saving
Hammer or Pliers?
Recently a client asked us a common question. With a little room in the budget, should more money be added to retirement savings, or a regular investment account? Which one is better?
Of course, the answer depends on the situation. In the early and middle career stages, one might not put funds to be used before retirement into a retirement account. Saving for intermediate term goals like buying or trading homes, or buying a boat or camper, perhaps should be done outside of a retirement account.
But getting it down to fine points, some retirement plans have provisions for using money before retirement without penalty. We believe you can gain an edge by paying attention to the fine points. We like to outline all the alternatives so you can make a good decision.
On the other hand, money to be devoted to growing the orchard – a pool of capital that you may someday live on – should almost always be sheltered from taxes, if possible. This typically means into some form of retirement plan. The tax advantages may make a big difference over the years and decades ahead.
And retirement plans come in different flavors. Individual retirement accounts, employer plans of various kinds, Roth… there are many options.
Just as one cannot know whether the better tool is a hammer or a pair of pliers, one cannot know the best way to invest without understanding the job the money is supposed to do for you. That’s why we talk back and forth! You ask us things about our area of expertise, we ask you things about yours. A meeting of the minds is just the thing to make progress, with a collaborative process.
Clients, if you would like to talk about this (or anything else), please email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Letters To Our Children #6: Investing, A Tale of Three Buckets
We talked about human capital, the traits, characteristics and skills you possess which others value. This is the source of your earning power. When you spend less than you earn, you develop savings. Our topic today is how to manage those sums.
Think of having three buckets. The first one you have is short term. This is where you go to find money to deal with emergencies. You also use the short-term bucket to save for annual expenses like real estate taxes or insurance premiums. This bucket must be stable and liquid, to provide money when you need it. Returns are secondary.
On the other end, you have a long-term bucket. If you ever hope to retire instead of going to work every day, or accumulate wealth for other long-term goals, you need one of these. Unlike the first bucket, this one may endure more volatility in the hopes of garnering higher returns over a long time horizon. You should plan on not tapping this bucket except for those long term goals, short of an emergency which can be met no other way.
Naturally, the third bucket is in between. You may have goals for things that happen in a few years, on an intermediate time horizon. It might be for a major purchase like a boat or camper, to meet educational expenses for a child who is a few years away from college, a down payment on a home you intend to buy at some point in the future.
Not surprisingly, the third bucket may balance stability and higher returns with a middle of the road approach. This is in between the strategies of the short-term bucket and the long-term bucket.
There are other aspects of investing that we will explore in future letters. But the idea of three buckets is a helpful way to understand the functional purposes of investing. You will need to know something about the basic kinds of investments, styles of investing, some tax considerations, and the options available in retirement accounts.
Clients, if you would like to talk about this or anything else, please email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
Sacrifice or Joy?
The ability to delay gratification is supposed by some to be the key to reaching our goals. And it seems to make sense.
If one can spend less and save more day by day, greater wealth results over time. Skipping dessert and taking the stairs instead of the elevator over the weeks and months may improve our health over the years and decades.
This framework casts our future welfare as something that contends with current enjoyment of life. “Sacrifice today for a brighter tomorrow,” and all that. It takes willpower to struggle against today’s desires for distant benefits, somewhere down the road.
We believe there is a more productive way to think about this.
The key is to find the immediate gratification hiding inside deferred gratification. If you are broke but begin saving a little bit of money every payday in a systematic way, you have the immediate gratification of changing your trajectory, of moving in the right direction.
Imagine the gratification of getting your act together in the way that most needs it. You have known it needs attention, and its neglect nags at you. Embarking on a plan gives you the immediate gratification of taking action to improve your life.
In short, you can struggle and sacrifice today for benefits in the misty future, or reframe it so that reaching for your goals brings you immediate joy. It’s a matter of the narrative you choose to tell yourself, the framing in your mind.
Clients, if you would like to talk about your goals or anything else, please email us or call.
Financial Wellness
We put a lot of time and energy into researching investments and managing portfolios. But there is more to financial wellness than being effective investors.
It is handy to understand where you are financially. Putting together a summary of what you have, and what you owe, is a great first step. What you own (your assets) less what you owe (your liabilities) is your net worth. This is a key indicator.
