While it’s generally a good idea to defer as much income as possible into your available IRAs, 401(k)s and Roth accounts, as with everything else in life, too much of a good thing can be a problem as well. When you have the bulk of your financial assets in retirement plans, you might accidentally expose yourself to some risks that you haven’t thought about… since retirement plan assets are much more likely to be impacted by changes to legislation – as we have seen in the past. In these days when Congress is looking for money just about everywhere, it’s not a stretch to imagine new legislation coming down the pike to tax retirement plan assets (like the excess plan accumulation tax that has been proposed). Other possibilities include accelerating required minimum distributions to achieve a faster payout taxation of the plan and eliminating the “stretch” provisions (this has already […]
saving
How to Build Good Money Habits
Dealing with personal finances can be daunting. They could be a new venture for you or your current way of dealing with them is less than ideal. Here are some tips that can aid you in developing good personal finance habits. Use technology. Whether developing a budget, savings plan, etc. the use of technology can make life easier. App such as Mint.com or spreadsheet software like Excel can assist you in getting organized and making clutter more organized. For example, an app like Mint consolidates all your finances, accounts, and can give you a snapshot of what you’re spending, saving, and your net worth with the click of a button. Don’t make it complicated. It’s not rocket surgery. Chances are your finances are not as complicated as you think. They’re just unfamiliar, as is the process of working with them. But I assure you, you can do it. Make a […]
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Principles of Pollex – Saving 10% of Income
(In case you are confused by the headline: a principle is a rule, and pollex is an obscure term for thumb. Therefore, we’re talking about Rules of Thumb.) I like rules of thumb, as a rule of thumb… I think we all generally want difficult issues in our lives to be boiled down to a simple, easy-to-understand statement. These rules of thumb are everywhere, all around us. Heck, there’s even a whole website dedicated to rules of thumb, where you can find rules on all kinds of subjects, as diverse as how to outrun a crocodile to changing your answers on a test. Save 10% of Your Income Let’s start with one of the basics you might hear regularly: Save 10% of your income. Like most all rules of thumb, this one is very general in nature, but it provides a good starting point. This starting point is best for […]
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Does It Really Cost More to Eat Healthy?
From time to time I will hear the argument that it’s expensive to eat healthy to lose weight or maintain a healthy lifestyle. What I want to do is provide some information based on my own experience that may help give a counter argument to this belief. While I am not disagreeing entirely that eating healthy is more expensive than not, I am saying that if done carefully, it is possible to eat healthy for less than what it would cost for less heathy alternatives. One of the arguments I hear is that individuals may be overweight due to relying on fast food menu items – especially those on dollar or value menus. And the reason these menus are relied on is because shopping for a healthy alternative is pricier. Let’s take a look. Consider a few value menu items from a well-known fast food provider. Cheeseburger – $1 – […]
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Tough Love on Saving for Retirement (for Millennials)
Periodically, I read articles that appear antithetical to the premise of paying yourself first and saving as much as you can, as early as you can to have enough saved for retirement. In the last few weeks, I’ve read two articles – one saying that traditional retirement savings for millennials is useless, and the other saying that it was ok that you’re not saving enough for retirement. Both articles mention their collective disdain for the recent tweet by Jean Chatzky saying that by the time you’re 30, you should aim to have 1x your salary saved, 3x at 40 and so on. I happen to agree with Ms. Chatzky. In fact, you should aim to have more if possible. In my opinion, both articles disagreeing with Ms. Chatzky (as well as the replies to her tweet) seemed befitting of excuses – which are easier to agree to, and may encourage […]
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Can I Retire Early?
