December 09, 2005
From the desk of Jane Galt:What should you do with your money?
In the comments to this post, Laura of 11D says ". . . you should hire yourself out to universities to give lectures to upcoming graduates. My fellow students were completely clueless. Oddly, they almost took pride in their financial ignorance." Well, I can't be everywhere, but I can offer my financial advice, such as it is.
I've actually contemplated the possibility of writing a book on being downwardly mobile for people who, like me, found themselves in a career track that caused them to downshift their income expectations. The first chapter would be an excercise in which people put down the book, went and looked themselves in the mirror, and repeated the phrase "I can't afford it" until it sounded natural and easy.
So here's the collected Jane Galt wisdom for people who are living on a tight budget. If you've ever read a financial advice book, you'll recognize a lot of it since there simply isn't much new in the world of financial planning. But you're getting this advice absolutely free. It's probably worth a little more than you're paying for it:
1) Pay yourself first. What does that mean? It means you divert money into savings automatically, before the money hits your bank account. You divert an automatic percentage of your salary into your 401(k), and you set up your direct deposit so that money is automatically put into a special savings account unconnected to your ordinary checking and savings, that serves as your rainy day fund. The rainy day fund should hold at least six months, and preferably a year's, worth of expenses. Retirement savings should 15-20% of your income.
Yes, I said 20%.
"20%!!!!!" I hear you screech. "I can't afford it!" Well, then you'd better start developing a taste for cat food. Home equity is going to be a bad way to save for retirement in a country with a stagnating population, as the US will have when I get around to retiring. And Social Security benefits may be slashed, means tested, or otherwise legislated out of your pockets. If you're putting 3% of your salary into your 401(k) every year and hoping that will cover you you're in big trouble.
The reason you pay yourself first is that for most people, budgeting just doesn't work. Most people simply don't have the discipline. The answer is to keep the money out of your bank account. If you don't see it, you won't spend it.
What if you don't have enough savings? You probably feel like your budget is pretty tight, but--trust me!--it can get tighter. (When I graduated from business school, I made about $40,000 a year, and had $1,000 a month in loan payments to make.) Start right now and set up your 401(k) to take 5% of your salary out of every paycheck, and set up a separate bank account with your bank that is your rainy day account, and arrange with HR to have a chunk of money deposited in there every month automatically. If you're poor, start with $100, or even $50 or $25, but put something in there, even if you have to cancel the phone and sit on your stoop to read by the streetlights. You must have savings.
2) Avoid credit card balances Credit card debt will kill you. If you just make the minimum payments, you will pay for whatever you purchased many, many times over. If you can't afford it, don't do it, no matter how important it is. Credit card debt can turn a bad situation, like a job loss or a medical emergency, into a financial disaster. Don't take on credit cards unless you genuinely have no choice, like an emergency repair on the car you need to get to work. And if you put your money into a rainy day fund now, hopefully you won't need it.
3) Use tax advantaged savings vehicles Unless you are making minimum wage, every time you save money in a 401(k), it's like getting a 30% match from Uncle Sam. You should max out your 401(k), and put money into an IRA.
Some financial pundits like Suze Orman are now telling people that they shouldn't bother to use a 401(k), because today's deficits will just mean that tomorrow's governments will have to raise taxes. That's probably true. But in your retirement, you will probably be in a lower tax bracket than you are now, so even if taxes go up, the net result may not be that big an increase. And the effects of letting your money accumulate for thirty years or so with no capital gains taxes are huge.
Should you use a Roth IRA (which doesn't give you a tax deduction now, but pays out the money tax free on retirement) or a regular IRA (which gives you a tax deduction now, but taxes the money at ordinary income tax rates when you take it out)? Depends on whether you're in a low tax bracket now, or a high one. If you're currently in a low tax bracket, then a Roth IRA makes more sense. If you're in a high one, go with a traditional IRA.
4) Wait a couple of years to buy a house The market is probably at or near its peak. The general rule is that troughs in the housing market tend to come about three years behind the peak, meaning that if you wait a couple of years, you will probably end up buying near the bottom of the market, and you will have markedly less risk of ending up "upside down" on your mortgage--meaning that you have negative equity, so if you have to sell, you owe the bank money. I know that you have a voice screaming at you that you want to build equity for yourself instead of a landlord--but the likelihood is that if you buy now, particularly on the coasts, you will not build much equity. And the bank, unlike the landlord, will not let you break your agreement without destroying your credit rating.
5) Use index funds, not actively managed mutual funds An index fund is one that mimics a broad market index such as the S&P. Study after study shows that actively managed mutual funds do not beat the market. I know, you think your fund does, but the research says that that's just luck . . . and that luck could easily turn next year. All actively managed funds do is cost you money in management fees.
6) Saving is more important than lattes People who say they can't afford to save can surprisingly often afford Starbucks, new cars, and alchohol. These are not things you need in the same way that you need to be able to eat if you get sick and can't work.
The easiest things to cut out are food. You *can* cook at home, no matter how tired you are; breaded chicken breasts and steamed vegetables take ten to fifteen minutes to prepare from scratch. Cutting out restaurant meals and buying your own lunch are the single easiest way to save money. Oh, I know, it's not as pleasurable to pull a turkey sandwich out of a plastic bag as it is to go down to the deli and get exactly what you want this minute. But the markup on those sandwiches is generally between 400-800%, and a daily starbucks will cost you over $1000 a year. As a side bonus, the more you have to cook it yourself, the less you'll be tempted to overindulge in goodies. And if you want to hang out with friends, I can generally prepare a very nice dinner for four for less than it would cost me to pay for my own meal at a New York City restaurant. And no waiter badgering you to free up the table.
7) Put yourself on a cash budget. Figure out how much you can afford to spend each week, and take that money out at the beginning of the week in cash. Once you've spent it, no more until the next week. It's surprising how easy it is to develop spending discipline when you have to watch each purchase steadily diminishing your purchasing power.
The corollary to this is to leave some of that money at home at the beginning of the week. You can't spend what's not in your pocket, and it saves the painful denouement at the end of the month.
8) Pay down your debt unless the interest rate is ridiculously low. Credit card debt should be your first priority, but it's also nice to get a headstart on student loans and mortgages. Oh, some of my business school classmates would be horrified. But real returns on investments are pretty low right now; by paying down a 7% non-deductible loan, you get a guaranteed 4.5% real return.
Your mortgage, of course, is deductible. But you are not a corporation; you are a real person who will suffer if you go bankrupt and lose your house. It is only sensible to shorten the time until you own your abode outright.
The easiest way to do this is to split your mortgage payment in two, and set up your bank account to automatically pay one of the half payments every two weeks. This will result in your paying 26 half-payments a year, or an extra payment per annum, and will shorten the life of a thirty year loan by about eight years. Because it is pegged to your paycheck, this is practically painless, and depending on the interest rate and the size of the loan, can result in material savings on interest just because the steady payments slow the interest from compounding. This works especially well for credit card debt.
9) Don't take on debt unless you absolutely have to Absolutely have to means: you need a car for work; your boiler broke down in the middle of winter; you are buying a house. It does not mean: your friend is getting married in Gstaad, your old couch is showing its age, you want to buy a nicer car than you can afford to pay cash for. If you want a treat, save for it. You'll enjoy it more when you have it.
10) Do not default on your loans A shocking number of students default on their student loans. This is a terrible idea. For one thing, those loans aren't dischargeable in bankruptcy, meaning you'll have to pay them eventually--if nothing else, they'll garnish your social security benefits. For another, it screws up your credit rating for years and years. And for a third thing, student loan lenders will almost always work with you if you genuinely can't pay--they'd rather get something than nothing, and they don't want to piss off the government by leaning on students too hard.
11) Do not take on adjustable rate debt There's nothing wrong with adjustable-rate debt, but most people who take on ARMs are doing so because they can't afford the payments on a fixed-rate loan. When interest rates rise--and there's practically nothing else they can do now--those people will end up defaulting. You really, really do not want a mortgage default on your credit report.
12) Buy used There's a genuine debate over whether it's a good idea to buy used cars; it is for me, because I have mechanics in the family, but most people don't. But there are loads of other things you can buy used, through Craigslist or the local classifieds. Furniture (although I don't recommend buying mattresses or anything upholstered), lamps, computers, china. You need plates and something to sit on, but you only want shiny new ones.
13) Buy generic Some brands are worth paying for, but half the time that private-label (aka "store brand") sitting next to the brand name on the shelf was turned out in exactly the same factory; the only difference is the name. Drugstore makeup is generally pretty much the same as the stuff sold in department stores. Vitamins, organic ingredients, and things that you eat make absolutely no improvement to bath and skin products, all of which rely on the same basic chemistry for breaking apart the fat molecules in dirt, and then putting new fat molecules back onto your skin.
14) Buy in bulk. Don't tell me you don't have space; I live in 450 square feet. You can find room for six boxes of pasta and sixteen rolls of toilet paper and you'll save a ton of money. If you don't want to pay for a Costco membership, ask around and find out which one of your friends already have one. They'll be happy to take you with them; warehouse club shopping is much more fun as a social experience.
15) Don't bet on home equity gains Buying a house is a fine way to make sure you have somewhere to live. But historically, it has not been a particularly stellar investment; your retirement plans should not count on enormous returns on your investment in housing. Nor should you take out a mortgage with a tiny down-payment; if you have to move, you can get screwed. And if you are buying a house, buy it because you want to live there, not because you're counting on flipping it for twice the price in three years.
16) Invest in stocks when you are young, and then transition an increasing portion to bonds in your fifties and sixties. When you have an investment horizon of twenty or thirty years, you can afford to ride out the ups and downs of the stock market, and in the long run, it should give you a better return than bonds. As you get closer to needing the cash, you should start transitioning your funds into fixed-income securities, which have a lower return, but guarantee that you won't have to sell in a down market.
That's it. Unfortunately, no surefire way to get rich quick; if I had one, I'd be using it, not telling you. But if you follow my advice, it should keep you out of the poorhouse.
Posted by Jane Galt at December 9, 2005 03:01 PM | TrackBack | Technorati inbound linksI'd add:
17) START EARLY! Now. Today. Shut up, no, right now.
I started a 401(k) as soon as I could at work, and they match 1-to-1 up to 6% so that's what I can contribute. Starting early (at 23 in my case) means you have an extra 15 to 20 years on the time-horizon. That can make a HUGE difference. If I retire at 70, I'll have been saving for it for 47 years, and that time at the front can be vital. I posted my own advice to other young folks awhile back.
