Is it better to save 10 percent of nothing
or 15 percent of nothing?
If that sounds like a trick question,
consider this: Recent U.S. Commerce Department figures say
the U.S. personal-savings rate hit an all time low of -0.2
percent in September.
Translation: We're spending more than
we're earning, which leaves less than nothing for saving.
The conventional advice from the financial-planning
books is to save 10 percent of take-home pay, with the goal
of salting away enough money to cover six months worth of
living expenses. For folks living from paycheck to paycheck,
that would take about five years. But at the rate they're
going, many Americans could save for five million years
and still not hit the magic number.
Fiscal
discipline
The key to saving is discipline, explains Ron Meier, a professor
at the College
for Financial Planning in Greenwood Village, Colo. The
first step in becoming more disciplined is deferred gratification.
"Instead of going out and buying
a $30,000 car, shop for a three- or four-year-old used car,"
Meier suggests. "Car payments can really weigh you down
and the money you would've spent on that brand new car, you
should look to put that money into a 401(k)," Meier suggests.
But the point isn't just to save for old
age, he stresses. For people unused to saving, especially
young men and women in their first jobs, retirement may seem
so elusive that saving ends up being ignored.
"To talk about retirement now is
pretty unrealistic, but when you say 'financial independence'
you really get their attention," he notes. "The
question then becomes what action can you take now so that
you can be financially independent and have the option to
work only if you wanted to.
"We're not talking retirement but
having a lifestyle that will maintain financial independence."
Financial planners note that a recent
college graduate with a new job, student loans and credit
card debt will have savings goals different from those of
a married couple with children. But the bottom line for anyone
at any stage of life is individual priorities, whether that
means saving for a new wardrobe when you're young, a better
car later on, or even a home or retirement when you get older.
Grads need
to save even a little now
- DANGER ZONE: The new
job may bring on new debt, as college graduates spruce up
their wardrobe, reward themselves with a new car or replace
the milk crates with plush furniture. In an effort to start
living like everyone else, short-term and long-term savings
goals are nonexistent.
- PAYOFF PLAYS: Start
saving for retirement now. At the very least, take advantage
of the company's 401(k) program. Arrange for a percentage
-- even it's only 1 percent -- to be deducted from the paycheck
every payday. Put that money in a savings account or mutual
fund. Try to increase the percentage to 5 percent after
six months, later to 10 percent.
Another danger new graduates should steer
away from is trying to meet too-high expectations before they
are established in their careers.
"Lower your expectations if you're
wanting to get a house now," Meier says. "Depending
on what part of the country you're living in, the costs will
have to match up with the standard of living there. The first
house for anyone should not be the 'dream house.' Think maybe
a townhouse or condo. Your goal now is just to start building
equity."
Ideally, a graduate would have all school
loans paid, no credit card debt and a job waiting for them
upon graduation. The reality is that most youngsters will
not have a job waiting for them, some will move back home
and those with student loans will have only six months before
they have to start making payments.
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DON'T
HAVE
A BUDGET?
DIG OUT
your checkbook, credit card receipts and other paperwork
(you know, you had it all for December's
special report) and take a few minutes to work
out your numbers.
IT MAY BE
a depressing reality, but write down a budget based
on what you're spending now, even if you don't really
want to see it on your screen.
THEN WORK
THROUGH the segments of this special report
and see where and how to make changes. When you're
done, you'll have a new budget for the new year.
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The
psychology of spending
It's here that psychological factors can lead to too much
spending.
"Low self-esteem appears to be related
to impulsive spending," said Tahira K. Hira, a professor
of family and consumer science at Iowa State University in
Ames. Starting in 1984, Hira conducted a 12-year study to
find out if people declaring bankruptcy or were otherwise
poor personal-income managers shared any traits.
Educated or not, she found that of the
200 families tracked, most had little or no idea of the amount
of their income, expenses, assets or liabilities. "Either
they were unaware of the financial situation or they did not
care to know," Hira said.
Couple low-self esteem with lack of knowledge,
combined with other savings barriers such as procrastination,
stress and insecurity, and the result is a greater focus on
paying for needs today and forgetting those for tomorrow,
Hira notes.
"We have to be sensitive to those
who are really poor, who are struggling to make it to the
next paycheck," Hira cautions. "What we're taking
about is the average person who has the means to save but
just doesn't."
Hira advises setting short- and long-term
goals makes saving easier. Rather than rigidly putting 10
percent of take-home pay in a savings account, Hira suggests
adopting a "70-20-10 formula" for living within
net income.
That is, use 70 percent of net cash for
regular purchases, such as groceries, rent or clothing; set
aside 20 percent for purchases that cost large sums of money
-- anything from a new car to a down payment on a home. Save
the remaining 10 percent or invest it for long-term goals
and don't touch it.