Not everyone is going to be great at creating and following a detailed budget. But it behooves each of us to think about where and how we spend money. At 228 Main, we don’t really have a lot of time to hector you or lecture you about spending money—you are the boss of balancing life in the present moment and preparing for the future.
When you know where you are, and understand the spending that needs to happen in your household, you can go to work on two ways to grow your net worth:
1. Reduce liabilities by paying debts off. One proven method is to pay some extra on the smallest one. When that is paid off, the amount of its payment plus the extra can be put on the next one until it is paid off, and so forth.
2. Increase assets by increasing your regular contributions to retirement or savings plans, or starting new accounts.
Once your plans are on track, there are some other niceties you might attend to, such as an emergency fund, managing your credit score, and beginning to think about your long-range goals.
What good is your money if it doesn’t connect at some point with your real life? That’s why we work to understand where you are, where you are trying to go, and the strategy and tactics you might use to get there.
Clients, if you would like to talk about this or anything else, please email us or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Simple or Complicated? You Choose
The object of a household budget is to end up with control of your finances.
If you Google “steps in budgeting” you will find results ranging from three steps to ten steps. Each one involves accounting for all of your outlays to the penny. The process must be repeated every month, and requires ongoing work to maintain.
Budgeting works well for some people, particularly when money is tight. If you might not be able to afford food unless you pay careful attention, you probably better pay careful attention.
But another, far simpler method works for many others. You pay yourself first, and spend or save what is left over. Paying yourself first can take many forms, but the most fool-proof methods are automatic.
• 401(k) plan contributions at work, by payroll deduction.
• IRA or Roth contributions, by automatic monthly bank account transfers.
• Investment account deposits by automatic bank debits.
You may need to do some arithmetic to see if your monthly investment amounts are likely to get you where you want to go. (We can help with this.) After that is done, all you need to do is pay yourself first!
Some of you enjoy keeping careful records of spending, and we would not discourage that. At a minimum, being mindful about our outlays makes sense. But for others, the simpler method may fit in better to your real life. It is a personal choice.
Simple or complicated? You choose. Clients, if you would like to talk about this or anything else, please email us or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
No strategy assures success or protects against loss.
Even Better Than Advice to My Younger Self
There is a recurring thing in social media about what people wish they had known when they were younger. We’ve never been too interested in participating, since there is little to be gained by wishing for a different past. (I did once post on this subject, but it was an attempt at humor: “Advice to my younger self—don’t go for the chili dog pizza at the truck stop.”)
A colleague got us thinking about this recently. We ended up with a hotter notion: advice from our future self. Imagine that the “you” from a year or a decade from now could come back and talk to you today—what would they wish you knew? “Advice from my future self” gives us the chance to make things better, beginning today!
At the risk of sounding as unstable as Vonnegut’s time-traveling character Billy Pilgrim, I imagined a conversation with my future self exactly to test this purpose. I already knew what my future self wanted to talk about—but I have been acting as if I didn’t know. The conversation may mark a turning point for me.
This is sort of personal, so I will not bore you with the details. But it isn’t difficult to sort out what kinds of advice our future selves might give:
- Save something every payday
- Acquire needed skills to change career trajectory
- Gain closer connections with special people around us
- Eat better
- Do something active every day
- … ???
We cannot know for sure what your future self would want you to know. It is almost too goofy to recommend to you. But if you ever get tempted to give advice to your younger self, we suggest that taking advice from your future self is likely to be far more useful.
Clients, if you would like to talk about this or anything else, please email us or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Organize Your Money: The Easy Way or the Hard Way
Anyone with a passing interest in personal finance has read about the need to know where your money goes every month—to run your finances in accordance with a household budget. If you google “household budget” you will find millions of links. It turns out there is actually an easier way.
A typical budget would include line items for home expenses including utilities, telephone, insurance, property taxes, rent or mortgage payment; auto including payment, repairs, insurance, gasoline; personal items including health care, clothing, gifts, personal care, etc.; and so forth.
It takes a fair amount of time to determine what amounts should be budgeted in each category, and then to track your spending by category each month. Time is what life is made of—we should be careful how we spend it. Especially when there is an easier way. So simple, it fits in three words:
Pay. Yourself. First.