Posted by: Timothy on December 9, 2005 05:37 PMAbsolutely agree with all points except item 1, "pay yourself first". Good idea if you don't have children. But even if I could save 15-20%, it would be irresponsible (in my opinion) to short change the children's education and/or health care needs to save for my retirement. And this is precisely the choice that most lower to median income parents face. So if you find yourself in that position, I recommend accepting responsibility for your children, doing what you can to stay healthy, and plan on working into your 70s.
Posted by: Randy on December 9, 2005 05:47 PMThis advice makes sense for someone who is EXTREMELY risk-averse. It's the equivalent of a bond fund. Nice, if that's what you want, but most of us can tolerate more risk and therefore (on average) earn more reward.
Posted by: brett on December 9, 2005 05:52 PMRandy
Totally agree with the notion of working into your 70s, regardless of your parentage. Life expectancy is steadily increasing, and for most white-collar workers who keep their weight under control, living to 90 may be the norm. No one wants to live past their savings, so plan on working to 75. It'll make your retirement stretch that much further.
Posted by: Half Canadian on December 9, 2005 05:55 PMAll good stuff, but buying a used car is a no-brainer. Cars, particularly the more reliable brands, built in the past ten years, are very, very, reliable, if they have been maintained. The key is to buy a car from the original owner, and to see the owner where he kept the car, usually the home. The last two Hondas I bought were from a guy who just has to have new cars. I bought the first one after seeing his ad in the paper, and going over to his house. The guy had four cars and a boat in a garage cleaner than most people's kitchens. There wasn't any doubt that he took care of his things, but he gave me his service receipts anyways. The car had about 100,000 miles on it, and I anticipate I'll be giving it to charity in fine running condition at the 200,0000 mile mark (I'm at 160,000 now), after spending money on little more than than the recommended maintainence. So far, I've had to replace the axels, at a cost of 400 bucks.
I saved over $14,000 buying (just initially, not counting interest costs if a loan had been taken out) this car used, as opposed to buying new, and the total savings I've had purchasing cars this way translated into paying off a mortgage much faster. Even if one is dead broke, and thinks that one must borrow money to buy a car, even an old, old, beater that can be had for a few hundred bucks is often the way to go. Heck, at this price point, they're disposable. In my early 20s I went through two or three cars a year; just buy'em and throw 'em away, if one has some means by which to make do for transportation to work for a couple of days until another wreck is found.
The point is to never, ever, ever, if it at can be avoided in any way, borrow money for something that you don't have a reasonable expectation of capital appreciation. Meaghan's advice to hold off on buying a house may be fine, depending on your local real estate market, but given there are thousands and thousands of local real estate markets in this country, it is very hard to make a generalized statement about when one should buy one's first home.
Posted by: Will Allen on December 9, 2005 05:59 PMI'm not sure I understand what you mean, Brett. Buying things you don't need rather than saving doesn't give you any return at all. And actively trading stocks is a sucker game; it costs you more in fees than you make in alpha. And keeping all your money in stocks at sixty doesn't mean you have a greater tolerance for risk; it means you saved so little that you have to take on inappropriate risk when you're older.
Posted by: Jane Galt on December 9, 2005 06:00 PMAlong the lines of working into your 70s, find something you like to do that pays something (not necessarily a lot), even if it takes twenty or thirty years. A lot of my clients are are past 60, and no matter the level of affluence, the happiest people are those who keep working at something, and the most miserable ones often are people with too much time on their hands. We ain't designed to sit on our rear ends, even if the rear end is seventy years old.
I'm all for supporting children as well, but there something to be said for instructing children early on that life's struggles are not consigned to the past. I've seen plenty of families get their children good educations via military benefits or through employers who will help pay for an undergraduate, or even graduate degree. Yes, your child will have to work extremely hard, by today's standards. Whattaya wanna do, deprive your kid of stories with which to bore his or her kids with?
Posted by: Will Allen on December 9, 2005 06:14 PMI didn't see the part about buying the winning lottery ticket...
Posted by: Peter vE on December 9, 2005 06:34 PMThe "do-it-yourself" advice shouldn't be limited to packing lunch or cooking dinner. You can change the oil in the average car for about $6 and 30 minutes of your time, with maybe $20-$30 worth of tools. Plus you avoid the people who are constantly trying to sell you something extra. I cannot tell you how many thousands of dollars I have saved by learning to swing a wrench in high school (those axels for the Honda: somewhere between $40 and $90 each, plus maybe 4 hours to get them in).
Also, speaking of tax-advantaged vehicles: consider a Health Savings Account, which lets you deduct health care costs without the 7.5% of gross income floor. And you can use them for retirement tax-free, too!
Posted by: Rob Lyman on December 9, 2005 06:35 PMOne more thing: the new Ch. 7 bankruptcy rules look at your income from the past 6 months to decide if you are eligible. If you get fired today and file for bankruptcy tomorrow, you'll find yourself getting treated as if you still had that job. But if you can hold out for 6 months, you'll be treated as if you had no income whatsoever.
Yet another reason to save.
Posted by: Rob Lyman on December 9, 2005 06:38 PMAnd point #18 - have all your blog readers click on the Amazon link, so they subsidize your luxury purchases.
Don't worry Jane, I just threw "subsidy" in there to get a rise out of you. The click through purchases are small way of paying you for the blog.
Posted by: Peter vE on December 9, 2005 06:39 PMA note for Randy above who doesn't want to shortchange his kids for his retirement -- you can get student loans for your kids, but you cannot get retirement loans for yourself. Saying "I'll work until 70" is not a sure answer -- there are a lot of things that, God forbid, could happen to prevent that from being the solution. A destitute parent [or parents] is more of a burden to a college student than a loan.
I'm not picking on you -- I used to feel that way, too. But now we have just had to find ways to cut the budget farther to try to save for us, as well as the kids' educations.
Terri W,
Its true that working into my 70s is not a sure answer, but the way I see it, savings is not a sure answer either. Maybe I could put away a hundred thousand or so. But one major illness and that's gone in a year. So now my kids have loans up to here and the hospital has all the money. No thanks. I have today, and I have my kids. I'll enjoy the time I have, and get them ready for the future. And then hope for the best - or deal with the worst. Life has no sure answers.
Posted by: Randy on December 9, 2005 08:58 PMbrett has a point. If for example you expect to be earning much more in 10 years it is silly to deprive yourself now. Buying stuff you don't "need" does give a return in pleasure. Why be miserable when you are young and healthy just to have more money than you need when you are too old and sick to enjoy it. Of course some people enjoy being misers.
Posted by: James B. Shearer on December 9, 2005 09:17 PMGood advice. I do all I can to follow all your suggestions, except # 6. One of the highlights of my life is going to bed at night knowing that in the morning I will go to my favorite bagel shop and leisurely eat a bagel slathered with cream cheese, drink latte and read my morning paper. Maybe I'm weird that such a small activity can bring such joy to my life but the thought of being cooped up in my kitchen horrifies me even if I can save a few dollars a day.
Posted by: alice on December 9, 2005 09:30 PMGreat advice, just in time for Christmas;)
Seriously though, I've got one more tip to add -- cut down on the deadweight costs of Christmas. This year we're giving each other less expensive gifts, and are dropping very heavy hints to make sure everybody gets what they want. It's been a much less stressful holiday accordingly, both to the wallet and in terms of shopping stress.
Lest anyone thinks that this goes against the spirit of the holiday, I'd just like to say that in every other respect we're going all out -- the tree packed with ornaments, the marathon cookie baking sessions...it's festive all right.
Posted by: Battlepanda on December 9, 2005 10:09 PMYou haven't addresed 'the whole catastrophe' as 'Zorba' called it. You can find plenty of anything about sex but nowhere is there a book, 'The answers to all the questions you were to dumb to ask about being married and having money.' One of the things that happens in our romantic marriages is that they become a game of financial chicken. At some point, somebody pulls up and says 'not the cliff,' and they may have won a role. Which segues me into what most people do I think and that is rely on relationships, personal and governmental, for financial standing. I certainly saw that working for the VA. An educated schizophrenic once told me in regard to my 'what next' question was to tell me that he hung out downtown with the other disabled people. People have their strata; the government has it's programs, laws. This is a melody which plays in the background of considering FDR, the leverage of the UAW on GM, etc. The 'relationship' as an entitlement issue may impassion the immigration debate. It is interesting in our 'capitalist' society how few people really make 'capital' decisons.
Posted by: Michael on December 9, 2005 11:21 PMJames B. Shearer writes:
brett has a point. If for example you expect to be earning much more in 10 years it is silly to deprive yourself now.
Read the beginning of Meghan's post:
"I've actually contemplated the possibility of writing a book on being downwardly mobile for people who, like me, found themselves in a career track that caused them to downshift their income expectations."
I think that Jane, while in b-school, expected to make lots of $, but then after her summer jobs in i-banking, realized she hated it and preferred to become a journalist instead. So the point is that you can't always rely on expectations of future income.
Posted by: Yevgeny Vilensky on December 9, 2005 11:29 PMUh... Pleasure is not a return. Pleasure is ephemeral. Bills are forever. I really don't think you'll be pleased with yourself when you've got 20,000 in credit card debt and it was all spent on crap you can't even remember anymore.
I sure wasn't.
Not to mention that racking up debts grasshopper style, is, even if you can pay it off, going to trap you at whatever job you've got. Live within your means.
Posted by: Toxic on December 9, 2005 11:54 PMtoxic, I don't recommend running up credit card debt but it is possible to overdo saving also.
Posted by: James B. Shearer on December 10, 2005 02:10 AM===============
..."inflation" seems one of the toughest issues to plan for in personal finances -- even if you're frugal and manage to save enough 'nominal' dollars for the future.
Even at a mere 3% inflation-rate -- your money loses half its purchasing power each 15 years.
And the official U.S. inflation rate is now 6%.
The unofficial (real) inflation rate is about double that.
The financial-planning "experts" usually ignore inflation, and not one in a thousand of those experts understands what causes monetary inflation.
Posted by: PelanoD on December 10, 2005 03:20 AM"Buying stuff you don't 'need' does give a return in pleasure."
But not a necessary return. The pleasure is created by the fulfillment of expectations, which are under the mind's control. The Amish, for instance, choose conspicuous lack of consumption, and do not seem substantially less happy for it.
