This post is by staff writer Honey Smith.

In my last progress report, I mentioned three pieces of good news:

  • I paid off my small student loan balance,

  • Jake paid off the balance transfer he’d made to one of my credit cards, and

  • I got a raise

Shortly after those occurrences, I reached another milestone: I celebrated five years with my current employer. Why is that a financial milestone? Because I became vested in the employer contributions to my 403(b) account!

This makes me very happy — when I started tracking my finances on GRS, I had just over $12,000 in my retirement account. Today, I have almost $32,000. What a difference a year makes!

As many personal finance milestones do, this one opens up some additional options for me, particularly regarding taxes now and retirement later. I just have to decide the best solution to my “problem.” I thought GRS readers might have some insight as I weigh the pros and cons of each, so let me walk you through my thought process so far.

The current solution: increase my withholdings

As I mentioned in my August progress report, my side gigs have expanded to the extent that I believe I’m going to owe additional tax for 2013. When I received my recent raise, I was already living within my then-current salary. So to mitigate my tax burden, I increased my federal withholdings by the amount that my take-home pay had increased ($50).

With about ten pay periods until the end of the year, that’s an additional $500 that will automatically go to my tax bill. I still think I will owe at both the state and federal level, but I’ve been setting aside a third of my business income. I will have the cash ready to cover whatever I owe when the time comes. Then I can adjust my withholdings to the appropriate amount for 2014.

However, my employer recently made me aware of another option: increasing my 403(b) contributions.

Another possible solution: increase my pre-tax retirement contributions

Currently I contribute 7 percent of my gross salary towards my 403(b), up to the employer match. This contribution percentage is mandatory at my employer. I was not a huge fan of this policy when I started my job and was trying to pay off my credit card debt. Now that I’ve paid off the credit cards despite a lower take-home pay and have a respectable balance in my retirement account to boot, however, I think it’s pretty awesome.

After I became vested, I got an email from my employer suggesting that I increase my contribution to 10 percent. Coincidentally, this is also an increase of about $50 per paycheck. That means that increasing my retirement contributions would have about the same impact on my monthly bottom line as increasing my withholdings has.

Increasing my retirement contributions would have the added benefit of giving those contributions some additional years to compound. This is especially important to me because I didn’t start contributing to retirement until age 28. Because I spent so much time in school, I missed out on about a decade’s worth of contributions. I’ve got some catching up to do!

This article at Fidelity suggests that by age 35, you have 1X your current salary set aside for retirement. Since I’m currently at about $32,000 and my 35th birthday is next year, increasing my contributions would get me almost all of the way there even before taking into consideration potential market gains. Getting on track feels smart.

Other factors: what is my freelance money for, anyway?

Of course, there’s nothing to say that I couldn’t both increase my withholdings and my retirement contributions. However, I’m worried that if I did that then it might lead to me relying on a portion of my freelance income for my everyday expenses. Why does that make me nervous?

  1. It makes me feel secure to know I could live off my day job’s take-home pay. Feeling like I need two streams of income to maintain my lifestyle gives me the lifestyle-inflation heebies, even though technically I’d be saving and could undo the changes at any time to bump up my take-home pay if I needed to.

  2. I think of my freelance income as “bonus money.” I have been allocating my freelance income to paying off debt and padding my savings account. However, after so many years of living paycheck to paycheck, I am enjoying the flexibility and responsibility of deciding where my income could best be utilized each month.

  3. I have to fill out “official” forms to make any change. To update my withholdings, I had to change the information on my W-4. To increase my retirement contributions, I have to fill out a bunch of other “paperwork” (sarcastic quotation marks because it’s actually an online form). Official forms read HIGH STAKES to me. What if I make a mistake that ends up costing me a ton of money?

  4. Change is scary. Counting on my freelance income means admitting that I’m earning more. And because this has been such a huge change, it’s possible that I’m afraid to earn more.

Being a little bit afraid is fine, I think. A healthy amount of fear (or maybe we should call it uncertainty?) is why we save for emergencies, pay off debt, and save for retirement in the first place. But being too afraid can be damaging, both psychologically and practically.

Fear-based decision making and “analysis paralysis”

J.D. has talked about building confidence and overcoming fear before. He believes that coming from a place of fear has the potential to lead to bad decisions. In my case, I don’t think that there is a “bad decision.” There is every reason to believe that I will be able to meet my tax obligations, save for retirement, continue to build my emergency fund, pad my online savings account, and pay down my debt no matter how I choose to allocate my money.

I can’t ignore my feelings, nor should I. However, that doesn’t mean that fear should be the driving force behind my decision-making process. Especially if it’s fear of success! I also feel like I am running the risk of letting the Paradox of Choice lead me to “analysis paralysis.” I want to avoid making decisions out of fear, but I also don’t want to end up in a situation where I don’t actually do anything because I’m too busy writing naval-gazing articles about my various options.

I’m very excited to finally be making significant headway with my finances, and I want to do the responsible thing. What would you do if you were in my situation? Are there other factors that I’m not considering?

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