Funny about Money

The only thing necessary for the triumph of evil is for good men to do nothing. ―Edmund Burke

PF Notecard #5: Save Early and Often

advice-on-a-card-1My first job paid $300 a month. Out of that I paid rent, food, clothing, parking, and everything else. Luckily, I didn’t have a car payment — my father had given me a Ford Fairlane for graduation. The thing proved the old jibe about Ford: F-O-R-D stands for Fix Or Repair Daily. But at least it was paid for.

Back in the day, there was no such thing as direct deposit. So as soon as I got my paycheck, I’d walk across the street to the bank and deposit it, in the process putting $10 in a savings account. Those were the days (!) when $10 would buy a nice office dress and $20 a good pair of leather heels. So even though $10 wasn’t 10 or 15 percent of net pay, it wasn’t nothing, either. At the end of the month, there was usually something left over, and I’d move that into savings, too.

So that brings us to item #5 in the personal finance principles that can fit on a notecard.

SAVE EARLY. Start saving the minute you start drawing a paycheck. And set aside a portion of every paycheck in some kind of savings instrument. Preferably more than one of them…

Obviously, as you reach the point where start to earn a living wage, you need to begin saving toward retirement. I’d never heard of retirement when I was working as a receptionist (nor was there any such thing as a 401(k) in those days), but I did want to have something in hand for indulgences and emergencies.

SAVE EARLY also means save a portion of each paycheck before the money hits your checking account. Most employers who direct-deposit your salary can deposit some of it in a savings account and some in a checking account. If you can arrange that, do it. Otherwise, get into your online account with the bank or credit union and arrange a monthly or semi-monthly automatic transfer that will move X percent of your pay to savings every payday.

Another way to SAVE EARLY is to contribute to your employer’s 401(k) or 403(b) retirement plan. A 401(k) is highly desirable if the employer is matching your contributions. If not, you may be better off to set aside a specific amount from each paycheck to deposit in your own Roth IRA and regular brokerage account, since investment options in a company retirement plan may be limited.

Here’s the thing: A 401(k) defers taxes until after you reach retirement age (59½ if you choose of your own free will to take distributions; 70½ when the government forces you to take a required minimum distribution). The theory is that when you retire your taxes will be lower because you’re not earning anything.

R-i-i-g-h-t…

Well, in the first place, you can’t live on Social Security (well…you can, but not well), and so you’ll probably continue to work, even if at much reduced pay. Any such income can easily push you into a higher tax bracket, maybe even into the bracket you occupied before you retired.

In the second place…have you ever heard of taxes going down? Not bloody likely. You will still pay taxes on those withdrawals from the 401(k) — and because the rates may be higher, there’s a good chance you won’t pay any less than you would have, had you paid up-front and deposited the net in a Roth IRA.

And in the third place, when you croak over and your kids inherit your vast wealth, they will have to pay the taxes on the money in tax-deferred your investments. They also will face a required minimum drawdown, starting they minute the inherit the funds. Thus they will inherit only a fraction of the money you worked long and hard to accrue.

Unless your net worth is well over a million dollars, they will not have to pay taxes on non-deferred savings and assets. But they will have to pay the taxes on your deferred savings funds. So if your wish is to leave your kids an estate, they may be better off if you use some other instrument to build retirement savings.

There’s a limit to how much you can put in a Roth IRA. Max it out each year, and then start contributing to a good low-cost mutual fund, such as one at Vanguard or Fidelity. Received wisdom these days: select an index fund, whose goal is to keep pace with the market. Leave the money there and forget about it until you retire.

SAVE OFTEN. You should be setting aside some portion of every paycheck, ideally about 15 percent, and investing it in retirement funds. And then you should put a little more into a bank account for emergencies and indulgences. While I was working, I had two savings accounts: one to cover property taxes, auto and homeowner’s insurance, and emergencies, and another to diddle away on vacations or damnfool things I chose to buy.