"Why be miserable when you are young and healthy just to have more money than you need when you are too old and sick to enjoy it."
Having 25% fewer plastic-and-silicon gee gaws is not misery. Hunting down, killing, and dressing a loaf of bread with your own hands is not misery. Misery is losing your home in an economic correction. It is choosing between taking your kid to the doctor or having electricity.
Spending money with no thought for the future is like not wearing a seatbelt. Sure, 99% of the time it's a big win. But that other 1% ...
Posted by: Daniel Newby on December 10, 2005 05:36 AMAgree with everything that has been said here. Like Jane, I was downwardly mobile for a while after grad school. I am now upwardly mobile again, albeit at a painstakingly slow pace, and starting from a rung quite a bit farther down the ladder than I expected to start from, but it took quite a while to make this happen.
Saving money does tend to be more pleasurable then spending, due to reduction in STRESS that results. Right now I am at the point where if a large, unexpected expense comes along, i.e. my car needs a new transmission, I can pay for it. It isn't a financial catastrophe that causes untold stress and requires me to max out my credit cards, tap the 401(k), ask relatives for a "loan", etc., etc. I will still feel the loss, obviously, no one wants to spend $4000 on an unexpected repair, but I can do it relatively painlessly if need be. By the same token, I lost my job in July. Didn't get another one until September. The interim was no problem, becuase I have savings. I bought a nice bicycle and used the time to got into shape.
This is a wonderful, wonderful feeling and is well worth saving for. I mean, it's a wonderful feeling.
Re: James' comment, I disagree because it is premised on the notion that you will be making more money in ten years. These days you NEVER know what is going to happen ten years from now. I went to an Ivy League law school. Did I expect to be doing temp work for $17/hr upon graduation? No, I did not. But that's what I had to do for a year and a half until I finally found a regular job. In the years since I have seen plenty of hardworking, well-educated people get laid off, fired, and otherwise set back in the years since. My buddy who was on Law Review has had four different jobs in eight years. It is awfully hard to predict the future these days. Best to put some money in the bank today.
Once you HAVE money, then you can start spending it. But not until you have it! Spending money you think you will have in the future is a bad idea.
Moreover, when the time comes to buy something, paying cash is for it feels great. When you are at Best Buy, how many of the people in line in front of you buying plasma TV's are using their debit cards to pay for them? Not many, I'll bet. I would like to buy a plasma TV in the next two or three years. When I do, I will enjoy it even more knowing that I own it free and clear am not paying finance charges for it every month. This feeling really is worth saving for.
Posted by: Joe Schmoe on December 10, 2005 09:17 AMThe thing that I found most helpful was getting rid of the ATM card. When I had one and got my statement at the end of the month it would show all kinds of $20 and $30 withdrawals. I never had any idea where that money went.
Posted by: plum on December 10, 2005 10:24 AMYour mortgage, of course, is deductible. But you are not a corporation; you are a real person who will suffer if you go bankrupt and lose your house. It is only sensible to shorten the time until you own your abode outright.
I think this is dubious advice--if you put extra money into mortgage payments instead of other savings and investments, then, all things being equal, you are more likely to lose the house because you may have to sell to get the cash out. If you do go the extra payment route be SURE you have a home equity line of credit in hand, because if you lose your job, you won't qualify for one, and you won't be able to get the cash out unless you sell.
So how exactly does one get Megan to cook a meal for four at her place? Not that I'm going to be in New York anytime soon, or anything . . . oh, wait, yes I am: 15th to 20th. If all goes well you should see me at the Xmas party.
I promise to bring something you can actually drink this time.
Posted by: Jessica on December 10, 2005 10:38 AMTuition alone for the University of Kentucky is almost $3000 a year, and housing is another $5200, and both are rising faster than inflation. Number One Son and Little Miss have already been told that they need to work for scholarships and will have to work during school, but that we will make sure that they don't have a large amount of debt starting out.
There's no way someone with a $30-$40k salary (which is median for a professional with a college degree here in KY) can service a $40k debt and try to pay for anything else.
Like Milady says, if I brought them into this world, I have to make sure they can start their lives without being in an unrecoverable financial hole.
Posted by: Kentucky Packrat on December 10, 2005 01:02 PMSo should I borrow from my 401k to pay off my credit card (assuming that I cancel the card first)?
Posted by: mcp on December 10, 2005 01:20 PM"Absolutely agree with all points except item 1, "pay yourself first". Good idea if you don't have children. But even if I could save 15-20%, it would be irresponsible (in my opinion) to short change the children's education and/or health care needs to save for my retirement."
Randy, I disagree--I think it's important to save for your retirement first. An 18 year old can fund or reduce the cost of his or her education through scholarships, attending a state university, going to community college first and then transferring, etc. Nobody is going to give you a scholarship for your retirement. Your children will be able to work at 18 but there's a real possibility that you won't be able to work at 70 or 75.
Another comment- everyone here seems to be focusing on reducing expenses, which is certainly a good idea. The other option is to increase your income by starting a business on the side or by investing in rental properties.
As for the student loans, I would avoid those at all costs if I could. The opportunity cost of lost wages while you spend 5 years in graduate school are immense. If you combine that with the large debt incurred by attending a top school, then you've got a rather large hole to dig yourself out of.
Posted by: bob on December 10, 2005 01:42 PMThere's probably a case for keeping some of your portfolio in bonds and/or money market funds even for those who are very young. If the (stock) market dips substantially and you have $ in case or fixed-income, you can liquidate some of it to take advantage of the equity buying opportunity. If you have it all in stocks, there is no upside to the dips.
Posted by: David Foster on December 10, 2005 02:58 PMmcp
Please, for the love of God, do not borrow from your 401k. Borrowing from your 401k is a HUGELY risky and potentially expensive thing. Should you loose your employment at any point before you pay back the loan, then the balance of the loan is considered to be a withdrawl, and subject to taxes and penalties. To put it another way, you could easily end up paying 50 points on that 401k loan in the event of mishap. Short of finiancing life medical treatment for life threatening conditions, just don't do it.
Posted by: quadrupole on December 10, 2005 03:02 PMKentuckyPackRat
My parents financed my education at a state school (except for some savings of my own) such that I graduated without any student loans. This was a great boon to me.
However, my parents also planned very carefully through their whole lives for their retirement so as not to be a burden on their children. Now that they are retired, and looking at things in perspective, this was an even greater boon. My parents always took the attitude that their children owed them nothing, while at the same time recognizing that if they raised us right we would feel responsible for looking after them. So they intentionally took that off the table by looking after themselves.
I strongly urge you to look at your finances again to see if you can do the same for your kids. My father walked two miles each day to work from the nearest free parking for decades, ate the same salami on rye sandwich everyday for lunch for decades, etc to allow my parents to do it. If a single earner middle income household with four kids can do it, it can be done.
Posted by: quadrupole on December 10, 2005 03:08 PMFocus on using debit cards rather than credit cards. No chance of finance charges.
If you have the discipline, there are several cards out there that pay *you* to use them. Currently, I've a Chase Visa that returns me 3% on all purchases on gas, groceries, and restaurants, and 1% on everything else.
I paid so much to the credit card folks in my salad days, it's nice to see them giving some back now.
I work in the financial industry, and am always curious as to why some of my colleagues pay cash at lunch, instead of getting the 3% off. They've certainly heard me expound on it.
Great advice, except for the emphasis on 401(k)'s. If your employer offers one, then take advantage of it. But keep in mind that 401(k)'s generally have higher expenses and are not so easily rolled over.
Individual investors should consider regular IRA's, SEP-IRA's (for the self-employed), and Roth IRA's. You can have these on top of a 401(k), just be mindful of exceeding the contribution limits, which can be found at http://irs.gov.
Another very important point: Dollar cost averaging, in which you invest smaller chunks of your money steadily (e.g., monthly) over time. That way, you buy less shares when prices are higher, and more shares when prices are lower, thus hoping to avoid the mistake of buying at the top.
Cheers.
Posted by: Steve Jackson on December 10, 2005 03:48 PMThe thing that I found most helpful was getting rid of the ATM card. When I had one and got my statement at the end of the month it would show all kinds of $20 and $30 withdrawals. I never had any idea where that money went.
When my wife and I were starting out together, we went through the exercise of writing down every single cent we spent for three months. Then added up the various categories. For us jointly, it was "We pay how much for insurance?" and calls to agents to find a better package deal. For her, it was "I spend how much on coffee?" and for me it was "I spend how much on books?" It turned out she wasn't even that fond of coffee, but was going through the social motions. Even though it's been 25 years, I have access to the complete catalogs of the metropolitan area public libraries and three large universities from my desktop, and I very seldom buy books until after I've read them.
Posted by: Michael Cain on December 10, 2005 06:49 PM17) START EARLY! Now. Today. Shut up, no, right now.
Indeed. For those who doubt the magic of compound interest: $1000 invested at 7% is worth $1967 after ten years, $3870 after 20 years, $7612 after 30 years and $14,974 after 40 years. It is almost impossible to make up for the money you didn't save in your 20s once you reach your 50s or 60s. Also keep in mind the fact that, statistically, your income will peak in your late 40s and decline after that. My children are getting tired of hearing this.
Posted by: Michael Cain on December 10, 2005 06:58 PMI've found "house brands" of anything to be typically foul.
Posted by: rakehell on December 10, 2005 07:34 PM"$1000 invested at 7% is worth $1967 after ten years, $3870 after 20 years, $7612 after 30 years and $14,974 after 40 years."
That's assuming you can get a continuous 7 percent risk-free return over forty years.
Posted by: rakehell on December 10, 2005 07:45 PMI guess I'm pretty lucky that I learned the tough lessons long ago and now I'm in pretty good shape. I make a very good salary, but I drive a car that I paid $14,000 for ten years ago. I truly enjoy a simple (i.e. cheap) lifestyle. I saved a lot and I've done very well with investing over the years, but it takes a lot of work.
The book The Millionaire Next Door explains in great detail the difference between having money and trying to look like you have money. So much of saving money, really saving money, is about lifestyle.
Having extreme liquidity is great for lowering your blood pressure and making life livable. Things that might be major problems become minor annoyances.
Posted by: Bruce on December 10, 2005 08:15 PM"I've actually contemplated the possibility of writing a book on being downwardly mobile for people who, like me, found themselves in a career track that caused them to downshift their income expectations."
