The Gig economy is NOW. Being self-employed offers incredible flexibility and ownership. One question that we hear often is, "how do I save for retirement without a traditional 401k." Don't worry, we've got you.Read More
There are so many crappy lists on the Internet, most of them designed to get advertising in front of your eyeballs. We have our own non-crappy list to share. It's our list of fundamental truths of personal finance and investing.
1. It Ain’t Rocket Science – Money guru Dave Ramsey has observed that “80% of personal finance is behavior” not education. You don’t need to be an expert on the stock market or high finance to start building for the future. All you really need is a solid plan and the commitment and discipline to stick with it over the years.
2. Start Early – Time can provide a powerful tailwind for your investments. The sooner you start saving for retirement, the more time your money has to take advantage of compound interest – a process in which the interest on your savings earns more interest. We should start saving for retirement from Day One of our first job. If you haven’t started yet, do it today! Waiting just 8-10 years to launch your savings program can really slow your growth and reduce the size of your potential retirement nest egg.
3. Set Goals – If you don’t know where you’re going, you’ll never get there. Carefully define your savings objectives, whether it’s a house or retirement. Visualize them in detail. Then, figure out how much you need to reach that dream. Use that information to craft a plan to reach your goal.
4. Budget – We too often think of a budget as a straightjacket or prison cell. But it’s actually an empowering tool that allows you to see where your money is actually going, better control your spending and stay on track towards your goals. If you don’t have a budget, you are flying blind in one of the most important aspects of your life – your finances. We guarantee you will get at least three significant surprises when you start analyzing your spending. “I spent how much at Starbucks last month?!
5. Spend Less Than You Make – Common sense, right? But it’s incredibly easy in this easy-credit, consumer-driven world to live beyond our means. Try to save at least 15% of your income.
6. Pay Yourself First – You can’t spend money you never see. Arrange to have your savings deducted from your paycheck via the 401k plan and/or direct deposit into a brokerage account.
7. Always Take Free Money – If your employer offers to match a percentage of your 401K contribution – and most do -- maximize that benefit by contributing to the match limit.
8. Don’t Go House Crazy – There is nothing worse than being ”house poor.” A too-big mortgage payment can really limit your ability to save – and spend on other things you need and want. So, when shopping for a new house is careful not to over-buy. Think very carefully about what you actually need in a home. How many square feet? How many bedrooms? How big a yard? How important is it to live in that trendy neighborhood? Stick to those parameters in your search. And remember: You don’t have to spend every dollar the bank is willing to lend you.
9. Protect Yourself – A complete personal finance plan includes provisions to protect the life and future you are building. Life insurance and estate planning are key to making sure your obligation to your loved ones is met, even after you are gone. If you don’t have life insurance start shopping for it today. (If you haven’t reviewed your policy in a while, do that. Make sure your benefit reflects any changes in your situation.) As soon as that’s done, make your will and get it filed. You can use an attorney or an online legal service like LegalZoom.com.
So, there you have it – the most useful, least misleading list in the history of the Internet.
Have questions? Not to worry. Just Click the button below.
Why don't people save? It could be one of several reasons: lack of knowledge, lack of motivation, lack of drive, or lack of discipline. Is this you?
The Barrier and the Hurdle
Saving doesn’t occur because of a knowledge barrier and an inability to get over a psychological hurdle.
Think of some of the excuses people have:
- I don’t know where to save – KNOWLEDGE BARRIER
- I don’t know how to save – KNOWLEDGE BARRIER
- I can’t save – PSYCHOLOGICAL HURDLE
- I don’t have enough money to save – PSYCHOLOGICAL HURDLE
- Prices have gone up and now I can’t save – KNOWLEDGE BARRIER & PSYCHOLOGICAL HURDLE
Many people have a tough time getting over the knowledge barrier which leads to losing any motivation. Think back to your days in college. Even though you liked a subject, you HATED one. You would go to the library motivated as hell to get a good grade on the exam. Once you started reviewing the material, you would get frustrated that you didn’t understand it. Then, you would take a break, go back, and continue to be frustrated. All that motivation at the beginning was lost and you might as well not shown up for the exam. You was beat before you even started.
That’s how many individuals react when it comes to savings. A recent Wall Street Journal article stated that 26% of Americans have ZERO emergency savings. Don’t let yourself become part of that statistic.
The first step we need to overcome is the knowledge barrier. Here’s how we would view saving money. Lay each brick in sequential order to build your financial pyramid.
Brick 1 – Pay off your debt: Although this may not seem like saving, it is. By getting rid of the bad debt (student loans, credit card, etc.), you are creating the true foundation for financial stability. In order to reap the full benefits of this first brick, DON’T continue racking up debt while on this level.
