Monthly Archives: February 2014
Today’s guest post is from my fiancé and it’s been a long time coming! Please leave him a comment to keep him motivated on his journey!
Throughout our existence as humans, we have always gathered as a natural instinct. The people of long ago would hunt and gather food for the approaching winters, and to stay safe from nature’s elements. People today are no different. We are often seen “gathering” clothes for the winter months. And in the modern day, we are often found trying to gather as much money as possible for financial security.
There are many different ways to save money. Many tactics are about a small amount being saved, but every bit counts. I have never been very good at “stacking my chips”. I have always spent the money that was left over. My fiancé always gets on me for being such a free spender. At times, I would notice myself spending twenty dollars every day on things I thought I needed. I would spend around ten dollars a day on my Starbucks habit, as well as seven dollars every day on cigarettes.
Smoking meant everything to me. It was my best friend, my worst enemy, as well as my biggest nightmare. Smoking was always a crutch. If I had a toothache (probably caused from smoking) I would light a cigarette in the middle of the night whenever I would wake up in pain from the throbbing. Oddly enough it would calm my nerves enough to fall back asleep. The same would be true for me when it came to getting a cold and cough. Whenever I couldn’t sleep from coughing, I would simply get out of bed and smoke. This gave me relief for enough time to get back to bed and fall asleep. Was it all mental you ask? Who knows. Maybe because cigarettes are a stimulant? No clue.
Today marks two weeks since I stopped smoking. I have my reasons for quitting smoking, but the main player in my decision would have to be S, my fiancé. She has been trying to get me to stop since we became a couple six years ago. In the past I would think of quitting, and quiver in fear. The thought of dropping my best friend of fifteen years was unbearable, and downright impossible. I grew up with a short fuse and can be confrontational at times, so the thought of the monster I would become during the nicotine deprivation period was more than concerning to me. This was mainly the factor in not quitting earlier.
Since making the leap to become tobacco free, I could not help but notice that I haven’t witnessed the monster in me come out like I was sure he would. In fact, it seems like it’s the little things making me happy instead of the puffs off a dirt (slang for cigarette) I seem to be sharing more laughs with S. Of course there are things that still bother me, like anxiety in the night hours, and some mild depression from losing my long time friend, but the reward will be worth it in the end.
One thing that motivates me is the money that’s not going to this disgusting habit. The break down goes a little like this. Cigarettes are expensive when they are a daily habit. If you are a smoker, and need extra money to put away but cannot figure out how to do it, the answer is right in front of you. Just think, a pack a day habit after quitting can save you around two hundred dollars every month. That comes to $2,400 in savings annually. Over a ten-year period, with the price of cigarettes going up every year, you are looking at $27,000 to $30,000 going to cigarettes. Want to get away? Maybe take your significant other away on a nice tropical vacation? The money is there to enjoy those things in life as long as you stop spending it little by little, day in and day out. 2014 is the year I will prove to everyone that I can beat the addiction. This June we will be going to The Cook Islands for our honeymoon, and I also plan on using that trip as a reward to myself. It’s the little victories during the process of quitting that get you through it all. I am currently taking this day by day, and understand it’s a long road, but I am ready for the journey. The longer I go without tobacco, the more tools I develop in my arsenal to combat the urge. The fact that I will be saving a small fortune while doing so will also help a lot.
Saving for retirement.
My favorite topic….kinda.
As I’m mentioned previously, I’m not big on a traditional “retirement.” I love what I do and can’t comprehend leaving because I’m “too old.” However, I AM big on being able to tell “da man” to shove it whenever I feel like it. While I can’t imagine stopping work, I can completely visualize myself doing ONLY work I like whenever I like it.
Which brings up the question of the hour: How much should I save?
I’ve read countless pages on this topic written by well-meaning authors, and surprisingly, most get it wrong. Most discussions zero in on your risk tolerance and types of investments. These are absolutely ridiculous topics to tackle until you know the magic formula.
The Magic Formula
This is FAR easier than you might expect.
You only need three pieces to know how much to save before you start playing with investments and risk tolerance.
First, you need to know when you want to “retire” (or, in Joe lingo, tell the man to go f$%k himself).
Let’s talk about this number for a moment before we move on. Sure, you can make that number early, but what does that mean? as you make that number bigger and bigger you eat into today’s budget.
Also, realize that what you’re really trying to come up with is “how much money will I need if I don’t earn another dime between now and the time I die?” That means you’ll have to make a few assumptions about your goals
Second, you need to know how much money you can save.
Some people ask, “Why Not Just Save As Much As Possible?”
Do you want to do less today than you possibly could? Why would you sacrifice the now too much for a future that might never arrive? If you’re into pain, save every penny. Me? I’m more about balance. I want to save enough for tomorrow, but I also want my ice cream today.
Third, you need to know what return you expect on that money.
Financial guru Dave Ramsey famously had a public fight with Certified Financial Planners on twitter, who were admonishing him for suggesting that people can count on a twelve percent annual return on their long term investments. While I often love Dave’s advice, I never want to count on a return that’s higher than the average. Historically, most investors average far less than the financial markets, which have performed, over long periods of time, at around a ten percent clip.
We’ll tackle “risk tolerance” and when to think about that, later.
Those are it.
Once you have those three numbers you can arrange them like this:
Amount You’re Saving x Return on Investment = Your “Tell Off The Man” Goal.