Instead, you should write a book directed toward college students telling them to pick careers that pay something. For example, a career as an architect or research scientist may be intellectually stimulating or interesting, but these types of careers pay extremely poorly and result in lost income due to the lengthy time in graduate school. It seems that our emphasis on science education in this country is misguided. Students should not be persuaded into pursuing careers that pay hardly more than $30K after 5-6 years of graduate school. There are plenty of foreign scientists who are willing to come to this country to work for such paltry salaries.
Posted by: E.C. Wang on December 10, 2005 08:33 PMJoe Schmoe, I second your assertion that savings reduces stress. The first 5 or 6 years of my marriage we just didn't get it. We had incomes that would allow for saving, but we just spent the money on ... I can't remember. The past 20 years have been wonderfully stress-free. Putting away 10% a year seemed impossible at first, but we managed to steadily increase it to 25%. We listened to a financial advisor and built up a cash safety fund - about 4 months take home pay. We never worry about how we'll pay for car repairs or replacing appliances or non-covered medical expenses (such as when my beagle chewed up my $2,000 hearing aid). The cash is always there. We haven't had a disagreement about money, much less an argument, in two decades. I'm convinced we'll both live a decade longer because we eliminated all that stress.
Posted by: JohnDewey on December 10, 2005 08:34 PMThe easiest way to do this is to split your mortgage payment in two, and set up your bank account to automatically pay one of the half payments every two weeks.
How much difference does it make to do this versus a full payment every 4 weeks (13/year)? My lender sent me an offer to enroll in a plan to do the split payment thing, but there was an intial fee plus an annual fee. I can do 13 full payments a year without the fees, but is it as effective?
Posted by: David on December 10, 2005 08:37 PMAnother suggestion, speaking from experience:
Don't EVER get into debt with the IRS or state revenue agencies. You will be crucified with penalties and interest. This is too easy to fall into if you are self-employed. I'd rather owe money to the mob.
I also second the notion of used cars. There is no bigger waste of money in our society than conspicuous consumption on automobiles. Once used, they depreciate in value faster than a condom. If you can resist not cruising the strip in your shiny Audi TT, you can save a lot of money. Something like a 10 year old VW Jetta (or a Volvo wagon if you have kids) can be had for $1000-2000. My recipe is to spend up to $1000 for a car (6 to 15 years old) with nothing major wrong with it, and then spend another $500, tops, to get it in good working order, then drive it for 1 to 3 years. Sell it or scrap it when it needs any repair over ~$500 (Here is where it helps to know how to turn a wrench). If you are concerned about it crapping out on you, get a second, similar car, and register it (but not insure it) until you need it. I have done this for 15 years, and average $120/month for total purchase and repair costs - and I drive 25-40,000 miles a year. Oh, and never buy from a used car lot, buy from an individual. Urbanites like Jane who use public transit can avoid this whole ordeal, but if you live in the boonies or the 'burbs like I have, I see no other way.
Happy winter solstice or Chrismukkwanzah or whatever to everyone in Jane Galt land!
Posted by: Lab Rat on December 10, 2005 08:46 PMQuestion for the group, on Megan's "wait to buy a house" comment:
I live in the Capital District, in upstate New York. Because my area's economy is dominated by government workers, we experience "dampened" economic cycles: we don't get really high peaks or low valleys. Our housing prices were stupid high this summer, so we dropped out of the market, but they have fallen about 10-15% since then, and there is a lot of inventory available.
We are currently renting a small house. Our in-home business has grown to the point that we need more room that is dry and temperature controlled (we do a lot of computer work). Renting a house that suits our needs will cost the same per month as the mortgage plus tax and etc. on the same property. Some of the house will, of course, be turned into an office.
However, I'm sensitive to the problems of owning vs. renting in an economic downturn--we got kicked in the head when the New York City tech market bottomed out after 9/11, two months after we bought our last house, and it took us years to get untangled.
So: Same advice, or different?
Posted by: Dictyranger on December 10, 2005 08:47 PMDifferent. The bubble is nowhere near as bubbly outside of the coastal urban areas. And it sounds like your business is doing well. But keep in mind that you should reserve 3% of the cost of your house per year for repairs and such; if you can swing that, go for it. Just don't buy all the house you can afford; buy enough that you'll be comfortable if business turns down and the house won't sell.
Posted by: Jane Galt on December 10, 2005 08:57 PMQuadrupole,
I know the conventional wisdom is to never, ever, ever, borrow from your 401(k). Every time I surf past MSNBC or PBS I can find some finance wonk telling me what a horrible idea it is to borrow against my retirement.
But is there no reward at all? I agree that the downside of losing your job and having to pay incredible taxes on the outstanding balance of a 401(k) loan is a significant risk that must be considered. However, if you do not take the loan and you lose your job, you still owe that money and (since MCP was talking about credit card debt) now you are paying late charges and most probably, the interest rate has maxed out on your outstanding balance(s).
How much better off were you not to take the loan?
At the company I work for, a 401(k) loan cost $35. Everything else goes right back into your account. The interest rate is Prime+1%. So, if MCP works for the same company that I do, he will be paying an interest rate of less than half of what he was paying the CC companies, and he will be paying it to HIMSELF! Surely, that benefit means something, right?
After playing devil's advocate, I'm not saying you're wrong. I honestly don't know. I would love to see feedback on that and I would even be willing to go to the mountain and petition Jane for a ruling.
Is a 401(k) loan the worst financial mistake you can make?
Posted by: Reagan Fan on December 10, 2005 09:02 PMit does all depend on your situation.
your industry can make spending in your 20s a very good idea, and many people will benefit from higher spending in their youth on work clothes and social spending (food and alcohol)
otherwise good points.
as to not getting into student loan debt: very, very, very true.
there's very little that you can't do with an engineering degree in terms of science, and you can get a good job with an engineering degree much easier than with a science degree. You can then parlay that over time into grad degrees through employer pay programs if you are smart. Just choose a company that offers that and try to match industry and desired degree, so that they'll benefit from your degree and will be more likely to pay for it and make room for the time needed (either full or part time).
You can get a very large number of employers to pay for your Ivy MBA, so this takes cares of very, very large debts, if you choose the right employer and make a commitment for a few years.
Ignoring all of these, your best investment comes from choosing who you are born to, but that's hard. Second best idea is to stop working for somebody else and to work for yourself. You make more money, have more control (and will thus feel better, even if you are doing the same job), and will take home more money (you can very easily reduce your taxable income through business deductions).
Posted by: hey on December 10, 2005 09:18 PMI second the advice about starting young. I invested what I could at 21-25, but then cashed it out to help pay for a tough stretch, when my wife needed to fulfill an unpaid internship. I missed the bull market of the 90's.
Oof.
Posted by: Al on December 10, 2005 09:27 PMNot bragging but offering encouragement - folks, it can be done. I'm 48 and my wife is a few years older. We're 100% debt free. Our house, both cars, and the airplane are paid off (it's a 1967 model). Our net worth crossed into the 7 figures this year. Life is good.
We do make a pretty good income but the key to achieving all of this is that we've ALWAYS made it a point to spend less than we earn. When we got married 22 years ago, we were both working our way through college. We were married for several months before our combined income exceeded $1000 a month. Out of that, we paid for everything including college. We took out student loans only as a last resort.
Despite our income, we both brown bag our lunches almost every day. I can carry my lunch for a week for the cost of eating out once. I never buy "designer" coffee because I'm just not that impressed with it to pay the high price, nor to put up with the fat content (some Starbucks coffees have more fat than a Big Mac.)
The money we've put away would allow both of us to go without work for at least 3 years without worry should the need arise and we're working to increase that. That's what I call financial freedom. A few months ago, my wife left a high paying but very stressful job for one that pays about $30,000 a year less but is much less damaging to her health. We're putting 100% of her income into retirement savings (401K, Roth IRA, and variable annuities). Meanwhile, I'm maxing out my 401K and Roth IRAs every year.
It's necessary to find a healthy balance between living for today and saving for retirement. Some people just assume they'll be able to work when they're 70 but it may not happen. A good friend of mine used to run marathons. Today, he's nearly a quadraplegic due to MS. A coworker of mine is in her early 60s and battling cancer. My father died at 47 of a heart attack. You just can't assume your health will let you work when you're 70. It's great if you want to and are able to work at that age, but it truly sucks if you have to work at 70 to make ends meet.
I believe we've found our balance. We're saving about 50% of our income, yet I have an expensive hobby (the only thing cheap about an airplane is the air in the tires). We've gone on a couple cruises and plan more travel each year.
One thing we're doing that I've never heard anyone else mention is that we're practicing for my wife's retirement by living off of my income alone. We're saving all of hers. When I get a year or two away from retirement, we'll practice by living off of our expected retirement income and saving/investing all of the rest. That way, when I actually do retire (planning horizon is 11 years from last month), we'll be used to living on that income level.
The recommendations I'd give are very similar to the ones given above.
1. Always spend less than you earn.
2. Pay off the highest interest rate debts first by paying as much as you possibly can.
3. When you pay off one debt, roll the money you were paying on it into paying off the next one. Keep going until you've paid off all of them.
I hate owing people money, so I take on debt only when necessary and always pay if off as fast as possible. Since we have no house payment, we were able to pay off the airplane and a new Toyota Highlander in 15 months while still putting away a lot of money.
Posted by: Larry on December 10, 2005 10:06 PMMeta-advice: Have simple tastes, which is what's behind many of Jane's (excellent) points.
Also, consider living someplace cheap, ie: not the coasts.
Posted by: Jay Manifold on December 10, 2005 10:08 PMKentucky Packrat- the numbers you gave equal to less than $700.00 a month, That's a part-time job for a college student. College does not have to be that expensive and college students get a lot more out of it if they have an investment in it.
Randy, your kids can put themselves through school, you don't need to put your future in jeopardy for your kids education. You would benefit your children more by taking care of and planning your future and guiding them to take care of theirs. By following your example, your children will not plan for their future either and then what good have you done them. Are you going to tell them "do as I say not as I do"? We all know how well that works.
One of the dumbest things people do is borrow $40-50K to get a doctorate in Social Work with a salary of never higher than $30k.
As far as borrowing from 401K to payoff things, I have relatives who borrowed at 4% from 401K to payoff 9% car loans, now they are having to pay about 7k in penalties and taxes this year because they didn't get 401K paid back. They have excellent credit, life just happened.
