It’s Costing You $5,000 Per Month to NOT Save

Posted on March 20, 2012 Written by Leave a Comment

I have many female friends who don’t save money.  I’m not sure why, but I have some ideas.  Perhaps they’re waiting for their sugar daddy to save them.  Who knows?  I don’t mean to pick on the ladies at all…

…if anything, I mean to stress the importance of saving, not just for women, but for men too.  It just seems that more women than men don’t invest their money.

When it all boils down, there’s just you and God and nobody else.  How you live out the end of your days financially is not determined towards the end of your life.  It’s determined now, and only you are responsible for how you behave with money.

Let’s do some simple math in terms of a Roth IRA retirement account.  Currently you are permitted to contribute $5,000 annually to a Roth IRA, if you actually have one.  Why is there a limit?  Because as your Roth IRA grows, it grows tax free, so you’re limited to how much you can contribute to it.  Did I mention it grows tax free?

“Big whoopie.  $5,000 isn’t going to make me rich!”

 You’re wrong.  Let’s take a look at a simple calculation…but first, lets break that $5,000 into a monthly number of $5,000/12 = $416.66 (sounds suspiciously like the average car payment in this country.)  Now, automatically deposit $417.00 into your Roth IRA every month, understanding that it’s out of sight, out of mind, until you retire.

Once you have your Roth IRA, you can direct where the funds in that account are invested, or you can pay someone to do it for you, but that’s the second part.  Let’s go back to the hardest part…getting started.  Let’s just get focused on saving that $5,000 every year.  Once you have that going, you can think about where it goes.

Now, on to the growth of that money.  To simplify the calculation, let’s say that you get an average rate of return over the next 20 years at 10% (very realistic.)

In 20 years, your total investment will be 20 X 12 X $417.00 = $100,080.00 but your account value will be $319,295.44!!!  That’s $219,215.44 of FREE MONEY.  Here’s an interesting way of looking at this.  Let’s divide the free money by 240 (number of months in 20 years.)  You get $913.40.

In other words, by NOT saving $417.00 every month, you’re throwing away $913.00 every month.  Make sense?

But what if you have more time, which many of you do.  Let’s bump that up to 40 years, assuming you start at age 30.  40 X 12 X $417.00 = $200160.00.  Would you agree?  In the previous example, your account balance was over $300K.  In this example, you’ve supercharged your account over time and it will now be worth $2.66 MILLION DOLLARS.  Your first million won’t happen until year 31, but only 9 years later you’ll exceed an additional 1.5 million.  This is the power of compound interest.  Once it’s in place, you can draw income from it.  I don’t know about you, but when I multiple 2.6 Million X a modest 6% I get $156,000.  That’s money working for you.  Imagine being 59 1/2 (when you can start taking money out penalty free) with tax-free distributions of $156,000 annually for doing nothing.  Not bad, assuming you started this when you were 20, which is a clear argument for starting immediately if you haven’t already.

On a 40 year timeline, what is it costing you per month to NOT save $417.00?  This will blow your mind…

$5,122.88 PER MONTH.

So go ahead.  Keep drinking your Starbucks, paying your car payments, going on 4 or 5 vacations every year, and spending all of your money on things that go down in value.  Like Dave Ramsey always says, “I hope you like the car.”

OR

Restructure your financial behavior and re-write your monthly expense budget to cut out the excessive spending, because it’s costing you more than $5,000 per month NOT to save.

Filed Under: Financial Basics, Personal Finances Tagged: , , ,

Tax Refunds Are Bad For The Economy

Posted on February 4, 2012 Written by Leave a Comment

So you say you’re getting a tax refund this year?  Isn’t that delightful.  Now you’ll have “extra” money with which you can do whatever you like.  Most likely you’ll consider it a bonus of sorts and it will be spent on some sort of vacation, gambling binge, or electronic upgrade.  Am I close?  That’s what most people do, right?  So why should you be any different?

If you’re like millions of Americans who over-pay their taxes, you might be getting some of that money back!  Wheeeee!  So what should you do with that “extra” money?

First things first.  Recognize that it’s not extra money.  This is money that you loaned to the government interest free.  It’s hard-earned income that should be in your hands, not the government’s hands.  You do work hard don’t you?  You do want your money to be in your pocket right?  Then stop giving it to the government in advance.

Getting money back at the end of the year is not an indication that you’re winning with money.  It’s not a barometer that measures success.  It’s a tell tale sign that you aren’t doing the right thing with your money and that something needs to change.

If you’re getting a refund, you’re doing something wrong.  And, some companies are helping you continue this trend.

Some tax preparation companies build their entire business models on the fact that you might be entitled to a refund from the government.  They sell you on the fact that they can help you get more, and then they help you think about ways you can spend that money.  Then, you buy into their marketing with some of your refund as a fee to make sure you’re getting as much of a refund as possible.

