Sometimes it can be difficult to save for emergencies or for retirement. While physically not demanding, the mental strain can be a hump that is hard to get over. In other words, we experience a little bit of “pain” or mental anguish if we have to physically hand over money or write a check. So how can we overcome this anguish? Automate. First, determine how much you need for an emergency. This can either be to start the fund or to replenish amounts that have been used. Generally, it’s a good idea to have 3 to 6 months of non-discretionary expenses (expenses that don’t go away if you lose your job or become disabled) set aside in an FDIC insured bank account. Some individuals may find it more comforting to have 6 to 9 months or 9 to 12 months. It’s up to you. For retirement, I recommend saving 15 […]
Over the last few weeks I’ve gotten quite a few questions from individuals ready to graduate college and start embarking on their first job. As is often the case, many of these individuals have varying amounts of student debt but also understand the importance of saving for retirement. Naturally, a common question is should they pay off student loans or save for retirement. Here’s my take. As I’ve mentioned in previous posts, there are few ways to receive guaranteed returns. One of those ways is by paying down debt. This is an example of a guaranteed rate of return that is also risk free. By paying off a loan early, the interest that would have normally gone to the lender ends up in your own pocket. The good news is that the debt is retired faster, and the individual experienced zero volatility exposure compared to investing in the market. On […]
This post is primarily geared toward younger individuals just starting out after college or from graduate school. However, the information can be used by anyone looking to boost income in order to increase retirement savings, pay off debt earlier or simply to put them in a better position financially. In financial planning we often talk about risk management as one of the bricks to the foundation of any solid financial plan. Generally, when we say risk management we think of auto, home, life, disability and other insurance coverage in addition to an emergency fund. Another area of “insurance” would be creating additional or multiple income streams as a hedge against losing an income source due to downsizing, termination, etc. If none of the aforementioned negative events occurs, then the extra income can be used to bolster retirement savings, reduce debt, or save extra for college. The point is that if […]
Very often in my classes I get asked the question “What should I do first, pay off student loans or save for retirement?” My goal is to give some perspective on approaching these two very important issues. Generally, holding student loans and making the minimum payments can lead to an unnecessary amount of interest being paid. For example, if an individual has a student loan at 6%, then that loan is earning 6% but for the lender not for the student. Many individuals find themselves wanting to pay off their student loans as quickly as possible. On the other hand, recent college graduates are also faced with the decision to save for retirement. Many of them have heard that it is wise to start saving when they are young in order to let compounding work its magic. However, many individuals are confused as to which situation they should take care […]
Many folks have a 401k plan – it’s the most common sort of retirement savings vehicle that employers offer these days. But there are things about your 401k plan that you probably don’t know – and these secrets can be important to know! The 401k plan is, for many, the only retirement savings you’ll have when you reach your golden years. Used properly, with steady contributions over time, a 401k plan can generate a much-needed addition to your Social Security benefits. But you have to make contributions to the 401k plan for it to work, and invest those contributions wisely. So how much do you know about your 401k plan? Below are 5 secrets that you probably don’t know about your 401k plan. Check with your 401k plan administrator to see if these provisions are available – some plans are more restrictive than others. Secrets You Don’t Know About Your […]
Many individuals hear the mantra to start saving money early, put something aside for retirement, or start accumulating a nest egg. However, as much as those mantras are good advice, sometimes an individual needs a specific direction on how to get started. Hopefully, this post can provide some of that direction. Whether you’ve just graduated high school, college, or have been working for a number of years, if you haven’t started saving for an emergency or retirement, there’s still time to do so. It’s never too late. One of the first things an individual can do is simply take a look at what is coming in and what is coming out of their income. An easy way to do this is by looking at the last three month’s bank statements. This will give an excellent representation of what income was coming in and what was being spent. From there, start […]
Many individuals understand the power of compound interest. They understand that compound interest means money or interest earned on interest received. That is, if I earn 5 percent interest annually on one dollar, in one year I’ll have $1.05, but in two years, I’ll have $1.1025, not $1.10. Granted, this may not seem like a lot; and it isn’t. But on several thousand or hundred thousands of dollars it really starts to add up. This post is mainly for those individuals who haven’t heard of this concept or haven’t started utilizing it to their advantage. Mainly, I’m addressing millennials and college students. Those individuals in the cohort I’m address have one powerful thing on their side: time. We’ve written before on this blog about the power of time and starting to save early. We showed the comparing of someone starting right away either during or right after college and another […]
This post is in response to a question an individual had for me when I was meeting with her a few months ago. The question she had for me and the title of the post was if she was saving too much money. The reason she asked is that after a conversation with friends of hers, they had collectively told her that she was saving too much money for retirement. Currently, this 25 year old was saving 26% of her income for retirement! My verbal response was a firm, “Well done!” My internal response was, “Get some new friends.” Her friends were trying to convince her that 10% was more than enough to save for retirement at such a young age. While 10% is a decent amount to put away, 26% is even better. In addition, this young lady was already used to saving 26% of her income. It wasn’t […]
