren't saving enough today, the lifestyle we want in the future probably won't match up with the lifestyle we have today.
Life choices. Sigh.
So how do we balance saving for tomorrow and living for today? How do we enjoy the life we're living in today while still trying to replicate that life down the road. I think it begins and ends with understanding where your money goes…and why.
Where Your Money Goes, and Why
You probably know I'm a stickler for rate of savings and the fact our rate of savings will always beat our rate of return. And rate of savings is, say it with me here, a financial factor we can control.
If you're already saving at a 15-20% clip, then balancing today and tomorrow shouldn't be that tough, right?
Wrong. Well, maybe not wrong. Maybe "it depends" is a better answer. Perhaps you don't want to work until 65+. Maybe you want to transition to a job or career that's a little less demanding, gives you more purpose - but doesn't pay as much. Hmmm, now what? Now we have to make some life choices.
If we want to save more money or take a job that pays less or whatever, we likely have to make some choices around where our money goes and why. I'm not saying you need to have a budg*t. Ewww, no. But we do have to know where our money's going…and why.
**Sidebar: I think even if everything in your financial world is going swimmingly, it's still a good idea to know where your money is going, and why. You might find other ways to re-purpose your money towards areas or endeavors that bring you more joy or which you place a higher value on.
Now, finding out what we truly value might not come so easily to some of us. It requires a little leg work. If this sounds like you, here's how you can figure it out:
1) Take a look at the last 12 months, 24 months of your spending habits. I like at least one year's worth because you can see the ebbs and flows of life: holidays, summer travel, etc. Even better, look at 2+ years of spending habits!
2) Next, let's figure out where you're spending your money based on some categories. You can get as specific as you'd like and websites like mint.com can help you organize things.
Okay, we've got our data and we'll start to see some trends - especially if we're looking at 2+ years of spending. Some of these trends might scare you, or appall you. That's okay. We're not judging here. We're trying to find a solution, not point out the problems. We can’t change our past saving/spending habits. We're merely trying to figure out where our money is going.
3) Now that we know where our money is going, it's time to figure out the "why" part. This is where it gets personal. Here’s a sample of some questions you might ask of yourself:
Are those areas, if discretionary spending areas like dining out, shopping etc, truly bringing you joy?
Do they provide more value for you than other areas of your life where maybe you aren't spending or saving as much?
Are you a charitable giver but find you aren't giving as much as you'd like?
Are there things you'd like to do but aren't actually doing, like travel more or save more for your kids' college fund?
I think it's a good idea to also brainstorm or brain dump as many things as you can think of that you want to do, financially. Doesn't matter if you're doing them already or not. Then sort or rank them based on what's most important to you. And now you can see if your money is going to the areas you deem most important to you. Again, no judging on the past.
Phew, we did it. We figured out where our money is going, and why. Now what? Maybe you want to make some changes. Cool! I have a template that can help you pare down your gobs of data into more digestable categories:
Live - what you're spending on daily buying decisions aka lifestyle
Give - what you want to or are already giving
Grow - what you're saving for the future
Owe - what you owe, obvi
**Sidebar #2: the order of the categories listed above is not the order in which we should be organizing our cash flow. It's just a way for you to see everything from a high level perspective. Plus it sounds cool when you say them in that order. To see how we should be organizing our cash flow for efficiency, get the 6-Step Simple Spending Plan.
The template gives you a high level view of where your money is going, and why - based on the four categories Live Give Grow & Owe. And inside of the template you can also highlight and create buckets for the areas you place a high value on. Maybe things like paying off your mortgage early or setting up a vacation fund. If you want a copy, LMK and I'll email it over to you.
Now we know where our money is going, and why. Hooray.
I want to point out a very important detail here. So far we've highlighted the where and we've figured out the why. It's vital we keep in mind and remind ourselves of this:
It's YOUR money.
Only you can decide what's important to you when it comes to where your money goes, and why. Only you can place the amount of value you derive from taking your family on a big vacation each year or giving 5% of your income to your favorite organization.
It doesn't matter what the neighbors or your co-workers are doing or buying. Maybe they have a higher income than you, thus can more easily afford that [insert shiny new object here]. Maybe they don't and they can't really afford [insert shiny new object here] but it looks like they can. The future will likely call their bluff!
It really doesn't matter. Because that's not a financial factor you can’t control.
Where YOUR money goes, and why…IS!
Recently Jill & I took a quick trip to surprise her mom and this required us to fly down to Miami. As we boarded the plane, I peeked into the cockpit. The pilots were in there, doing their pre-flight checks. We moved on down the aisle, took our seats, and prepared for takeoff.
For us, getting to Miami was as simple as booking tickets, boarding the plane, and buckling up. The pilots had a little more on their plate. Before they even boarded the plane, they had a flight plan. I'm not a pilot so I don't know what that exact flight plan consisted of. To me, the flight plan looked like this:
Take off from BWI
Take a nap
Fly south toward Miami
Land at Fort Lauderdale airport
Pretty simple. Not easy, though.
I don't even have to imagine the more intricate details that went into getting that flight from the departure gate to the arrival gate. I don't know what they were but I know it was way more detailed than what I listed above
I also imagine the flight plan didn't go exactly as the pilots planned. We experienced quite a bit of turbulence throughout the flight. Maybe this was anticipated. Maybe it wasn't. Maybe they expected more and we experienced less. Or vice versa.
My point here is that our pilots had a plan. Before they even boarded the plane, they knew exactly what they had to execute in order for the plane to arrive at their destination. And they have to expect going into every flight that something in their flight plan might not, ahem, go according to plan.
So what do they do when this happens? They make changes to the flight plan. They might increase or decrease elevation, they might take a route more east or west, north or south of the intended plan.
They adapt and adjust.
It got me thinking about this financial planning stuff, again.
I've talked about the importance of planning over the actual plan itself. Life is not a straight line. Jill & I are walking proof of this (4 kids in 2.5 years). And recently I've walked side by side with a couple of clients experiencing life events that weren't part of their plan:
an unexpected job change because the current job was no longer fulfilling
parents who needed financial support
an earlier than expected opportunity to buy a retirement property
None of us could have predicted these events would have unfolded 3 months, 18 months, 36 months ago. And while we could say the third example was part of their "plan", the timing certainly wasn't planned for.
The good news is each of these clients were prepared for their life event through the planning that's happened along the way. Part of their plans involved (say it with me) focusing on factors we could control. Factors like rates of savings and having cash on hand. And when their plans changed course, we were able to change course with it. We simply did a little more planning.
Our financial plans will never work out exactly as the numbers tell us - just as our pilots' flight plans won't always be as smooth as planned. The key here is having the ability and know how when it comes time to adapt and adjust.
The key is in doing the planning along the way.