For the average family living paycheck to paycheck, a $3000.00 refund, for example, might seem like an annual treat.  But if you divide that number by 12, you get $250.00 per month in additional income with which to budget.  When given large refunds, people tend to spend that money in their heads on big, extravagant purchases to satiate their desire for some sort of relief from the monthly grind without realizing that they could have had more wiggle room every month.

Can’t save up that emergency fund?  Need that deductible for unexpected insurance gotchas?  Need a bit extra every month to pay down debt?  You know where to find it.

“But if I don’t pay in, I might owe…”

Yep.  That’s true, you might, but if you plan for it, and save for it, it won’t be a problem, will it?  The optimal plan puts you at zero owed, zero paid back at the end of the year.  It’s hard to nail that right on the nose, but personally, I’d rather owe, have complete control over the money, and not give it to the government.  If it sits in my account, I earn the interest on it.

“It’s like a savings account…”

I hear this from people who don’t have the discipline to save and don’t understand the amazing power of compound interest, which Albert Einstein once declared to be “the most powerful force in the universe.”  Those same people struggle to make their monthly expenses and don’t even realize they could have more breathing room, pay off debt faster, or save for a specific goal.  I’ve heard out of the mouths of people who are getting refunds that they “aren’t able to save $1000.00,” that it’s “just not realistic.”  Oh really?  If you’re okay with your employer automatically sending your “savings” to the government, why not just adjust your W4 so you get more of your paycheck, then setup an automated transfer into a savings account.  Label that savings account “Tax Savings” and leave it alone.

Bottom line?  You are in control of how much money your employer withholds from your paycheck when it comes to Federal and State taxes.  Social Security?  Not so much.  (Man am I fired up about that one!)  If this year you get a big refund, adjust your W2 so that your employer reduces the amount they withhold by the amount of your previous year’s refund.  You should be in much better shape the following year.

 

 

Filed Under: Personal Finances Tagged: , , , ,

A Quick Note on Borrowing To Save

Posted on October 12, 2011 Written by Leave a Comment

Borrowing to save?  Yep.  That’s what I said.  Borrowing to save.

If you know me, you know that I detest debt.  I will NOT borrow money, and I also won’t lend it.  I have enough of a history of debt, and I’m done with it, permanently.  It’s worth it to me to suffer now so I won’t be a slave any more.  Period.  It has ruined aspects of my life, and it has ruined relationships.  It’s not worth it.

With that said, the inspiration for this quick note (grin) came from a recent comment on a post that I left on Facebook.  The comment goes something like this:

I love the part about saving, but sometimes you have to refinance in order to save.

If your brain just popped like the tin lid on processed food and your palm found its way to your face because you know better, then good for you.  You have 20% of the equation solved.  The remainder is 80% behavior.

Myth.  Refinancing will free up extra money so you can save.

Truth.  Most Americans who refinance to free up some of their income will spend the difference.  They won’t save it.  True wealth-building savings comes 2nd to giving, not 2nd to spending.  You see, the healthy flow of your income should look something like:

1.  Give

2.  Save

3.  Spend

IN THAT ORDER

You give to your charities or cause or church first.  After that, you pay yourself by SAVING.  Don’t you work hard?  Why would assign your most valuable wealth building tool (your income) to someone else after you’ve already completed your giving.  The bank is not a charity.  Finally, what’s left over is what you learn to live on.  If you can’t cut lifestyle AND increase income, you’re always going to be broke.

Do it any other way and I would challenge that the person who GIVEs SAVEs SPENDs will outperform the person who SPENDs SAVEs GIVEs.

If your mindset tells you that the only way that you can save is to combine your loans into one lower payment so you have extra money at the end of the month, then you’re already losing financially.  Rich people ask the question “How much does it cost?”  Poor people ask the question, “What’s the monthly payment.”

The implication by someone who would refinance in order to save is that they also are concerned more with the monthly payment than they are with the total cost over time.  Now, I don’t know the particular person who made this comment, but they’re about as normal as the average broke American, buying into these types of lies.  They probably don’t have an emergency fund, and they probably owe many people lots of money.

The reason that being concerned with the monthly payment keeps you in a rat race of “brokeness” is because in order to get rich, it takes TIME, and people focused on monthly payments are financially myopic.  Investments take time and hard work.  Growth takes time…and hard work.  If you’re focused on how much this month, then you’ll miss how much it really costs.

A good example is the simple difference between a 15 year and 3o year mortgage.  If you compare the two, a 15 year note for $100,000 at 4% yields a monthly payment of $739.69 and has a total cost of $133,143.83.  A 30 year note for $100,000 at 4% yields a monthly payment of $477.42 and a total cost of $171,869.51.

So, you save $262.27 per month by taking the 30 year but by doing so, your total cost increases by $38,725.68.  That means that you have to save $262.27 per month for 147 months just to break even on the added TOTAL COST of the note, and then you’ll STILL HAVE 213 months of mortgage payments left.  On the plus side, that means you’ll have a pretty healthy savings account by then.  But wait.  If that’s the case…if you’re able to save the difference after financing the loan, or re-financing, then why weren’t you able to save before you had the loan?  What makes you think you’ll have the discipline to carry this out when you don’t have any savings to begin with?  If you DID have the savings to begin with, then you wouldn’t be borrowing any money, and the $100,000 home would cost you just that.  $100,000.  At best, you’d have a healthy down payment, reducing the overall cost AND the monthly payment.

