Money Management

It shouldn’t surprise you that the richest Americans also have some of the largest bank accounts. Find out how much they have on average. 

When you think of rich people, you probably think of people with a lot of big, expensive stuff: multiple houses, cars worth six figures, and yachts to drive them to their private islands. But most of them also have money they just sit on. They keep money in checking and savings accounts just like you and I do — except obviously they have a lot more.

If you’ve ever been curious, the Federal Reserve’s latest Survey of Consumer Finances gives us a little insight into just how much rich people actually keep in the bank.

How big is that bank account?

We all probably have our own definitions of what constitutes a rich person, but for this discussion, we’re going to look at households whose usual income falls in the top 10% of all Americans. For 2022, those in the 90th percentile made about $245,400 on average.

If you’re wondering how this compares to the rest of the country, here’s a breakdown of the average usual income for selected percentiles. Keep in mind these are household figures, not individual ones.

I probably don’t need to tell you the richest households have no problem stashing money away. But to get a sense of just how much more they have than others, it helps to look at what people of other income levels have saved on average. So here’s a breakdown based on the latest data from 2022:

The general pattern isn’t surprising. A higher income makes it a lot easier to stash money in the bank. What is surprising is how much more the richest 10% have saved compared to the bottom 20%. The wealthiest 10% earn about seven times more than the bottom 20%, yet their savings are 124 times higher. That’s quite the difference.

How to start growing your savings

I won’t sit here and pretend you can penny-pinch your way to a six-figure bank account balance if you’re currently in the bottom 20% with $900 or less in your checking account. It’s probably not going to happen. But there are a few things you can try that could help you get your personal finances on a firmer footing.

First, choose the right accounts for your money. A lot of brick-and-mortar banks have maintenance fees and they don’t pay you a lot in interest. That’s bad news for anyone, but especially those who don’t have a ton of extra cash.

Online banks, on the other hand, are known for offering high interest rates on savings accounts and some offer interest on checking accounts as well. Most don’t charge maintenance fees or have minimum balance requirements either. Switching to one of these could potentially put more money in your pocket because you’ll be able to ditch any monthly bank fees you’re paying now, and you could earn more in interest.

You could also look into community and government programs, like Supplemental Nutrition Assistance Program (SNAP) benefits, that help low-income families with their everyday expenses. This could potentially free up a little extra cash you could put into savings.

And if cutting your expenses back isn’t possible, see if you can find ways to boost your income. You could try a side hustle if you have some spare time. Or see if you’re able to negotiate a higher salary at your current job.

Saving regularly is ideal, but if you’re not able to do this, set aside money when you can. Even if it’s just $5 or $10 here and there, it adds up. Over time, you can work toward an emergency fund that can help you avoid major financial setbacks when unexpected costs come up. Once you’ve got that taken care of, you can start working toward some of your longer-term goals.

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Self-employment tax can take a big bite out of your income — and it could be even costlier next year. Keep reading to find out why. 

If you’re a gig worker or freelancer, you’re technically considered to be self-employed — even if all of the work you do is for the same company. This means that you are an employee, but you play the role of “employer” as well. And that means you’re probably going to have to pay self-employment tax.

The IRS just announced its 2024 updates to tax brackets and other figures that are adjusted annually for inflation. One of the most significant updates gig workers and freelancers need to know about is the Social Security taxable maximum earnings, which could have big implications for your self-employment tax.

How self-employment tax works: The quick version

Most workers in the United States are required to pay taxes to help fund Social Security and Medicare. The Social Security tax rate is 6.2% of all earned income up to a certain limit, and the Medicare tax rate is 1.45% of all earned income, with no limit.

If you work in traditional employment — meaning that you get a W-2 at the end of the year — you pay Social Security and Medicare tax according to these rates, and your employer also contributes an equal amount to these programs. But if you’re self-employed, you’re both the employer and the employee.

As such, self-employed individuals are required to pay both the employer and the employee sides of these taxes. This is collectively known as self-employment tax.

The big self-employment tax change for 2024

In 2023, the self-employment tax is structured as follows:

15.3% of the first $160,200 in net self-employment income (Social Security and Medicare)2.9% of any income in excess of $160,200 (Medicare only)

But the threshold for the 15.3% — which is officially known as the Social Security contribution and benefit base — is adjusted upward for inflation every year. In 2024, the contribution and benefit base, which is the maximum amount of income Social Security tax can be applied to, is rising by $8,400 to $168,600.