Many individuals at some point in their life and career wonder if they can retire early. First, retiring early is relative to the individual. That is, retiring early for one person may mean retiring at age 55. To another, it may mean retiring at age 30. When teaching, I’ll ask my students what the “retirement age” is. Answers range from 65 to 70. Inevitably, I will get asked the question, “How much money do you need to retire?” And the answer is the crux of this article. Whether an individual wants to retire can be based on several factors such as money saved, age, job satisfaction, and health. For example, an individual may never want to “retire” if they love their job, or if they find fulfilment and purpose while at work. For some individuals, the choice to retire isn’t a choice. They must continue to work to cover expenses, […]
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The Retirement Answer
Although I will admit that the title of this post is a bit glamorous, I wanted to share the simplicity of the message. Typically, every morning we will sit down to eat breakfast. Meals at our house are generally jovial, with discussions ranging from which animal would win in a fight to how my kids will spend their day. A few mornings ago, however, my oldest asked me a rather interesting question. Knowing what I do for a living she asked, “Daddy, what do you have to do to retire?” My immediate response was, “That’s a great question!” At age 7, my heart swelled that she was already thinking about retirement. Before I could give an answer she quickly quipped, “Wait. I know. You have to save enough money so that one day you can retire.” I was speechless. Pretty profound for a 7-year-old. Finally, I replied, “That’s exactly what […]
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How to Save Even More
In the past, we’ve written about how to save more money by paying yourself first, saving 15-25% of your gross income, or saving just 1% more in order to have enough to retire comfortably, send a child to college, or other goals requiring capital needs. Saving money via payroll deductions, automatic contributions to IRAs and 401ks, and directly into piggy banks (for kids and adults alike) can be considered ways to save money directly. However, there are some ways to save money indirectly – and convert that money into direct savings towards retirement, college, or other financial goals. Turn the lights off (shut the door, close the refrigerator)! This phrase still echoes in my head from when I was younger. My parents could frequently be heard telling me to turn lights off in my bedroom or in the house if I wasn’t going to be using them or needing them. […]
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Axioms for Graduates
As the spring semester comes to end for high school and college graduates, I wanted to perhaps give some unsolicited advice as these newly christened adults start out on their own and begin making life choices and financial decisions that will impact their future. Resist the temptation to spend everything you make. Instead, do your best to save as much as you can. In fact, it’s possible for a recent college grad to go from making hardly anything during their college years to a decent starting salary. Pay yourself first. Establish an emergency fund of 3 to 6 months of living expenses and save to your 401k and IRA. It’s absolutely possible to save $23,500 annually ($18,000 to the 401k and $5,500 to the IRA). In ten years, without interest or compounding, you’ll have saved close to a quarter-million dollars. All by the time you’re between the ages of 28 […]
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How to Make Your Saving Automatic
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 […]
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How to Save On Holiday Spending
It’s that time of year when Thanksgiving comes and goes and before we know it Christmas will be upon us. For many people, this time of year means the giving and exchanging of gifts to family, friends and loved ones. It also means that many people will be worried about their spending over the Holiday season; with concerns of how to budget, going over budget, or amassing unwanted amounts of credit card debit. Here are some ideas to help keep your Holiday spending in check in order to stick to your budget and avoid the trap of credit card debt – the gift that keeps on giving. Create a spending plan and stick to it. Many individuals have a budget when it comes to what they will spend on gifts for the Holidays. However, it becomes tempting to spend in excess of this budget when we see additional gifts we’d […]
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Multiple Income Streams
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 […]
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The Third Most Important Factor to Investing Success
Previously I wrote about the Most Important Factor and the Second Most Important Factor to Investing Success. Continuing this streak I’ll give you the third most important factor to investing success: Leave it alone. To recap: The most important factor is to continuously save and add to your nest egg over your career; the second factor is allocation – make sure you’re investing in a diversified allocation that will grow over time. The third most important factor to investing success: Once you’ve started investing, leave it alone. Resist the temptation to sell off the component of your allocation plan that’s lagging; the reason you have a diversified allocation is so that some pieces will lag while others flourish, and vice-versa. Reallocate your funds from time to time (once a year at most) to match your allocation plan, but that’s all the fussing you should do with your investments. Leave it […]
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How to Save Money
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 […]
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The Spare Change Challenge
Many individuals who know me know that I’ll run in front of oncoming traffic to pick up a penny (or anything shiny for that matter). While some may think that this is a waste of time and that “it’s only a penny”, the fact is that the small change adds up. Whenever I get weird looks or folks laugh at the mention of a penny to be grasped, I always ask, “Would you walk past a $100 bill?” The point being, it all adds up. The tiniest snowflakes create earth-moving avalanches. The small amounts I pick up are usually deposited into my kids’ piggy banks. When we’re together and we find money they call the change “lucky coins”. The interesting thing is that these lucky coins have gotten pretty heavy in their banks. Both of my kids can barely lift their piggy banks due to all of the luck we’ve […]
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The Power of Compounding
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 […]
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Am I Saving Too Much?
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 […]
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Analyze your assets to avoid missing the mark
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 […]
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Should You Invest Dollars or Percentages?
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.
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Where to Keep Your Emergency Fund
Ask any qualified financial planner and they’ll generally tell you to have at least 3 to 6 months of living expenses set aside in order to fund a “rainy day” in the future. This emergency fund is there to help you pay bills such as your mortgage, utilities, and groceries in the event you lose your job, become disabled, or to pay for an unexpected emergency (such as a car or home repair). Some folks may need greater than 6 months expenses if they lose a job that may be hard to find again or a single income family that relies on one individual’s income.
Sterling Raskie, MSFS, CFP®, ChFC®
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And if you’ve come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed “advisor’s advisor”.