Brick 2 – Build emergency reserves: This is money that should be used only in emergencies. For instance, your car windshield breaks and you are waiting on the insurance money to come in…dip into this fund to pay for it and then fill your emergency reserves back up when you get your insurance check. We need three to six months’ worth of expenses to solidify this brick.
Brick 3 – Short term cash: This is savings for an expense that is coming due within one to three years. Maybe it’s a house or an engagement ring. These monies should be invested in very safe investments… just in cash or a CD.
Brick 4 – Match your 401k: If your company offers a 401k, increase your 401k contribution amount to be at least what the company is matching (if they are matching at all). Matching just means that if you are participating in the 401k, the company will contribute some money to your 401k as well. Think of it as free money.
Brick 5 – Max the Roth IRA: This is dependent on your tax filing status and current income (see 2014 table here). But, if you are able to contribute to the Roth, then set a goal to put $5,000 ($6,000, if 50 years or older) into it. Money goes into a Roth after tax and comes out tax free… and the money grows tax free within the Roth. Wahoo!
Brick 6 – Max out your 401k: Remember that account where we have free money? Well, we can actually put more than that amount (likely) into the 401k. The max that we can contribute is $17,500 per year ($23,000, if you are 50 years or older). So, set a goal for an amount that gets you from your contribution on Brick 4 to your maximum ($17,500 or $23,000).
Brick 7 – Put money into a brokerage account: Many refer to this just as an investment account. No maximum amount restrictions or investment restrictions. It’s an account that allows for you to invest in any type of investment, such as a stock (Apple, IBM, etc.) or bonds. But, there are no tax benefits to a brokerage account, but it is very useful to our pyramid.
Bite Size Motivation = Chunks Worth of Savings
The second step is to overcome the psychological hurdle. We need to find a way to stay motivated and not let ourselves lose before we ever begin. Saving is a daunting task. Unless we are saving for Brick 3 (short term cash), we aren’t really going to see fruits of our labor for a long time.
- One source of motivation is reward or instant gratification, so instead of looking at your savings as this extremely long term task, cut it up into bite size pieces.
- Set a reward for completing each savings brick. Now, there are only seven bricks, so each completed brick would be a large reward. Maybe treat yourself to a meal at that steakhouse you have been eyeing for a while now, or maybe buy that piece of jewelry you have wanted (within reason)! Set these larger goals and write them out somewhere so that you will see them daily (maybe the bathroom mirror).
- Okay, that’s done, but it’s still too long because it could be multiple months or years to accomplish some of those bricks. Cut the task into even smaller pieces. Take each brick as its own task, and break it down into monthly goals.
We know what our emergency reserve goal needs to be our monthly expenses multiplied by three.
Emergency Reserve Goal: Monthly expenses * 3
Take this number and divide it by six or twelve (however quickly you want to complete your smaller goals to get the bigger reward).
Smaller Goals: Emergency Reserve Goal/6 OR Emergency Reserve Goal/12
If you complete each smaller (monthly) goal, treat yourself to a small reward. Maybe that movie you have wanted to see or that bottle of wine you have wanted to try.
Be sure you don’t use all of your savings for your reward. Use just a small piece of it. The goal is to save, but the mentality with this program is that if you save $100 and spend $10-20 of it, you have still likely saved more than you would have if you didn’t reward yourself.
Brick by Brick We Can Overcome the Barriers and Hurdles
It’s easy to sit here today and say I wish I had created Google or found a way to better understand statistics… because they are either irrelevant or not that realistic.
However, money is both relevant and realistic, and, unfortunately, too many people wait to worry about savings until it’s too late. Many times I hear that people don’t deal with savings now because they don’t think it’s relevant to them. They think they’re too young to worry about savings yet. That’s completely false.
Down the road, we don’t want to have that, “I wish,” thought about saving more. The barriers and the hurdles have been torn down. Now is the time for us to begin the process that will allow for us to say down the road, “thank goodness I started saving early.”
There’s a simpler way to keep your spending on track. All it requires is some initial analysis and a bit of discipline. It’s called the Daily Spend Limit. Here’s how it works.Read More
If you have kids, you love them. You want to give them everything, yet you want to make sure that they don’t have “too much” and that they “earn their way” as we once did. There is a balance when it comes to sending our children to school. However, the majority of parents want to be able to help pay for their children’s college tuition in some way, so let’s make it simple to save for college.
How Much It’s Going to Cost
Average cost of public in-state tuition in 2014: $22K. Inflated at the average inflation rate of education over the last 10 years this becomes $46K by the time your newborn goes to UGA. Four years later, you have spent over $180K in college costs (if you are considering covering the full boat). If you have nothing saved today and you can earn 7% on your money (which you should be able to do this in the stock market), you have to save $418/month to amass the full $180K by the time little Joey enrolls. Have a second child and…..well, you do the math. Calculate how much you might need to be saving using our Education Goal tool at www.yourwela.com
This can obviously be a low or high number depending on the college that you end up sending you child to, but it’s worth discussing these numbers as an average when you are planning.