And then if anything is left in checking at the end of a pay period, after all the bills are paid, move that amount over to savings, too.

And then do the same with every windfall: every income tax refund, every credit-card rebate, every cash gift of any kind…straight to savings.

Once you’ve accomplished Notecard Item 4, Get Out of Debt, all this is d0-able. You’ll be surprised how fast savings accrue when you set things up to move money into savings instruments automatically.

Speaking of Notecard Item 4, here’s another useful SAVE OFTEN trick: once you’ve paid off your car loan, keep on paying that amount to yourself. Stash the equivalent of a car payment in a special savings account, and don’t touch it. In four or five years, you will have accrued enough to buy your next car in cash.

In summary then: First pay off debt. Then put an established amount into savings on a regular basis.

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Author: funny

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5 Comments

  1. I am a huge fan of the online banking concept – I’ve been with one online bank or another for 12-14 years now. They make it super easy to open new accounts – every time I have a new savings goal, I just open another savings “bucket” – I have one for property taxes, one for insurance, one for vacations, one for house maintenance, and I recently opened one for a future kitchen remodel.

    Then I set up automatic debits from my checking account into each of these buckets – and I don’t think about it again.

    • I used to do that “bucket” method myself. It’s a good way to make yourself set aside money for specific purposes.

      After awhile, though, keeping track of all those accounts became really tedious. Reconciling statements is not my favorite activity. Even with Quicken (remember back when Quicken really WORKED?), it was a PITA. I finally consolidated them into a checking account for day-to-day expenses and a savings account for emergencies. In retirement, though — particularly in forced retirement — you soon find that savings go away and there’s really nothing to replenish them with. What I do now is put an entire year’s worth of funds in a checking account, add Social Security monthly, and hope to god I can live on it until the next drawdown.

      The exception is incoming funds from Medicare and Medigap. The Mayo is very slow to figure out what’s really owed, and if you overpay them, they won’t refund the money — they’ll tell you they’ll hang onto it to cover the next bill you rack up. So I have a “Mayo” account that holds all reimbursements until such time as I get a statement from the Mayo that looks like it’s really final. About the time they threaten to turn my balance over to collections is when I pay them.

      😀 Getting old is such an adventure…

  2. I have an online bank where you can setup multiple accounts, but I’ve yet to do it. I still track it all on my spreadsheet. Just get used to something that works and stick with it, I guess!

    • WonderAccountant insists on using Quickbooks, because it simplifies tax prep. However, when you download data from your bank into Quickbooks, it doesn’t tell you what everything is for — a check, for example, comes across as Check No. 1234 for $254.67, but it doesn’t tell you who Check No. 1234 went to.

      Nor can it track transactions on credit cards.

      Sooooo… I have to keep track of everything in Excel, too. I have an Excel spreadsheet on DropBox that records every transaction at the credit union and through the credit cards. So when she needs to know who got XXX amount of money, all she has to do is glance at the spreadsheet to update her version of QB.

      Intuit has made Quickbooks SO complicated and so arcane that it is now unintelligible to me. I can’t use it at all. Surely could do without having to pay for it for no other reason than to help my accountant compile tax forms.

  3. I have my pay checks direct deposited into my savings account and transfer from there into my checking what I need to cover bills about once a month. That way I get the higher interest from the moment the money is deposited and I automatically have the extra in savings.

    I use an online bank and have one checking account but multiple savings accounts. One account is the EF, another is the vacation/wants fund, and I just created the Annual Expense account for my property taxes and LTC premium, then set up the automatic transfers to start in January.

    As for retirement savings, I switched all my payroll deductions to a Roth 401(k) through Vanguard offered by my employer. I had stuffed quite a bit into the standard 401(k) already and was past the threshold for a Roth, so this was the next best thing and recommended by my financial advisor. The only downside is that doing this doesn’t decrease my taxable income at all.