If you always save 10% of everything you ever make for the long haul, you probably will be able to retire at a decent age. PAY YOURSELF FIRST by electing that kind of percentage into employer retirement plan or other long-term investments.
If you put something into savings every payday, you’ll never get caught short by a broken appliance or unexpected home or auto repair. PAY YOURSELF FIRST by putting 5% of income into shorter-term savings. When your savings balance equals many months of income, you can transfer funds to long-term investments.
Depending on your circumstances, you may need to pay yourself more to reach your goals. But the 10% and 5% are a good place to start.
So with the ‘pay yourself first’ method, how much should you spend on everything else, all those other categories of things we need or want? Very simple: whatever is left over after you pay yourself first. Think twice about buying a money pit of any kind—it will imperil your goals. Spend as little as you need to on things that decline in value, like vehicles. And be careful about things that come with monthly bills, like pet horses or satellite TV. Housing and vehicles consume major fractions of our incomes, so make thoughtful decisions in those areas.
As long as you simply pay yourself first, you can get to where you want to go. Or you can do it the hard way: download one of those comprehensive budgets and get to work.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the loss of principal.
Persistence Pays in Many Ways
We have noticed something so prevalent it borders on being a universal truth. In so many of life’s endeavors, persistence is the difference between success and failure.
Tenure in a career builds experience and skills and value to employers…and earning power. Building a reputation in business takes years but can pay off for decades. A friend tells us, a college degree tells potential employers one thing: a willingness to stick with something for at least four years. In a world where instant gratification is so dominant, persistence—or grit—is an asset.
Persistence usually implies effort, willpower, or self-control. But there are ways you can be financially persistent without much thought or effort.
A saver who commits to put $100 monthly into an investment or savings account will run into reasons why it would be OK to skip a month, perhaps intending to make it up later. Maybe they feel it’s not a good time to invest, the refrigerator will need replacing, or an auto repair popped up. So the commitment turns into 12 decisions each year, 120 decisions per decade, 480 decisions over a working career.
By simply setting up an automatic deposit from one’s checking account, one decision is made and it lasts for all time. It is much easier to get one decision right instead of twelve or hundreds.
Many people have 401(k)s, IRAs, or other voluntary retirement plans available to them. Here, too, inertia can help you build wealth. You sign up, and so many dollars go into the plan every payday without any sweat or effort on your part. Sometimes people nearing retirement find out they are in pretty good shape because a young person long ago put wealth-building on auto-pilot.
When you combine these automatic, systematic ways to invest with the power of compounding wealth, amazing things can happen. Call or write if you would like to discuss your situation in more detail.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the loss of principal.
Make Sense of Your Financial Planning
If you go searching for financial planning help, you will find a great many tools at your disposal, from online calculators to professional financial planners who can help you chart a course for your future.
Whether you’re using online tools or seeing a professional face-to-face, the logic they will use is often the same. First, they will sit down and total the major expenses you expect to face over your lifespan: paying off debt, marriage, childbirth, kids’ college, new houses, retirement, et cetera. Then they divide the grand total of your expenses over the number of years you expect to live through to pay them off, adjust it for compounding interest, and arrive at a target percentage of your income that you should be saving each and every year of your life in order to afford these major milestones.
Often calculations like these will give you worrying results. This arithmetic often tells you that you must put aside an enormous amount of income into savings or else you will never be able to afford to retire.
Fortunately, there are a couple of crucial flaws in this reasoning that may provide some relief. Young couples often stay up late worrying how they’re going to pay for a house, kids, college, and retirement, and the answer is simple: you’re not paying for all of those things at the same time. As we advance through our lives, new expenditures come up and old ones go away. When you buy a house, the money you were setting aside for a down payment turns into money you set aside for kids. When you send your kids off to college, the money you were setting aside for them turns into money you set aside for retirement. You don’t have to save for all your big expenses in advance: your cash flow (which will tend to increase as your earning power grows with age and experience) will help accommodate different expenses at various times.
Don’t get us wrong: saving more money is better than saving less money. But it’s important to remember what you’re saving money for in the first place, so that you can spend money on the things you want and need in life. Call us if you need any help making your plans and planning work.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
You must be logged in to post a comment.