The key is getting a grasp of cash-flow
management, Hira says. "What is it I take home, what
do I spend. Those who don't know extend their income with
credit cards. They have to get a handle on net income flow
and where it's going," she notes. "Keep a record.
If you lose track of $20 of every $100, you're in trouble."
Don't squander
raises on luxuries
- DANGER ZONE: Keeping
up with the Joneses may distract you from long-term saving.
Increases in salary can bring about increases in spending
and raise the standard of living beyond your means to pay
for it.
- PAYOFF PLAYS: Keep
today's standard of living in perspective. Ask yourself,
"Will I be able to maintain the same standard of living
or better when I retire?" Or, "Will my children
be taken care of should something happen to me or my spouse?"
If the answers are yes, there may be some wiggle room for
big-ticket purchases.
Once the graduate is established in a
career and is making more money, savings goals take on a new
perspective. The mistake typically occurs for some here: More
money can mean spending beyond one's means. For some, the
wedding bells have rung and children may soon follow. Priorities
shift as planning for a college education, purchase of a first
or bigger home and increasing 401(k) contributions start to
become overwhelming.
"You may change jobs, get bonus checks
or a raise, but the key is to try and live on the same salary,"
advises Meier of the College of Financial Planning. "If
you've gotten a 20 percent raise over the years, give yourself
a 5 percent increase on your standard of living and sock that
other 15 percent away toward your children's college education
or some other long-term goal."
Insuring
present income, future security
But how realistic is it to devote such a significant
portion of take-home pay to savings goals when the mortgage,
car payments, braces and credit card bills need to be taken
care of today?
Again, perspective plays a part. "If
the main breadwinner is disabled in a car accident or if a
spouse is laid off from work, maintaining without having a
cushion becomes a fight to survive," Meier warns. "For
this reason, disability and life insurance are extremely important
-- especially if you have kids."
While setting long-term goals for children
is important, "at the same time retirement should still
be the No. 1," says M. Eileen Dorsey, author of Lifetime
Strategies: How to Achieve Your Financial Goals. Dorsey
is a certified financial planner and president of Money Consultants
Inc., a Missouri-based investment advice company.
"Children can still go to college
without the parents having to take out a second mortgage,"
Dorsey maintains. "Parents should decide how college
will be paid for: Will the child get a part-time job, are
scholarships, grants or financial aid options, or can the
parents save for college and still maintain their retirement
savings?"
Or, as author Ginnie Applegarth puts it
in her book, The Money Diet: "When you are receiving
oxygen instructions on an airplane, you are always told to
put the mask on your own face first before putting the mask
on your children. (This way), you will be able to assist them
without running out of air. This is true of retirement planning."
Likewise, a will that clearly states who
will take care of the children should the parents die and
how the estate will be divided up is "just as important,"
Dorsey suggests.
Cut back
expenses, turn up savings before
retirement
- DANGER ZONE: After
years of being distracted by supporting a family and paying
for college, people in their 40s or 50s may be in complete
denial about saving for retirement and achieving financial
independence.
- PAYOFF PLAYS: Decide
whether living at 80 percent of current living expenses
may be too high. Will getting by on 70 percent suffice?
Try investing at a higher rate of return. Move to a smaller
house or consider renting out part of the home once retirement
comes.
Ideally, by the time a couple or individual
reaches their 40s or 50s, the kids have moved out of the house,
the home is midway if not almost paid off and the retirement
stash is well-padded. Realistically, though, "Some people
are surprised that they are way behind even though they've
been contributing to their 401(k)," Meier says.
"Nothing goes in a straight line,"
Meier cautions. "People get laid off, you may have to
borrow money to pay for your children's education. But theoretically,
these are your peak income years."
Ideally, a comfortable house and some
discretionary income are in place. "Now, is the time
to maximize retirement savings as fast as you can," Meier
advises.
The
guardian of your lifestyle
Although the children are grown and out of the house,
a divorce or other financial setbacks may force the kids to
retreat to home-sweet-home.
"It's hard at this point, especially
if they aren't bringing in any steady income," Dorsey
says. "We all complain about inflation but we don't understand
that $100,000 or $600,000 is not a lot for retirement. The
parents are going to have to make some hard decisions and
there are no right answers."
Compromises and sacrifices are necessary
at every stage in life, but the key is to think of savings
as a guardian of your lifestyle.
"If you planned well, you should
enjoy life even if you have a mortgage, children's education,
retirement and elderly parents to fend for," Hira says.
"It can be a very good life, and the key is curtailing
expenses and thinking of long-term savings when you're in
your 20s and 30s."
-- Posted: Jan. 5, 1999
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