Don't mean to sound harsh, but noone knows for sure what is going to happen even six months from now. Just because you refuse to plan for a rainy day, doesn't mean it's not going to rain. It is going to rain, you can be prepared or not. Just like life insurance, just because you don't want to discuss it or plan for your eventual demise, doesn't mean you aren't going to die, it just means you made it harder for the people who survived you. They miss you and now have less income, support from you, because you didn't want to deal with the inevitable. I have a friend going through that with his Dad right now, because his mom just passed and he has no idea where any of her information is, life insurance, credit cards, bank accounts.
Posted by: charles on December 10, 2005 10:10 PMI see the 'oh I'll just work until I'm 70 or 75 so I don't really have to worry much about retirement savings' remark frequently. Unfortunately, I know quite a few people who weren't healthly enough to work even into their 60's, let alone longer. Any day you can get cancer, heart problems, bad backs, knees, you name it. And our obese, sedentary baby boomers are going to have more health problems than most. Exercised and ate right all your life? Have you had your knees replaced yet? No, well, you probably will. All that exercise takes it's toll too. Don't count on staying healthy way into your 70s. I never had a health problem until breast cancer at 54. The treatments were so debilitating I could only work part-time and I finally had to retire at 56. I'm much better now (9 years later) but would still have problems holding down a full-time job. I'm very thankful I saved my money amd won't have to work full-time for another 10 or 15 years just to eat. What work I do now is for fun and to buy fun things, like a trip to India this year. Good health, like good jobs, can be gone in a moment. Car accident, anyone?
Posted by: Nancy on December 10, 2005 10:30 PMAgree with everything on the list, except #4.
Why? Not because I think today's coastal prices are sustainable; they almost certainly aren't. #5 on the list explains it: the reason that actively managed funds do worse than indices is that it's too hard for individuals to properly make cutting-edge investment judgments in a consistently correct manner.
Just recently I pulled out an old NYT piece about the Westchester housing market bemoaning the unsustainable rise in prices...dated July 2002. And remember Greenspan's famous "irrational exuberance" speech - he was right, but the market didn't crash for another 4 years. It's too hard to know exactly when to call the top of the market, until too late after the fact. I wouldn't encourage people to try timing the housing market for that reason - better to stick to the other pieces of advice about debt and not assuming that you'll get a huge return.
The inflation rate is currently 3% (see http://inflationdata.com/Inflation/Inflation_Rate/CurrentInflation.asp), it's not 6%, and i don't know what one commenter was talking about when he/she said it was 12% unofficially. This year the CPI indicates that inflation will be 6%, however in the last 5 years, the inflation rate has been between 1-3%. So, don't believe everything you read, the 6% is a high point, historically.
Posted by: Rob on December 11, 2005 02:28 AM11th Commandment:
Thou shalt not touch thy principal.
---
If you have the discipline and get a Christmas bonus, depending on the amount - make that your 13th mort. pmt.
OR -
get your amortization schedule and pay next month's principal amount w/the current payment.
1 pmt should = 7ish years off your loan.
Posted by: Sandy P on December 11, 2005 02:51 AMI find this works for me:
live at eighty percent of your net income.
limit your credit cards to a few.
budget your credit cards, that is treat them as if they were debit cards and limit yourself to an amount you can pay in full every month. I prefer credit cards to debit cards for the points, but I watch all my accounts and balances on line.
Use on line banking and get as many of your bills sent to you and your bank electronically. You wont miss a payment due to slow or lost mail, which keeps your credit clean and it's easier to keep track of your spending. also check on line all the vendors you pay such as utilities and credit cards to stay on top of your spending.
Besides Jane's suggestion of making two half mortgage payments a month, make a separate payment every month for principal only. even if it's only $50 a month that is still 6 thousand dollars over ten years of your principal balance and on a thirty year mortgage you will save nearly that in interest as well.
If you have kids buy in to a 529 or state guarantee prepaid tuition plan. if possible start from birth, your child will have a paid up tuition in a state university and if they go to a private school the plan will pay what the state would charge in that year to the private school.
Buy whole life life insurance when your young. it is another forced savings scheme and as the cash value builds up when you retire you can borrow 70% at retirement and the cash in the policy will generate enough at that point to pay the interest and insurance coverage until death. you will had the money and your heirs will still collect a good portion of the face value especially if you elect to take and pay for the cola adjustments to the policy premium every two or three years. and the cash you take as an advance is tax free.
If for example you expect to be earning much more in 10 years it is silly to deprive yourself now.
Beyond the fact that 23-year-olds are poor judges of how rich they're going to be when they're 35 -- you're missing that this is about habit. The amount I've saved in the past year dwarfs the amount I accumulated in a decade of scrimping as a grad student and postdoc. But now that I make money, I handle it sanely because of the habits and lessons from when I was auto-saving $50 a month. It's not so easy to suddenly become smart one day, and I'm glad I made my mistakes with $2K in my 20s, not with $200K in my 30's.
Posted by: JSinger on December 11, 2005 07:28 AMIf for example you expect to be earning much more in 10 years it is silly to deprive yourself now.
My ten-year income expectations at 24 were probably 150K. My ten-year income expectations at 28 were considerably more than that. My ten-year income expectations at 32 are considerably less than that.
Life happens. Having worked as a network engineer during the tech bubble, I know too many people who lived right up to their incomes, then lost the house when the bubble popped. Now their credit records are ruined and they're considerably more miserable than they would have been had they lived more modestly when times were good.
Posted by: Jane Galt on December 11, 2005 09:18 AMThe myth of index funds outperforming actively managed funds has been around for several decades, but recent studies show that it's just that - a myth. According to a recent issue of Financial Planning, the average actively managed fund outperformed indexes roughly 68% of the time.
Index funds do well in a secular bull market, when everything is going up and throwing darts at the stock pages will make you money. In a secular bear market, when indexes go nowhere - as in the period 1965 to 1982, they can kill your financial dreams. In those periods, having the ability to "buy low" and "sell high" can make a fund money, and it is not something that index funds can do - by definition.
Finally, index funds can't protect you against loss. Very few people brag about the fact that during a market decline of 50% they lost no more than 50%. Or in the case of actively managed funds, if the market declines 50% they only lost 40% of their money.
That is why as this market meanders around, and the lessons of the tech crash sink in, more people will gravitate toward "absolute return" funds that don't measure their performance against the market, but have an absolute return objective irrespective of market direction.
One thing I didn't see mentioned that I think many people could benefit from -- invest in your future health.
Eat healthy. Don't try to make big changes, but make some changes a little at a time. Drink water or diet-soda with lunch and dinner. Substitute fresh vegetables or fruits or salads for french fries, candy bars, or doughnuts. Choose turkey or grilled chicken instead of a hamburger. Reduce saturated fats (for example, put reduced-sugar jam on your toast instead of butter). Replace some of the fat and sugar in your cooking with substitutes (trans-fat free Crisco and butter flavor substitutes well for butter with half the saturated fat, and Splenda can replace half the sugar in most recipes)
Exercise every day. Get some dumbells and lift weights 3 or 4 times a week. Do push-ups, crunches, lunges, etc. Not just for men, women also need to keep the muscles toned and healthy.
Take up jogging, jumping-rope, aerobics, whatever. During the winter, a jump-rope or a mini-trampoline are cheap but can help you get a great indoor workout. Or just turn on the music and dance around your home for a half-hour. Get some aerobic/cardio exercise 3 or 4 times a week, alternating with your weight/strength training days.
All of these simple changes to your routine will pay-off later in life. Your heart will be much healthier, you will be less likely to have high blood pressure, diabetes will be much less likely, and you will drastically increase your chances of being able to actually walk around rather than being confined to a wheel-chair for fear of falling and breaking something. And that doesn't even count the savings in medical bills (Medicare/Medicaid is on an unsustainable path -- don't expect all your medical problems to be covered when you are old, something has to change)
Posted by: ErikR on December 11, 2005 09:59 AMAren't we a nation of fatties because of our eating habits? Just so, we are a nation of asset-poor wage earners because of our spending habits. A habit is something you do without thinking about it. The worker who maximizes her 401(k) contributions (10% of participants do) spends no more time thinking about it than the one who maximizes her credit card balances. It is not hard to follow good habits because you do them without thinking. What's hard is to form good habits because you must force yourself to do them until they become second nature. The hardest thing of all is to break a bad habit because a habit is something you do without thinking. The best way to break a bad habit whether it's overeating or overspending, or whether it's being a couch potato instead of gettng the exercise your body needs, is to force yourself to replace the bad habit with the good one until you do it as automatically as you used to do the bad habit.
Posted by: Martin on December 11, 2005 10:00 AMOne thought about #7- a cash budget is a great idea if you don't have the financial disciple to cut your spending, but if you do, using credit cards strategically can be beneficial if you pay off your balance in full (or take advantage of 0% balance transfers). You basically get an interest-free loan until the bill comes, and you can earn cash back or rewards on many cards.
I use a Discover Gas card for all my gas purchases (5% back) and Amex Blue Cash for everything else (up to 1% back, up to 5% for grocery stores, drugstores, ect). It's basically free money
And my other suggestion: Don't pass up opportunities to make more money.
I'm lucky enough to be hourly, and I aggressively ask for overtime. A few years back, our department head sent out an email looking for people to work on saturdays for a couple months. I signed up. I've been doing it for the last 2.5 years, and it's 7 hours of time-and-a-half almost every week, which seriously helps the bottom line. I'm always amazed how many coworkers complain about being broke but pass up overtime.
Also, there are a lot of ways to make money if you seek them out - a few bucks here and there, but it's free money. I do surveys. I do test drive offers where you get a gift card for test driving a car. I buy stuff on sale or clearance and sell it on eBay for a profit. I once bought a bunch of used textbooks off my MBA classmates and resold them on half.com for a profit.
It amazes me how many people just leave money on the table.
Posted by: Mad Anthony on December 11, 2005 11:20 AMThat is a good comment above about heirs losing track of your assets. Write up a letter to describe all your insurance, bank accounts, safe deposit boxes, mutual fund accounts, retirement accounts, location of deeds, passwords for online financial sites, etc.
Also if you are a collector of books, stamps, Beanie Babies, whatever, write something up about which are the more valuable items and how they should be liquidated, reputable dealers and auction houses to contact when the time comes, and so on.
