Dennis Smith
Many of us think that because we have put money into our pensions, IRAs and 401(k) plans that we are sufficiently saving for our future. In some cases they might indeed be sufficient, but in most cases they surely are not.
Remember that it is your savings that will get you and your family through your retirement years, and the best time to start thinking about that is the first day on the first job you get. You need to be constant in your savings, not only in the actual dollars you put away, but also in your attitude toward the necessity of saving.
You should be mindful of saving even if you have to consciously reduce the level of your expected lifestyle. Perhaps, disappointingly, you may have to learn to do without some things you want.
It’s a lecture, I know, and I hate writing like this, but to me advice about saving is as certain as saying “you should don a mask before entering a fire building.” I simply want to remind you that years have a way of passing quickly, and you will be well served if it is your habit to save – for you will be compounding those saved dollars into a reliable nest egg for your family.
Think of the dozens of reasons you want to save: a dream vacation, emergencies, kids’ college, retirement. Some people are so overwhelmed by all these things that they never get around to putting together a savings plan – they figure they’ll pay as they go, or take out a loan. Let me demonstrate how that can cost you.
Let’s say you dream of a family vacation in Hawaii. It will cost $5,000, and you save for two years, stashing money away each month in a bond fund. You would need to save $196 per month, or a total of about $4,700 to pay for your vacation. The interest earned will make up the other $300. Say, instead, that you went the more common route of using your credit card and paying for the trip later. At a typical 18% interest rate, if you paid $196 per month, it would take you over 32 months to pay for your trip. You would end up paying over $6,300 for your trip – $1,600 more than if you saved your money before taking the trip!
Another item we should all have savings for is an emergency fund. None of us knows when tragedy may strike, and job loss, illness or natural disaster could happen to anyone. You should keep three months’ salary saved in a money market or some other low-risk, readily available account for just such occasions. This should pay you interest, as well as peace of mind.
Saving for kids’ college and retirement are daunting tasks, but Congress has just made both a whole lot easier. In fact, the tax bill enacted recently adds up to extraordinary gifts for those saving for retirement or college, and we should be taking advantage of these as much as we can.
One of these gifts is that earnings from the “529 College Saving Plan” have been made tax-free. What does that mean? It means that if you save $50 per month for your child’s education in this new plan, at a 10% rate of return, you will have over $30,000 for your child’s education in 18 years. While this may not pay for everything, it will certainly help.
If you save the same $50 per month at the same rate of return in some other type of plan, you will end up with just $22,700, after paying an average of 25% in taxes each year. That’s a gift from Uncle Sam of $7,200 just for using a 529 plan. These plans are available from every state and you can choose whichever one suits you best (you don’t have to enroll in your own state’s plan). If you hope for your children to attend college, the 529 plan is a great way to go.
Congress is also offering a gift to those who want to boost their retirement savings. You can now stash $5,000 into an IRA or Roth IRA. To give you an idea of how this can benefit you, keep in mind that the earnings in a Roth IRA are tax-free. If you save $5,000 per year in your Roth and invest at 10%, you will have over $490,000 in 25 years – almost half a million dollars! If you save the same amount in a taxable account, you will have less than $340,000. That’s still a lot, but it shows that you would be missing out on a $150,000 gift from Uncle Sam.
I know it isn’t easy to save. We all have a thousand different needs and wants pulling at our wallet strings. But I hope these examples show you that saving is undoubtedly worth the effort. Pension plans and Social Security are each a big help to senior citizens, but any retiree will tell you that these plans alone are not enough for a comfortable retirement.
In this America, funds are available for those qualified people who want to go to college, but what if they don’t get that scholarship? Few of us want to saddle our children with thousands of dollars in debt as they prepare for their future. Therefore, we would be wise to invest for their college, even if that means doing without some luxuries and conveniences.
For just about any big-ticket item we could spend our money on, it’s better to save first instead of paying later. It’s been said that those who understand interest payments collect them, while those who don’t understand interest pay it. This is so true. Make a plan today to be among the smart, the disciplined and the few who understand interest and save for the things they want and need.
So how do we best save our money? An employer’s automatic deduction plan is a good place to start, and I suggest you talk to your boss or the municipal finance office in your town or city. Or, you could send money every week or month to a bank or a financial investment firm, a process that takes a lot of personal discipline. Or, you could buy a government or business bond regularly through an automatic deduction plan.
Most financial firms will handle the paperwork for you if your employer has a savings withholding system in place. And, it is important to ensure that your saving dollars are invested at a minimum risk. One person’s minimum risk might be another person’s grand scheme, and if you are not certain about this, or if I can help you in this or any other financial question, just e-mail me at dennissmith.com.
I cannot advise you on what particular stock or bond to buy, but I can explain the choices you have between stocks, bonds, or cash equivalents, and how to rate low, moderate or aggressive risk. The whole point of this column is to be of help.
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About the Author - Dennis Smith
Dennis Smith is the founding editor of Firehouse Magazine and the best selling author of
Report From Engine Co. 82 and other books. He has completed the federal Series 7, Series
63 and Series 65 exams and is a licensed financial advisor. Dennis Smith will be providing
some financial insight beginning with the January issue of Firehouse Magazine, as well as
authoring regular on-line commentary for Firehouse.com.
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