How to Save
Always remember, there are student loans for a reason. People will lend kids money to go to school because they know that they have 40 years of earnings potential ahead of them to get paid back, whereas nobody will lend you money to retire. Save for your retirement first. Talk to your financial advisor or Wela to determine how much you need to be saving for you first.
Once you take care of retirement, determine how much you have in excess monthly cash flow (income minus normal expenses minus retirement savings equals excess cash flow) and set up an automatic withdrawal from your checking account into the college savings account of your choice (see below). Choose a monthly savings number using our tool at www.yourwela.com. This makes it automatic and seamless every month.
Where to Save for College
The most common place to save that we all hear about is a 529 plan. We like 529 plans because you put in cash today, it grows over time, and you can withdraw the amount you put in and the growth tax-free. This is a big benefit, especially when you start early. The biggest problem with a 529 plan is if you don’t use for qualified college expenses, you must pay taxes and an additional 10% penalty on the earnings of the account. This is a hefty penalty. You do have options, such as transferring the proceeds to anyone, family or not, but this should be avoided at all costs.
The other option is to save in your own after-tax, brokerage account and just earmark the funds for this very specific purpose. This way, if your kids are the geniuses you thought they were and get a large amount of scholarships, you won’t have to pay penalties or too many taxes on the savings you put away which they might not need.
How Much to Really Save
We don’t typically suggest saving every dollar that it could cost you to send your children to college. Many factors could reduce the amount owed (scholarships, grandparents, less than average inflation, etc.). With that in mind, we don’t suggest over funding since you are penalized for not using the funds for college.
My goal is to save 80% of the inflated cost for our family’s first child and 50% for the next one in a 529 plan. This way, the first child’s education can be fully funded, and any amount leftover can be passed onto the second child. In addition to these funds, we will be saving with “earmarked” savings in our other investment accounts.
Start saving early Know how much you are aiming to save Break down how much you need to save by month Determine whether a 529 or brokerage account makes more sense Do it, now
Fighting back urges is difficult at times.
I mean, that guy that tries to muscle his way through the line, and shoves you and your girl needs to hear a piece of your mind, right?
Or what about the urge to let BJ Upton know how you feel about him after he strikes out (which is often) with runners on? The only problem is that little kids are around, and we don’t want to tarnish their future, but the urge still arises.
These aren’t uncommon, and at times we resist the urge but at others we don’t.
When we don’t hold back on muscle man we most likely end up with a black eye. Then when we don’t hold back on BJ, we may get a stern look from the little kid’s parents.
Either way, we remember the decisions that we made, the outcome and how we felt.
We usually feel better (longer term) when we resist the urges we know aren’t good for us in the long run. I understand the mentality of “well, they deserved it, and it felt good to get it off my chest,” but isn’t it better to be a lover than a hater, calm rather than violent and cool rather than creepy?
Investments are no different than the muscle man; they will push you around, and if we can resist the urge to push them back, we can be on our way to reaching our million dollar goal. When we don’t, we very well might get multiple black eyes that will keep us from reaching our goals.
Our past has been rough…. Don’t let the future be the same too
If you are in your 20s or 30s, the investment environment hasn’t been too kind to us.
We have had the great fortune to see the technology sector collapse in 2000 (right as some of us began having the desire to invest). We experienced the sadness of 9/11. Then we experienced the worst economic recession since the Great Depression… which was something that we believed only old people dealt with.
Either way, these experiences haven’t given us much comfort to invest in the markets. We’ve seen Mark Zuckerberg develop Facebook and make billions. We’ve seen App companies sold for billions of dollars, and so we now believe we can make that quick billion… HA!
Recent events tend to drive our decision making process, so the terrible experiences have pushed our generation away from traditional investing.
However, traditional investing is still the one place that we could put $100 and (historically speaking) get $1,000 back in 10 years.
I don’t think that it only cost $100 for Zuckerberg to get his billions, rather it cost a pretty penny.
Traditional investing lets those other guys spend all the money developing the company while we can reap the rewards afterwards, with less of a contribution.
Moral of the story, resist the urge of a quick buck.
Focus on the pie, not the pieces
Say you put $5 into two different investments, and one investment sees a $1 gain while the other investment sees a $1 loss. Rating your feelings (1 being extremely pissed and 10 being extremely happy), how would you rate each investment?
Studies would show that people would likely rate their feelings towards the losing investment as a 1, while rating their feeling towards the investment with gains at a 5.
We tend to be much more upset with our losers (actually studies show two times as much) than we are happy with our gainers.
What this does is lead us to some of those undesirable investment urges. We let the emotions of the loss drive our investment decision making. This causes us to sell at the complete wrong times, and then try to recover our past losses at the exact wrong time.
Resist the urge of focusing on individual investment returns.