I love the TSP and the fund options it offers. Participants (generally government employees and military) have access to very low cost index fund options and a handful of target date funds (L Funds) that incorporate different combinations of the individual index fund options depending on what stage you’re at in your retirement savings journey. I wish more employer sponsored plans mirrored the TSP’s simplicity, low costs and efficiency. Employees may or may not have access to a match on deferrals, depending on their employment class. The TSP has a number of different fund choices available. The G Fund invests in short-term Treasury securities that are specifically issued for the TSP. The principal and interest are guaranteed by the US Government but they are not inflation protected. That is, these funds may have returns below the inflation rate. The C Fund is the common stock fund designed to replicate the […]
When we talk about financial fitness, one of the measures that is most important to the conversation is the value of our assets. There are really five different kinds of assets that we should consider: Personal Assets. Clothing, furnishings, and jewelry fit into this category. Most of this “stuff” decreases in value to less than half what we paid for it before we even get it home. Household Assets. This includes real estate, cars, and appliances. Most of these items either appreciate in value over time or provide a fair value over their life (in relation to renting the service). The total value of these assets must be reduced by any loans that we have against them – such as mortgages and auto loans. This will produce a net value of Household Assets. Employment Assets. Some employers still provide for a pension for their employees’ retirement. This pension has a […]
In many employer sponsored plans such as a 401k, 403b, 457, or SIMPLE employees are generally given the option of deferring a fixed dollar amount or fixed percentage of their income. The question becomes which category to choose when initially enrolling in the plan and whether or not to change the original decision. Generally, the wiser decision is to choose (or switch to) the fixed percentage. The reason is that by choosing a percentage, you really never have to worry about increasing your contributions. For example, an individual starts a job earning $50,000 annually and decides to contribute 10% annually to his retirement plan which is $5,000 per year.
We’ve all been there: making decisions about the ol’ retirement savings account. It doesn’t matter if it is a Roth IRA, a traditional IRA, a 401(k), or a deferred comp plan, there are many different decisions that you need to make. It can be overwhelming, until you step back and realize that there are actually only three primary decisions to make about retirement savings: How much to contribute How to allocate between asset classes (stocks and bonds; as well as within the sub-classes like large-cap, mid-cap & small-cap stocks; corporate bonds, government bonds, etc.) Which funds/investments to choose
Recently I had a chance to have some fun with some of my undergraduate students. Polling my entire class I asked them to make a list of wants (not needs) that they frequently spent money on. Answers varied from smartphones (and the respective bill), cable and satellite TV, dining out, coffee shops, beverages (you know which ones), and appearance (spending extra to dye hair, pedicures, etc.). Here’s a list of how each expense was broken down as told by the students. In other words, it was their numbers not mine.
When saving and investing for retirement many folks as well as advisors helping those folks plan save and invest for retirement generally will have the conversation that includes how much they can save per month or year, how much they need at retirement and how long they have to save until retirement. Essentially, all of the ingredients in the previous paragraph boil down to a phrase mentioned many times in financial planning classes as well as courses in finance, investing and business: the time value of money. The time value of money helps individuals and businesses figure out how much they need to save, earn, and spend in order to achieve certain financial goals. What it boils down to is what is a dollar worth, if not spent today, and instead invested and allowed to grow for tomorrow (the future).
It seems that an easy fix for saving for retirement for many folks is to simply choose a target date fund. Generally how target date funds work is a fund company will have a set of different funds for an investor to pick from depending on a best guess estimate of when the investor wants to retire. For example, an investor who’s 30 years old and wants to retire at age 65 may choose a 2045 fund or a 2050 fund. In this example since the investor is age 30 in the year 2014, 30 more years gets him to 2044. Most target date funds are dated in 5 year increments. If the investor was age 60 and wanting to retire at age 65, then he may choose a 2020 fund to correspond to his timeline. Generally, the goal of target date funds is to follow a glide path […]
Procrastination is a silent and slow killer. Everyone, including yours truly, is guilty of putting things off, waiting until the last minute and then scurrying around frantically to get done what we could have easily gotten finished weeks or months ago if we would have either planned ahead or simply started. Let me give you an example. Last year my wife and I were debating whether or not to have a tree removed from our back yard. The culprit is the much loathed sweet gum tree that is common in this area of the country. Readers familiar with this pariah of the deciduous family of trees recognize it with annoying “gumballs” that are far from being smooth but rather are the sharp and pointy fruits that fall relentlessly from the tree mainly in the fall and work wonders on mower blades and bare feet. Needless to say they are a […]
Frequently I’m asked by folks how much they need to be socking away for retirement. Many people I talk to are concerned about having enough (a very common concern I would say among most people) for retirement and fear running out of money. As much as I would love to give them a rock-solid answer and as much as they want a definitive answer, the true answer is that it depends – on a number of factors. 1. How much do you plan to spend in retirement? This question can be difficult to answer especially if you’re young and can’t contemplate nor even come close to an estimate of what expenses will be in retirement. For others, this may be more readily a number to come up with especially if one is close to retirement or in the peak accumulation years of their careers which is usually later in life. 2. […]