I'm a part-time book/stamp/paper dealer and you would not believe the money thrown away by heirs and executors when dealing with valuable collectibles. It can be millions, certainly often into 6 figures. A bookcase can hold $20,000 easy.
Way too many people carry credit card balances charging 18+% and simultaneously buy CDs paying 3%. I understand about having 6 months' expenses set aside in liquid form, but it's also important not to ignore a spread like that, which will eat you alive.
Shopping at places like Wal-Mart, Costco, Sam's Club will save you tens of thousands of dollars over a couple decades. Don't let your silly PC notions about the evil big corporations blind you to that.
The advice about cars is vital: almost nothing wipes out wealth faster. We drive a 1994 Honda Accord wagon and my mechanic says it will last another 100K miles. A neighbor once said to me, "Why don't you drive a BMW or Mercedes? You can afford one, right?" The response I felt like making was, "In fact, we can afford TEN of them, and for cash, but we don't like to throw money away."
Pay close attention to your tax bracket. If you are near a transition point, it may pay you a lot to accelerate deductions or put them off until next year. Same with income.
If your benefit costs at work vary depending on your salary, check the brackets. I once saved us several hundred dollars by asking for my wife's salary to be decreased $1 for one year (medical insurance premiums jumped at that point). Everybody but me thought I was nuts.
Study frequent flyer/frequent hotel stay programs. A new book just out called MILEAGE PRO is useful for starters. Then peruse www.flyertalk.com, among others.
If you have stuff to get rid of, eBay it. Quite easy and straightforward.
Read books like "The Millionaire Next Door" and "The Millionaire Mind." Some good avice in there.
Start now!
Posted by: Chester White on December 11, 2005 12:14 PMWhen I was about 40 I was in a crappy job situation - as things got worse, the boss's tendency to be a bully (never fully under control under the best of circumstances) got worse and worse. I thought I needed the job to keep paying child support, making house payments, and saving. Of course I lost it anyway, eventually, but not before I lost my self-respect and taught the boss a bad lesson that he is still recovering from: you can bully people infinitely. It would have been better for me and for him if I had been prepared to tell him, "You misunderstand our relations here."
So I sat down with my children and told them, "We will see if we can bring you to the point where, at 40, you can tell an abusive boss to take the job and shove it. And generally, bosses are like dogs, and if they sense that you are hookless, will not attempt the bullying anyway." Ten years ago next month we started a savings and investment program for them; I matched their contributions to 10%, above the $100/month per kid that I was putting in. Now they are in their early - late 20s. Two of the three have paid off their college loans, both to the government and to me, and are buying houses of their own. The third has small debt, as she was told all along she had better hold it low depending on her career choice. The three together now have liquid assets (managed mutual funds) of well over 100K.
1) You can do college and 16% 401(k) savings for self and children on a salary never over 75K.
2) There's education and education, and a long-practiced habit of savings and investment can be worth as much as a degree.
3) The kids should be close enough at age 40 that they will not have to take crap.
Oh, and don't count on Social Security for a penny if you are under 30. I've spent years studying it, even had my own paid subscription to the bound quarterly report, and, no matter what Democratic politicians tell you, it is completely unsustainable over 50 years.
It's the biggest fraud in the history of the world, stating with the fact that there is no "Trust Fund." What people call the "Trust Fund" is nothing more than paper, promises from one arm of the government (Treasury) to pay money to another arm of the government (SS) in the future.
Just as if you transferred money from your right pocket to your left to save for retirement, and put an IOU in the right pocket.
Nothing there. Don't rely on it.
Posted by: Chester White on December 11, 2005 12:28 PMThis is all pretty good advice, but falls somewhat short of the mark. My very strong advice to anyone wanting to get his or her financial house in order is to plug into Dave Ramsey (www.daveramsey.com). He offers a $100, 13-week course called Financial Peace University that has absolutely changed my life, and the lives of millions of others. Some of what he teaches is different from what Megan says above. For instance:
- Ignore the interest rates: Pay off your debts in order from smallest to largest. Ramsey calls this the "debt snowball." The idea is that the smaller debts can be paid off the fastest, thus giving you a psychological "win" PLUS it frees up the monthly payment from that debt so that it can then be used to attack the next smallest debt. By the time you take on your largest debt, you may have freed up hundreds of dollars in monthly payments that you can then use to help you take down the monster.
- Don't just manage your credit cards: Cut them up. Just having them there is too tempting for many people.
- Forget this "most people don't have the discipline to budget" stuff. Budgeting is not an option. Either you control your money, or your lack of it will always control you. If you don't tell your money where to go, it will always evaporate and leave you wondering "where it all went."
- Do whatever you have to do to get at least $1000 in the bank NOW as an emergency fund. Sell the furniture, your soul, whatever, but get at least that much money set aside for when "life happens." Eventually, you need the six months of expenses saved up, but the $1000 is your starting point until your debts are paid off.
- Donate, donate, donate. It seems counterintuitive to tell someone who is in debt to give money away. But giving makes you less self-centered and more thankful for what you have. Givers make better spouses, better parents, and better citizens. You will be amazed how much your outlook changes when you are willing to give 5-10% of your income away, even while you work to get your personal finances in order.
I could go on, but Ramsey's advice is solid, and I can not recommend him highly enough.
Posted by: Ben on December 11, 2005 01:31 PMI am not, by the way, an employee of Dave Ramsey's or in any way affiliated with him. Reading back over my post, I can see where someone might get that impression. I'm just someone who went from having $50,000 in unsecured debt (mainly credit cards) and looming bankruptcy to now having my financial house in order. Thank kind of experience tends to get you a little fired up.
Posted by: Ben on December 11, 2005 01:36 PM>>>"Ignore the interest rates: Pay off your debts in order from smallest to largest. Ramsey calls this the "debt snowball." The idea is that the smaller debts can be paid off the fastest, thus giving you a psychological "win" PLUS it frees up the monthly payment from that debt so that it can then be used to attack the next smallest debt. By the time you take on your largest debt, you may have freed up hundreds of dollars in monthly payments that you can then use to help you take down the monster."
I'm sorry, this is completely nonsensical and dangerous advice. Put $1000 onto my 5% $10000 home equity line of credit balance and not put it on my 29% credit card debt of $20000?
So a year from now I will have saved $50 (deductible) on my HELOC interest and racked up another $290 (non-deductible) on my credit card loan?
And I have to pay $100 for advice like this? Remind me not to loan Mr. Ramsey's customers any money.
For anyone able to think and not be scared by having 6 debts of various sizes going instead of 5 at a larger total, this is hooey.
Posted by: Chester White on December 11, 2005 01:41 PM18) Save your raise. You were getting by on what you made before, weren't you? My wife and I found that we could set aside at least every other raise and still enjoy a rising standard of living. If you can put it into a 401(k), you get to save with pre-tax dollars. If there's a company match on such savings, you get an immediate risk-free return.
19) If you leave a job, don't just leave your 401(k) behind (this is apparently a much more common practice than I would have expected). Rolling it over into an IRA is an almost trivial exercise. Chances are good that at some point, the company will make changes inside the 401(k) and the default investments for your money will not match what you really want.
Posted by: Michael Cain on December 11, 2005 02:12 PMTyping on BlackBerry-sorry! Don't make every-two-week payments on your mortgage if you can afford two extra payments a year, make the equivalent dollar-amount payment toward *principal only* once a year, for heaven's sake! Put aside the extra money month-by-month, maybe in that rainy-day account, and fill in the little blank on your mortgage statement that says "add'l amount to be applied to principal" once a year.
In other advice: know your weaknesses. If you can't carry cash without spending it, don't. If credit cards are your Achilles heel, avoid them. My husband and I have no problem paying for everything with credit cards and paying the entire balance monthly, but if I have five bucks in my wallet it'll be gone by nightfall.
Finally, don't do your kids the disservice of not encouraging them to work for their keep, even in college.
Posted by: jamie on December 11, 2005 02:39 PM["The inflation rate is currently 3%... not 6%, and i don't know what one commenter was talking about when he/she said it was 12% unofficially..." --Posted by Rob, Dec 11]
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...yes, it is a tricky concept to understand -- and your Federal politcians make every effort to keep you confused & complacent about their deliberate monetary "inflation".
The most commonly used 'Official' inflation-rate is based on the Consumer-Price-Index (CPI)
compiled by the Federal Bureau of Labor Statistics -- which supposedly tracks overall price changes monthly, with an 'annual' summary percentage stated as the "Inflation Rate".
Your referenced 'current' inflation rate of "3%" is almost a year old (Jan/Feb 2005); whereas, the most current Federal 'official' rate (Oct 2005 data, annualized) is indeed 6% ... as I correctly stated.
The 'unofficial' (real) inflation rate is much higher. Federal politcians have every incentive to under-report official inflation rates -- many government spending programs are indexed to the official rate and a low rate reduces their costs; a lower rate causes higher economic productivity & GDP to be 'reported' in other government numbers-crunching; and a low reported rate hides the deliberate debasement of U.S. currency by politcians.
The 'Official' inflation rate is also officially 'fudged' downward with massive arbitrary 'adjustments' {like ignoring food & energy costs}. Other government indices like the "Producer Price Index"(PPI) do show a 13% inflation rate (Sep/Oct 2005, annualized).
You state that an inflation rate of 6% is "...a high point, historically". Apparently, you overlooked 1980 when the official U.S. inflation rate was 13.58%.
In fact, prices increased over 40% in just three years, from 1979 to 1981.
So what will inflation do to your savings over the next 20-50 years ???
Posted by: PelanoD on December 11, 2005 04:04 PMThe "debt snowball" thing (paying off smallest debts first, working your way up to largest) is a very good idea.
It may not make the most mathematical sense -- the smallest debt might carry a 6% interest rate, the bigger debt with an 28% rate should in theory be paid off first -- but it makes the most psychological sense.
If people were coldly rational creatures, most wouldn't have gotten into debt in the first place. Among the entire population of people whose credit cards are maxed out, those who acquired the debt because of medical problems or job loss are undoubtedly the smallest group by several orders of magnitude.
The rest of us are irrational and need to get and stay motivated. Paying off the smallest debts first is a GREAT way to do this. Paying off that first $40 debt (to Blockbuster, for late fees from two years ago) gives you an instant sense of accomplishment, which generally leads to next month's payment of $221 to Macy's to finally bring the balance of your store credit card down to zero. Eventually you pay off the $8000 Visa, the $28,000 home equity line of credit, etc., etc. Before you know it you look at your checking account and realize that you have gone from living paycheck to paycheck to having $2000 per month extra to spend.