It’s also worth mentioning that if you are a gig worker or freelancer in addition to W-2 employment, the contribution and benefit base refers to all of your earned income. For example, if you earn $100,000 from W-2 employment in 2023, a maximum of $160,200 in self-employment income is subject to the full 15.3% self-employment tax rate.

What it could mean to you

If you are a relatively high earner with self-employment income, this could result in a big tax increase in 2024. In fact, the $8,400 bump in the contribution and benefit base translates to an additional $1,041.60 in self-employment tax for individuals with more than $168,600 in net self-employment income.

Unlike with federal income tax, there are no deductions or credits that will reduce your self-employment tax. You could potentially create an S-corporation and pay yourself a salary from it to lower your self-employment tax, and if you’re a high-earning freelancer or gig worker, you might want to discuss this option with a financial planner or accountant.

Another effective strategy could be to ensure that you’re properly recording and claiming all of your business expenses (again, talk to a tax or financial professional), as self-employment tax is only assessed on net self-employment income, and business expenses lower this figure.

The bottom line is that there are some ways to potentially lower your self-employment tax, but even if you can’t, it’s important to know what to expect for next year so you can plan your estimated tax payments and other tax strategies.

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Opening a taxable brokerage account is a smart choice if you’ve claimed key tax breaks already. Here’s what you need to keep in mind. 

Some types of brokerage accounts have tax advantages. For example, if you invest in a traditional IRA, you can typically take a tax deduction for the amount you contribute each year (up to annual contribution limits). Or if you invest in a Roth IRA, you’ll be able to take money out tax-free. With these accounts, your money also grows tax-free so you can sell investments at a profit without having to pay capital gains taxes.

If you open a taxable brokerage account, though, you won’t get to deduct contributions, make tax-free withdrawals, or avoid taxes in most cases. But investing money in this kind of account still makes sense in some circumstances. Here’s what they are.

When you’ve maxed out tax-advantaged accounts

In many cases, it’s a smart decision to max out contributions to tax-advantaged accounts first before putting money into a taxable brokerage account. After all, why pass up a subsidy from Uncle Sam that makes saving easier?

The contribution limits for tax-advantaged accounts for 2023 are:

$22,500 for a 401(k) for those under 50 and an additional $7,500 for people 50 and over$6,500 combined limit for traditional and Roth IRAs for those under 50 and an additional $1,000 for people 50 and over

If you have maxed out these accounts and claimed all of the related tax breaks available, then it can make sense to put extra money into a taxable brokerage account to make even more of your wealth work for you.

When you’re investing for something other than retirement

If you are not investing for retirement, you will likely need to put that money into a taxable brokerage account (except in limited cases such as when you are eligible to contribute to a health savings account).

See, tax-advantaged accounts are typically limited to retirement plans and there are restrictions on when you can take your money out without penalty. If you want to invest and access your money on your own schedule rather than when the government says you can, a taxable brokerage account is the way to go.

When you want more investment options

There are some limitations on what you can do in tax-advantaged accounts.

The typical 401(k) offers a limited number of investment options, such as around a dozen or fewer funds you can put money into. IRAs offer more choices since you can usually invest in almost any assets the brokerage account offers, but there are still some extra limits in most cases. For example, you may not be able to trade all options strategies or trade on margin within an IRA (which means you borrow against the value of your equities to get more money to trade).

If you want to execute any investment strategy you want, a taxable brokerage account is usually your only choice.

If you do decide to invest in a taxable brokerage account, remember that you pay taxes on dividends and when you sell. On the positive, when you sell assets, you’ll be taxed at a lower tax rate if you own your assets for longer than a year. So don’t be afraid of a taxable account if investing in one is the right move for you.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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If you’re going freelance, your financial life is likely to get more complex. Take a look at three things in particular you need to know. 

There have never been more opportunities in the gig economy than there are now. If you want to use your skills and resources to become a freelancer or pick up a side hustle, now could be a great time to try it.

Like any major life decision, there are pros and cons. After all, if freelancing was an ideal situation, everyone would do it. While the flexibility of freelance life can be fantastic, and ambitious freelancers can essentially control their own income in many cases, there are some drawbacks.

Compared to being an employee, you’re likely to discover that your financial life is much more complicated as a freelancer. Here are three important financial lessons to keep in mind if you decide to pursue work in the gig economy.

1. Taxes can be devastating if you don’t plan ahead

In my first full year where freelancing was a large source of income, I was shocked to find out that I owed the IRS about $14,000 at tax time. I simply figured the withholding from my W-2 employment would cover whatever I had to pay — after all, prior to becoming a freelance worker, I received a tax refund every single year. (To be fair, I wasn’t a Certified Financial Planner® way back then!)