Sure, you’ll need some calculators to figure out the formula, but I think you know where this is headed. Once you come up with the number you’ll need to “Tell Off The Man,” you can easily find out if your savings rate and return fit the goal.
Here’s When Risk Tolerance Matters
If you can’t meet your goal, you have a few choices to adjust course:
– push back your “Tell Off The Man” date,
– live on less after you tell him off,
– save more money,
– or jack up your rate of return.
Now your risk tolerance actually matters. Instead of choosing in a vaccuum, now you’re talking about risk toward meeting your goal. There’s a huge difference between “I really don’t like this type of investment” and “I’m not going to do what it takes to reach my goal, so something has to give.” As Steven Covey wrote in The 7 Habits of Highly Successful People, when you pick up one end of the stick, whether you want to or not, you pick up the other end, too.
Once you know the return you’ll need, it’s easy to look up which types of investments historically have given you that return. If you can’t stand the risk these investments present, you have three choices:
– Teach yourself to take the risk.
– Back down the risk and save more money.
– Back down the risk and push back the goal.
See how that works?
Don’t get sucked into a “risk tolerance” quiz or investment discussion until you know your retirement formula. Why look up investments or make risk-based decisions without knowing what you have to do first?
Looking for more? Joe is cohost of the Stacking Benjamins podcast and writes at the blog by the same name.
As counter-intuitive as it sounds to all of us instant-gratification folks, there is actually a big reward for being responsible with your money. Having funds to decide what to do with will make you less desperate, and you will be able to make better decisions. I never understood that and just wanted to buy, spend, do, move quickly. It’s been a very different tone since I’ve paid off my debt. There are a lot more “honest moments” I have with myself. I have to ask myself, “Can I afford buying this at the moment and still pay off my credit card balance in full this month?” Of course, the answer is still usually no, but the difference is that I listen and will resist the temptation to spend. I’ve set up a few paths to make this previously unheard of responsibility possible.
Give Everything Plenty of Time
This is the best lesson I have learned so far. Time is magic. It’s changed the way I look at my day. I prepare for my work day the night before by packing my lunch and my workout bag. That saves me money instead of buying lunch and pushes me to get up and go to the gym before work. Plus, now that I work out in the mornings, it frees up my evenings for reading, hanging out, and whatever else. I give myself time to plan my day and this makes the next day so much better.
You also need to give yourself time to become better off financially. You just paid off debt or bought your first place or some other big financial milestone. That’s awesome! With the debt, you need to give yourself time to start growing your savings. With the house, you need to give yourself time to figure out how much you will now be spending each month, and how to deal with repairs you need, or renovations you want. You can’t do everything at once. Everything is step by step, and as simple as that sounds, if you apply it in your finances, you’ll be surprised at how it can make things more comfortable and achievable.
Be Committed to Staying Out of Debt
Everyone worries about lapsing into old habits. Debt was a habit and I fed that habit for almost 10 years. This month was tough because I had to pay a big credit card bill in order to stay out of debt. But I incurred it, and I am responsible for paying it off. I don’t want to pay any interest on consumer debt ever again. That’s going to be hard because I feel like we have a very spendy lifestyle and our income just doesn’t match it. Oh for now it does, but it’s definitely a squeeze. We need to figure out how to spend less. On gas, eating out, rent, everything. It sucks to say that I still feel squeezed even though I am not paying off debt. But I am saving a lot, so it feels like I am living on less.
Decide on a Certain Percentage of Savings and Keep Growing That Number
Right now I am at just over 31% of my income being automatically saved in investment accounts. My goal is to get that to 40% by the end of the year. I’d love to do it right now, but I may jeopardize my cash flow for everything too much, so I am going to work hard to make it happen by the end of the year.
Do you have any rules that help keep you in line?
A 529 plan is a way to save for college expenses for a selected individual (usually a child or a grandchild. Depending on the state, there are specific tax benefits or advantages to having your money in this account versus a basic savings accounts.
There are two types of 529 plans, a 529 Savings Plan and a 529 Prepaid Plan.
- Books, supplies and equipment for classes
- Fees (technology, etc)
- Room and board (as long as the student is at least half time)
529 Savings Plan
- The money is usually in mutual funds
- As the beneficiary gets older, the owner may choose to be less risky with the mutual funds.
- States run these plans.
- Records are kept by mutual fund companies.
529 Prepaid Plans
- The purchaser buys a credit at the current price, and that money invested will still be worth a credit when the beneficiary enters college.
- States or colleges can offer prepaid plans.
- Florida, Illinois, Maryland, Massachusetts, Michigan, Nevada, Texas, and Virginia are open to new enrollment in prepaid plans at this time.
Advantages of the 529 Programs
- There are several states that offer tax deductions from 529 plans.
- The principle is able to grow tax free.
- The purchaser is the owner of the account, and may use/disperse the funds as they wish.
- Fees are low
- Easy to enroll, and automatic deductions are available
Disadvantages of 529 Programs
- There are several 529 programs to choose from, not all are investments for higher education which creates some confusion.
- Should you choose not to use the money for college, the money will be taxed at the current rate, plus an additional 10%.
- A student may not qualify for as much financial aid if their tuition is payed directly from a 529 account.
Each state offers their own version of 529 plans, and some will transfer between the states. It is very important to check the laws in your state to determine eligibility and specific rules that will apply to you.