The "debt snowball" is a good way to keep the average person motivated. It takes most people several years to get out of debt, and little psychological victories along the way are very important. Without them, many would not perservere.
Posted by: Joe Schmoe on December 11, 2005 04:17 PMOops meant ...$2000 extra per month... hopefully you won't spend it!
Posted by: Joe Schmoe on December 11, 2005 04:18 PMJane, is your recommended 20% savings before or after taxes?
Posted by: Marm on December 11, 2005 04:26 PMThoughtful article and comments, too. I'd like to add one general piece of advice that is almost a cliche: CONTROL YOUR EMOTIONS. A few examples where applying this principle may help avoid a mistake:
1) If personal safety is not an issue, resist the temptation to walk out of a bad marriage, especially one with kids. You can't believe the financial and other stresses that you'll encounter as a single parent.
2) Keep that old car running another year. You'll save thousands of dollars by not letting that new or nearly new-car smell entice you.
3) Don't quit your job in order to show your boss and co-workers how much they should have appreciated you. Grit your teeth, make plans, and leave when you've got another job.
Jane Galt, some poor people arrange to be paid off the books so they can avoid paying into social security. I think they are dumb to do this (assuming they could provide a legitimate social security number and will work enough to meet the minimum requirement for benefits) as social security is a good deal for the poor. Your comments about how social security is in trouble suggest you may feel otherwise. Is that the case?
Posted by: James B. Shearer on December 11, 2005 07:28 PMChester -- This is not corporate finance, it's personal finance. Trying to be "savvy" about interest rates and so forth while sinking into debt is what gets people into trouble to begin with.
Joe is absolutely right about the psychological benefits of paying off small debts first. But just as important is the fact that paying off the smaller debts frees up the money you were making in monthly payments on those accounts and allows you to more effectively attack the larger debts.
Put it this way: If I'm barely keeping my head above water, scraping together an extra $100 a month is tough. But if I put that on my $20,000 home equity loan, it will just be a drop in a very big bucket, and I won't really be getting anywhere. But in less than a year, that same $100 a month can retire a $1000 department store credit card debt and erase the minimum monthly payment, which can then help me attack the next debt -- say, my car loan.
It all makes great sense if you think about it.
Posted by: Ben on December 11, 2005 07:55 PMSorry, but I have to comment about what someone above said. Working in college is the stupidest fucking thing I've ever heard of.
You go to college to learn. Full stop. Every hour you spend working is an hour you should have spent learning. If you are carrying a 4, then add useful classes -- eg, if you do anything in the hard sciences, math, or social sciences, statistics are a wonderful complement -- and once you are a fulltime student, MC=0.
Finally, if you are doing all the above and carrying a 4, graduate early. There are virtually no jobs for people in college that pay enough money for it to make any sense to put off graduation. The only reason people have jobs in college is because their parents don't have enough $ to get them through / inefficiencies in the credit markets / not wanting to live like a pauper for 4 years. Nonetheless, they shouldn't have jobs... And if you can help your children to avoid doing so and have them spend those hours on learning instead, it's a wise investment.
earl
Posted by: earl on December 11, 2005 08:16 PMThere are risks to over-saving as well. For example, consider the case of a single person with no dependents. One risk to over-saving is that he may die before he gets to spend his savings. Another is that he may not be in good enough health at retirement to really enjoy his money.
An example: My grandparents saved everything they could their entire lives. Their philosophy was to put every extra cent away for retirement, and live frugally. They had big plans to visit Japan, travel Europe, maybe buy an RV and tour the U.S.
They retired with about half a million dollars in the bank. They bought a modest little house for about $80K in the town near their farm, and started making plans for what they were going to do. Then my grandfather was diagnosed with Alzheimers, and my grandmother had a stroke. Within three years they were both dead, their hard-earned savings almost completely unspent.
Their children fought like cats and dogs over the money, which destroyed the family. Most of the money was burned up in lawyers' fees.
Youth is a valuable commodity. There are things you can do when young that you either won't be able to or won't want to do when you are 70 years old. The average lifepan is 77 years now - if you're 35, perhaps you can be expected to live to 80. But there's maybe a 10% or 20% chance that you won't life to 70. And an even lower chance that you'll make it to 70 and still have health good enough that you actually want to do all the things you think you will. If that's when you are planning to retire, and if your money has no value to you after you die (i.e. you're not saving for your children), then discount the money you are putting away today by that much to get your expected value of your savings.
Make sure you save enough to allow you to live a comfortable life in retirement, but I wouldn't make grand plans about living the life of Riley in retirement and seriously shortchange your life now. There's a balance to be drawn between living in debt and living like a pauper because you are putting all your money away for later.
I put away about 9% of my salary. My wife has a good pension through her employer that will allow her to retire at 70% salary. We live in a pretty nice house. Our retirement plan is to live off our pensions, the 9% I put away, plus our Social Insurance paymnents. If that's not enough, we'll sell our house or take out a reverse mortgage on it to supplement our income. Other than that, we put away money for our daughter's college fund, and that's it. The rest gets spent. We don't maintain credit card debt, but we do have car loans and a mortgage. I understand we could drive older used cars and not have the payments, but then we could also not buy X boxes, go on vacations, or engage in any other luxury spending we have.
Not everything is about optimizing every penny you spend.
Anytime advice on personal finance does not begin with the qualifier, "Assuming you don't have to pay for daycare..." I move on. Anyone who works *and* raises young kids knows that this particular cost blows a hole in all these wonderful bits of wisdom about saving. For those years while kids aren't old enough for school, you just make sure the debts don't get bigger.
My savings rate will be positively Asian once I stop sending a medium-sized mortgage payment each month to my kids' daycare providers. Until then, I shuffle along, paying off a debt here and there, yearning for some extra cash flow.
Could I find a cheaper daycare? You bet. I could also cut my kids' medicine tablets in half when they are sick and save money that way too. Both methods are really, really stupid ways to save a buck, at least if you think your kids are priceless.
Seriously, how many of you folks who are providing all this smug advice about money are also raising multiple kids below school age? Don't be shy...
I thought so. Sorry for the caustic tone, but it always chaps my @ss when people speak in absolutes about how you need to cut expenses, and how everything beyond food, water and a lean-too is a luxury. If you have young kids, they absorb an amazing amount of cash just to make sure they remain safe and fed while you go out and earn a buck. I make pretty great money (top 5% percentile), but with mucho student loans for me and my wife and two kids, we live lives similar to familes in the bottom 20% to keep costs under control. (My older daughter actually thinks we are poor because of where and how we live. No kidding.) I honestly have no idea how other people make it today.
Anyway, the lack of acknowledgement and discussion of this fact by alleged financial advisors strikes me as another instance of "umarried marriage counselors." There should be a separate analysis for people with young kids who are still early in their careers.
Posted by: Hmm mmm on December 11, 2005 09:30 PMI am retired. Some comments on your numerated items
One: Definitely. What ever sacrifice you need to make, it is absolutely essential that you put back ‘X’ number of dollars for retirement. And you cannot begin too early. You can never save too much for retirement. And I have never bought into my wife & I paying for our children’s education. And 3 out of our 4 children are college grads.
Two: In C A P I T A L letters. Home mortgage and automobile loans have been unavoidable for me.
Three: While working, I put 10% of my salary into a 401(k) and my employer put in 5%. That five percent was all gravy. And for decades, the first bit of interest earned beaucoup interest.
Four: Interest paid on a home mortgage reduces your taxable income. The government is subsidizing your home purchase.
Five: The hell with indexed funds and mutual funds. Learn how to evaluate common stocks. Remember, you as an individual do not have the restrictions that fund managers must abide by.
Six: I agree 100%. You need to practice discipline. Self denial. I don’t care how little you earn, you can always cut back. Been there, done that.
Seven: If you use cash instead of checks or plastic, it makes you more likely not to spend.
Eight: Pay down high interest debt as soon as possible. But a 5.5% home mortgage, no way. I can (and am) make more putting that extra money in common stocks. But that takes discipline.
Nine: It goes without saying.
Ten: And if you do make monthly credit card payments (or any other recurring payments) make sure that they are never, absolutely NEVER, late.
Eleven: I agree. Never had one.
Twelve: Thirteen: Fourteen: Yes to all three.
Fifteen: I have never have counted on home equity loans.
Sixteen: A few years back when Eric Clapton won a whole bunch of Grammys, a whole lot of people said where did he come from, Eric Who? Well, he paid his dues as backup, in Cream et cetera. Well, I spent 20 years studying the stock market, figuring out the attributes of companies that had above average returns. Bonds and mutual funds are not for me.
Caveat: My answers have worked for me. Your mileage may vary.
God, nothing brings out the morality freaks like saving money. We're a consumer culture. It's what we are. Don't try to change it. Why Jane isn't looking for alternate sources of income rather than meekly accept turkey sandwiches is more than I can figure. She certainly writes more aggressively than she lives.
So apart from "avoid credit cards" and "save more", I think all the cheap living advice is pretty weasly.
That said, as a single parent who has worked as an independent consultant for the past 15 years, I suffered for years from lousy cash flow and offer this up to anyone who might find it useful. I made plenty of money, but never had it when I needed it. I had sterling credit and $35K of credit card debt in 1998, with $1200/month in credit card payments, and I knew the boom was ending sometime soon. I wanted out of the debt.
So I decided to lock up my credit cards and allow my credit rating to go to shit and back. Whereas before I had run out of cash and charged whenever an emergency expense came up (although never food or mortgage, that always struck me as bizarre), I resolved never to run out of cash. If cash was low until I got a check, I didn't pay my bills. Mortgage first, then utilities, with credit cards last.
Then, when I did get the check, I made substantial payments on all my cards. And as one got paid off, I started paying more on the others. At the same time, I finally began saving money, building up to $1000/month by the boom's end.
My credit rating tanked, but I had all the debt gone in two years. I was able to afford grad school, and only ran up debt once, when a client didn't pay (took him to court and won--and paid off the cards).
I didn't live like a pauper, despite the fact that the recession and grad school took my income to 25% of what it was. I continued to save, but not aggressively. In fact, when I finished grad school I was enjoying my life as a teacher/tutor/publisher so much that I decided to take an extra year off. My son never suffered, although I recently decided to go back to tech because I wanted to have plenty of discretionary income for his senior year. I have consequently upped my savings rate as well.