Prepare for a storm and weather it in silence
When it snows, in Atlanta at least, we stock up our pantries well in advance. If you go to the store the day the storm is set to come, the shelves are empty.
When we wait until the last minute we are stuck with what we have at the house and relying on neighbors. However, we typically do not overreact, and try sell all our valuables just to get food for this short time period.
We do this because, ultimately, the storm passes, and the shelves go back to being full so we can go replenish our empty pantries.
The markets have always been able to weather the storms. They recovered from the Great Depression; they have made it through multiple wars and, they have found a way to advance during the worst and best of presidents.
After the markets saw their shelves cleaned and money lost, they became replenished… because ultimately the day the markets collapse for good is the day we have bigger things to worry about.
So, build your portfolio for longer term goals, and if you don’t put all your eggs in one basket, you will be able to weather those snowstorms that come along the way.
Resist the urge to react over short term events.
Oh, remember we are just average
Trying to outsmart the market will not work.
I often hear of people telling me that they timed this situation perfectly and nailed that last market fall. They don’t tend to tell me about the times they didn’t time it right or outsmart the market.
Investing is supposed to be a boring thing. Gambling is exciting. When you begin your investment career, you have to make the decision whether or not you want to invest for your future goals or gamble for them.
If you decide gambling is for you, then best of luck. As they say in Vegas, the house always wins, and that’s how it will be within the markets.
Resist the urge to try and outsmart the markets.
I’ll leave you all with words from the best investor of all time, Warren Buffett: “Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
Related Blog Posts:
It doesn’t matter whether you make $20,000 per year or $200,000 per year. Having a budget will improve your life in the long term. Unfortunately, the term “budgeting” makes people think of limiting their fun and restricting their choices, but if you take the holistic view, budgeting actually helps relieve constraints and increase life choices.
The financial needs of single people differ from the needs of couples and families, and the needs of single parents obviously differ from those of the single person without dependents.
However, there are several solid budgeting principles that apply to single people of all ages, incomes, and life situations, like these five.
Building an Emergency Fund is Critical Conventional wisdom says you need half a year’s worth of living expenses socked away for emergencies, but keep in mind that the higher your salary, the longer it generally takes to find a comparable job. According to the Boston Globe, a general rule of thumb is that it takes one month of job search for every $10,000 you were earning. Place emergency funds where they can be accessed quickly and without penalty if you need them. Money market accounts and high-interest savings accounts are good choices. Start your emergency fund even if you can only spare a few dollars monthly. Any emergency savings is better than none, and if you use direct deposit you’ll be surprised at how little you miss the money you set aside.
Assess Your Need for Life Insurance If you are a single parent, you need life insurance in the amount of at least ten times your annual salary. Young, healthy people generally pay low premiums. If you don’t have dependents, but worry that a family member would be burdened by burial and legal costs if you were to die, then you should consider purchasing a term life insurance policy in an amount sufficient to deal with your estate and burial. Lifehacker has some informative guidelines for determining how much life insurance you need.
Start Saving for Retirement as Soon as Possible If you’re a young single person, start saving for retirement now. When you start saving for retirement in your twenties, you set yourself up for a far more comfortable retirement than if you start in your thirties. Furthermore, as a younger investor, you can take more risk with your 401K portfolio than older people can, and should some of your risks not pay off, you still have plenty of time to recover. If your employer matches 401K contributions, do not pass up this opportunity. Those 401K matching benefits are the closest thing you’ll get to free money, and they really add to your personal wealth over the decades.
Use Bi-Weekly Paychecks to Your Advantage If you are paid bi-weekly, you have another easy opportunity to boost your savings. Rather than depositing money into savings at the beginning or end of each month, have savings automatically withdrawn from your paycheck. Chances are you won’t miss it, and at the end of the year you’ll essentially have an extra month’s worth of savings in the bank since you have 26 pay periods in a year. If you buy a house and can arrange bi-weekly mortgage payments, it’s also a terrific way to pare down that principal over the years.
Never Assume that Marriage Will Fix Your Finances Don’t think of single life as a precursor to “real” life that involves getting married and having children. Manage your money effectively as a single person, and don’t ever get into the mindset of, “I’ll budget when I’m married.” The financial habits you develop now can have an enormous influence on how you manage money should you marry and have a family. Going into marriage with an emergency savings account, a thriving 401K and limited debt makes the future brighter for both partners. Real life is right now. Don’t put off adult responsibilities until you have a ring on your finger.
Some single people, particularly very young ones, mistakenly think budgeting is unnecessary if they keep the bills up to date and don’t abuse their credit. However, the financial habits you develop as a young adult have a massive impact on your future.
Budgeting now will make life easier should you buy a house, get married, or have children, and it can make the difference between a comfortable retirement and a retirement that requires a lot of sacrifices.
This article originally appears on Mint.