Big news flash.  People don’t have a habit of positioning themselves such that they have extra money with which to save.  They typically spend first.  When they apply for loans, they approach their lenders with the mindset that says, “how much can I afford every month?”  The average bank then gives you a maximum price for your purchase to fit that number and then you’re tapped and won’t have the extra income to save the difference.  The bank wins.

Don’t fall into this trap.

Give.  Save.  Spend.  Sacrifice now so later you’ll be able to live crazy well and help others do the same.

Wall Street has nothing to do with your personal economy.

 

Filed Under: A Call To Action, Stupid Tax Tagged: , , ,

The Other Snowball

Posted on July 27, 2011 Written by Leave a Comment

The Debt Snowball is a debt reduction plan that focuses on keeping all debts current with minimum payments while over-paying the smallest debt until it’s paid off.  Then, the amount paid to the smallest debt moves over to the next smallest debt, and so on.  The speed at which each debt is paid off increases as you throw more and more money at your balances as the smaller debts are paid off.  By the last debt, your attack power will be so strong that you’ll pay it off faster than you ever imagined you could.

When you’re in debt, your income + the interest charged to you, makes your financial plan operate like a formula 1 race car in a mud bog.  Your wheels will spin, but you’ll go nowhere.

The very second you earn a single dollar, you have unlocked an amazingly powerful tool which makes earning that second dollar even easier.  You have the means to build a foundation of wealth that, over time, will begin to build itself.  Your most powerful wealth building tool is your income.

Compound interest is a monster of a tool that can either make, or break you.  Unfortunately, so many of us would rather commit our future income to a “now” purchase than save that money and buy it later, at a discount.  When we do this, we allow compound interest to benefit the bank rather than our bank account.

When you’re out of debt, you get to experience the opposite of the debt snowball.  You get to see your money start to grow on its own, which is the most powerful aspect of your financial future.  Building a nest egg requires planning and sacrifice, and it’s never too late to stop the old ways and start anew.  Drop the anchors holding you back and start building your wealth snowball.

 

Filed Under: A Call To Action Tagged: , , , ,

Are You Running Red Lights With Your Money?

Posted on September 14, 2010 Written by Leave a Comment

There are 3 things that you can do with money.  You can give. You can spend. You can save. Concerning spending, there are two ways to measure whether or not your spending is effective in your life.  The first way is obvious…profit.  When you spend $1.00, will it return you $1.25?  Can you spend $7.00 on an antique dresser, refurbish it, and sell it for $70.00?  The second measure is utility.  Utility is a micro-economic term to describe an acceptable measure of enjoyment that you receive as a result of spending money.

One example I can think of is an ice cold beer at home versus an ice cold beer at a sports bar.  A 12-pack of beer will run you around $12-13.  That’s about $1.00 per beer.  A beer at a bar will run you $3 to $6 depending on the time of day.  The beer is the same, but the atmosphere is different.  If you’re willing to spend 200% more on a beer at a bar because the added benefit of being social is worth three times the cost, then to you, the measure of utility returns dollar for dollar, at the very least.  You see, when you spend $3.00 on a beer, it needs to be worth at least $3.00 to you for it to make sense, OR you’d have to be able to justify it by re-selling it for a higher price, which you aren’t going to do with this particular example.  For most, the $3.00 beer is worth far more than $3.00 as a measure of utility, which makes it a green-light expense.

When we increase the cost of doing something, the corresponding result must be either a financial gain, or a measure of utility that outpaces the cost.  If the incremental increase in cost does not return a greater increase in profit or utility, then it’s not worth doing, and will actually become a cost center in your life, hurting you in the long run.

We live in a world where there are plenty of “red lights” to indicate that we should not be spending, yet we see only green lights.

This isn’t so complicated, yet too many people act as if it is a green light world and run red light after red light without so much as tapping the “expense brakes.”  This process is about scrutinizing your results hard and understanding exactly where they come from.  Don’t pay for a second of anything until you’re sure the first one is producing great results!”

-Gary Keller, The Millionaire Real Estate Agent

Take inventory of the recurring expenses in your life that aren’t producing either a financial gain or increase in utility.  If it’s not doing anything for you, stop spending it.  Are you banking somewhere that charges you fees to hold your money?  Move your money somewhere else.  Are you parking in a paid parking spot when you live only two miles from work?  Ride a bike.  Is your girlfriend spending your money?  Shoot her.  (just kidding…please don’t shoot anyone, unless you’re a film maker.)

The whole point is that if you’re spending money without knowing about it, and you’re afraid to reach into the cookie jar (look at your financial situation), then you’re probably running red lights with your expenses.  Stop at the next red light and ask yourself if the money you just spent was worth spending.

Filed Under: Hey! Wake Up! Tagged: , , , ,
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