The point is that freelancers need to understand how they’re taxed and how to properly plan for it.

On the latter issue, the IRS generally requires freelancers to make quarterly estimated tax payments based on their anticipated tax liability. But even paying a lump sum every three months can be a burden. I typically suggest freelancers set aside a reasonable percentage of their income for taxes every time they get paid.

It’s also important to know that in addition to paying federal income tax, freelancers also have to pay self-employment tax to cover their contributions to Social Security and Medicare. In a nutshell, because these taxes are generally split between the employer and the employee, and freelancers are technically both of these things, you’ll end up paying double the Social Security and Medicare tax that you would as an employee with the same income.

However, there are several unique tax breaks available to freelancers, such as the home office deduction and a deduction for mileage you drive for business reasons. In short, my advice would be to learn as much about self-employment taxes and tax breaks as you can.

2. Retirement contributions will sneak up on you

One of the most valuable tax breaks available to freelancers is the ability to use retirement accounts such as SIMPLE IRAs, SEP-IRAs, and Solo 401(k)s. All of these options have much higher contribution limits than traditional IRAs and Roth IRAs do.

However, be aware of your contribution deadline and plan accordingly. Retirement contributions can be a fantastic tax break for self-employed workers. For example, the contribution limit for a SEP-IRA is essentially 20% of your net self-employment earnings up to $66,000 for 2023. But you don’t want to have to come up with your entire contribution right before the deadline — it’s best to spread it out over the entire year.

3. You need more emergency savings than the average worker

Fortunately, I didn’t learn this lesson the hard way, but I know several freelancers who did. Financial planners generally suggest aiming for six months’ worth of savings in an emergency fund, but this is even more important for freelancers.

Think of it this way: Who is more likely to need to cover several months’ worth of expenses — a W-2 employee who has been at their job for 10 years or a freelancer whose income varies significantly from month to month and depends on several different client relationships?

Is being a freelance worker worth it?

To be sure, there are some financial drawbacks of being a freelancer. Even if your tax burden ends up being lower than it was as an employee, it’s likely to be far more complicated. And you’re on your own for retirement savings, while employees generally have a 401(k) or similar plan to use.

However, there are some rewarding qualities of freelance life, especially when it comes to flexibility and work-life balance. For example, I’ve been self-employed as a freelance writer and investment analyst for more than a decade, and I don’t exactly miss the need to check my PTO balance every time I want to take a day off.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Matthew Frankel, CFP® has no position in any of the stocks mentioned. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.

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Insurers are often willing to accept payments once per year, rather than once per month. Learn why one writer opts to pay annually. 

I have many different kinds of insurance. Like most people, I have automobile insurance for my car. I also have homeowners insurance to protect my property.

Whenever I sign up for an insurance policy, I make sure to set it up so I can pay my premiums annually. This is one of many choices available to me, as I could also opt to pay monthly or to pay on some other set schedule such as quarterly or twice a year.

There are two very simple reasons why I opt to cover my insurance costs with one annual payment instead of making several smaller payments throughout the year. Here’s what they are.

To earn a discount on premiums

The single biggest reason why I always make sure to pay insurance premiums annually is because doing so saves me money. Many insurers provide around a 5% to 10% discount to policyholders who make a single lump sum payment or who pay just twice a year instead of breaking up the premium into many smaller payments.

I have different insurance companies for different things, so the exact amount I personally save differs between companies. But overall, I end up paying about 7% less for all of my coverages than I would if I broke up the payment and sent it in monthly instead.

Saving 5% to 10% can make a real difference in how big of a burden insurance costs are. For a policy with a $1,000 annual premium, for example, getting 10% off the price just for paying once per year would result in an extra $100 in savings. That’s a good chunk of change that most people can find many more fun things to do with than sending it to an insurer.

To simplify my life

Another reason I prefer to pay my insurance premiums annually is that it makes my life a lot simpler.

I don’t have to sign into my online account and arrange to make payments each month or several times a year (or even sign in to check that autopay worked properly). Instead, I just transfer a little money from my checking account to my savings account each month automatically. That money collects in my savings account and is ready to go to pay the premiums when they are due. I simply transfer the funds over when the bill comes.

Of course, this only works for those who have the money to pay their premiums in one lump sum. I’m lucky enough to be able to do that because I shopped around carefully for affordable coverage. Since my premiums are affordable, it’s not hard to set aside money in a savings account each month.

Anyone who is able to save the money for auto insurance in a savings account of their own may also want to consider paying these premiums monthly as well. This will mean they can also get a discount and avoid having to think about their insurance costs too often.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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