So for anyone who is looking at a huge mound of credit card debt, consider paying the credit cards last. Keep cash on hand. And when you have cash, make big payments on the debt. Even if it doesn't feel like it's making a difference.
This runs counter to all the experts, but if your issue is cash flow as opposed to consumption, give it a shot.
Posted by: Cal on December 11, 2005 09:51 PMGreat advice from Megan; without having read all the comments, I'd add three additional points:
1) This one goes with Megan's point about buying a used car: keep a used car. So many people act as if the point of a car is to impress people, so they feel the need to replace it as soon as it starts to look old. Keep in mind that the point of a car is to get you from point A to point B; if it still does that reliably, then you don't need to get another one, new or used.
2) Going with Megan's point about budgeting: The best $30 investment you can make is Quicken. Of course, you can do it with pen and paper, too. The point is, track everything. A little bit of money here, a little bit there, and pretty soon you've spent a lot of money without realizing it. People buy the sandwich from the deli instead of making it at home in part because they don't realize how much they're spending; it doesn't seem like much at the time, but it adds up. If they saw that they were saving $1000/year, rather than $5/day, by brown-bagging it, they'd be a lot more likely to do it.
2b) For the same reason, if you have any discipline in not going into debt, credit cards are _good_; you can use them just about everywhere nowadays, and they help you track where your money is going. (Of course, if you lack discipline, then you shouldn't carry them.)
3) Divorce is bad. Very bad. Very very bad. Leave aside any transaction costs associated with the divorce itself, and there's this simple fact: you're turning one household into two. This dramatically increases housing costs, food costs, and every other househouse expense. If your spouse/partner/roommate is beating you up, of course you should leave. If the problem is just that he/she/it isn't taking you to enough romantic dinners, three words: Get Over It.
I liked the comment from hmmm regarding children and daycare. You are correct that the kids eat up alot of $$$. My wife now stays at home, and we live a "decent" neighborhood....but I often think we could be living in a "better" house. I would like her to work, at least a little....
We save, but it is hard. We drive a 99 Windstar and just bought a NEW Kia, not a bad car and cheap.
On the mortgage, I disagree on the always going with a fixed rate. In 2003 I got a 3/1 ARM at 3.5%...thats a low rate. It pays principal at a faster rate than a conventional would have, it allows for cash flow, and it's cheap. the max it can adjust is 2% a year with a max of 9.5%. So I got a very cheap loan for 3 years, in year 4 I'll get 5.5%...which may be slightly below market rate...beyond that who knows. I am happy with the ARM and can afford the higher payments. I can always refi, or move. The vast majority of mortgages last less than ten years. So for most people getting the 30 year locks you in to higher rate for a product you are not going to use.
As I say, there is nothing wrong with an ARM (my parents had one) per se. The problem is that most people who are getting them now can just barely afford the payments at the low introductory rates, and are counting on increasing home equity to be able to refinance. If your ARM leaves you room in the budget for increasing payments, they can be an excellent financing vehicle, for the reasons you named.
Posted by: Jane Galt on December 12, 2005 10:00 AMFor all the folks who think I shouldn't plan on being able to work into my 70s;
If I can't work into my 70s, if my health is so poor that I cannot work, then life is going to suck anyway, and money isn't going to change that. So why should I let my life suck now, and let my kids run up debts, so that I can have money in case my life sucks later?
The true investments are family, health, and willingness to work. Saving is fine if you can afford it. But its not a priority.
Posted by: Randy on December 12, 2005 10:19 AMI must say I always find it hard to understand people who find it hard to save.
As long as you have no dependants and are are working full time it should be easy. In 15-20 years a person in such a situation should be well on the way to a million in assets (even on a small income).
Key advice don't buy a car unless you really need one, vacation at home or visit family, have hobbies that earn you money, don't buy unnecary items, and invest what you save.
If you do the above you be surpirsed how much you can accumulate in a short period. As my grandaperents say it is not what you earn it is what you have.
Posted by: shawfactor on December 12, 2005 10:20 AMWith regard to driving older used cars, keep in mind that few cars older than about the 2002 or 2003 model years are equipped with side airbags (many new GM and Ford cars still don't have them, but that's another rant for another time). Side airbags are such absolutely proven lifesavers that I think it's foolish to drive a car without them just to save a few bucks.
Posted by: Peter on December 12, 2005 10:26 AMSome comments here run along the lines of: "Why save for later? Enjoy it now while you're young and healthy?" Maybe.
But I've seen too many people who made it to 65 with nothing saved, and I mean nothing, who are now living like paupers. Pretty healthy, old, paupers.
So for those of you spending now "while you can enjoy it," what makes you think you won't need the money for when you're old and frail? Most likely, you WILL need the cash, not for exotic travel, but for long term care and various disabilities.
So you never get to travel to England but get Alzheimer's instead. Life is indeed hard, but immeasurably harder if you have no money to care for yourself in old age. Being at the mercy of the government in the baby boom years seems to me a recipe for disaster.
Posted by: Pogo on December 12, 2005 10:48 AMRandy,
Why should I pay for your old age when you simply refuse to save for it?
So "life is going to suck anyway, and money isn't going to change that"? Such a comment shows me (1) you don't know how old people live -or misunderstand the finances- and (2) you are relying on someone else's income to pay for your old age needs that for some reason you don't think you should save anything for. Why should they be required to do so? What makes you so sure it will still be that way when you are old?
Posted by: Pogo on December 12, 2005 10:54 AM"So you never get to travel to England but get Alzheimer's instead. Life is indeed hard, but immeasurably harder if you have no money to care for yourself in old age. Being at the mercy of the government in the baby boom years seems to me a recipe for disaster."
On the other hand, if you're in a nursing home with Alzheimer's, does it really make a difference to you whether you're self-paying or on Medicaid?
Obviously, it'll make a difference to your heirs, and less directly to the taxpayers, so maybe the arguments in favor of savings should be couched in those terms instead.
Thank God for Dan H. I was starting to think the whole world had gone crazy except for me.
Jane's original post was for people who have substantially lowered their original income expectations, as Jane was forced to. But somewhere along the line it seems like the comments section turned into a screed against having debt and/or living well.
Unless you're like Jane -- saddled with massive business school loans with little income to pay them off -- then for the love of god, don't waste the only life you have on steamed vegetables and brown bag lunches.
Posted by: DRB on December 12, 2005 11:08 AM"And if you do make monthly credit card payments (or any other recurring payments) make sure that they are never, absolutely NEVER, late."
Absolutely. Late payments can be ruinous to one's credit score, especially if there are more than one or two of them.
I read on another forum a very good tip for ensuring that your credit card payments are never late, a tip best described by example:
Your credit card bill arrives on the tenth of the month, with a due date of the 30th and a $25 minimum payment. You want to pay $200 when you get paid on the 25th.
Do *not* wait until the 25th to make a payment. Instead, as soon as you get the bill go right to the computer or telephone and pay the $25 minimum (nearly all CC's accept telephone or online payments). Don't put this off until later, under any circumstances. Then, when you get paid on the 25th, pay $175 ($200 as planned less the $25 already paid). This way, even if for some reason you overlook the bill and don't pay it on the 25th as planned, you still will have paid the month's minimum and your credit report will show "pays as agreed."
"Key advice:...vacation at home or visit family, have hobbies that earn you money, don't buy unnecessary items..."
My Christ, what an awful life that would be.
Posted by: DRB on December 12, 2005 11:16 AMPogo,
I'm not asking for you or anyone else to take care of me in my old age.
As for my understanding, I know for a fact that it is possible to be completely happy flat broke by the side of the road in a pouring rain. I'm not afraid. I once road through the desert in the back of a pickup with the stars so bright I thought I could see eternity - and when I am old enough, I will go there again.
Posted by: Randy on December 12, 2005 11:41 AMI hear so often from young people that they never learned about any of these things, and they find themselves out of college with debt and inflated expectations of the high-paying jobs. And by then they're not in school and don't know where to turn to get this info. There's a new program called Econ4U that's "ambushing" young adults with this information in places they'd never expect to learn it, like on movie theater screens, beverage napkins, metro cars and bowling centers. It's an innovate and interesting way to reach the demographic who won't "self-select" to learn it (and most likely the ones who need it most). Check out the quiz--a lot of the answers really stop and make you think about things in a way you probably hadn't before.
Posted by: Erin on December 12, 2005 12:05 PMJane
What is surprising (not) is of course that this is no different from my father's advice and way of life (b. 1930). Real housing prices were lower in the 50s and 60s, but they managed to pay off the house in 10 years, we bought new cars, but kept them for 10 years each (in a Canadian road salt winter). I'm not even sure if my father has a credit card (he got one to buy things online, I think) but he certainly has never had an overdue balance in 60 years of adult life.
Of course in his prime university was free and taxes were lower and you had 2 weeks holiday a year (fewer chances to spend money). So it is not a one to one mapping.
As in so many areas (eg public hygiene) we have 'forgotten' important lessons that our parents knew.
John
Posted by: John on December 12, 2005 12:13 PM Median US households spend
While we're dishing out socially harmful but selfishly rational advice, here's mine. Don't buy medical insurance even if you don't believe Robin Hanson. Make sure all your savings are bankruptcy protected, avoid doctors except in emergencies, and go bankrupt of you have an emergency instead. Buy antibiotics on-line and self-diagnose/self-treat obvious bacterial infections. Travel abroad for medical treatment if you really want to treat a chronic problem. You shouldn't have medical insurance unless your IRAs are fully vested, and should probably save wealth in a home (local bankruptcy law permitting) and possibly, if you have a small amount left over, in physical precious metals or small art objects or collectibles. If you have savings left over after this, you aren't earning like a typical American and you should buy medical insurance.
I think the over-consumption myth is a result of lying by calling people who's incomes differ by an order of magnitude "middle class". The "upper middle class" really do waste money egregiously, but they have high enough incomes that they can afford to do so. In general, they are prepared to retire at a comfortable level just by selling their houses and down-shifting to an expensive but less expensive house. At the same time, the median American, with a much smaller income, spends almost all of it on necessities, and still spends far more than a tithe of their discretionary income on charity, (and generally do this without a tax deduction)which the upper middle class does not do (sadly, most of this money is wasted). When despite their frugality they are unable to save enough to deal with even moderate ill-fortune, they then get le