Jan 28

It’s possible, of course, but is it really common? From a number of recent articles, you’d conclude that we are now a nation of savers. In early December, I read, “Could You Be Oversaving for Retirement?” on Yahoo Finance. (To give you a hint as to how rare I thought this was, the word oversaving wasn’t in my speck check dictionary till now.) A couple weeks later, Jean Chatzky wrote You may be saving too much for retirement for CNN Money.  I like Jean’s writing, and she was kind enough to cite the source for this wave of ‘saving too much’ articles that have sprung up. It was a paper by the Head of Retirement Research at Morningstar, David Blanchett. Estimating the True Cost of Retirement dispels, sort of, the notion that one will need 80% of their pre-retirement income post retirement. I say ‘sort of’ because one’s earnings aren’t linear, nor is one’s lifestyle, and there are too many variables to project 40 years out with any level of confidence. The 80% number is as good a rule of thumb as any especially when considering the alternatives. If, instead you plan for 60, and as you near retirement, realize that in those final years your lifestyle has crept up a bit, more vacations, a second home, any number of things, it will be tough to catch up to where you should be. But if you plan for 80%, and, with 5 years to go till retirement, you realize you have more than you need, it’s a simple matter to retire early, or just enjoy the fact that you have an extra cushion.

David’s paper makes excellent points, and is a worthwhile read, but it doesn’t discuss one thing, the amount we are actually saving. The average retirement savings for those 55-64 is $69,127. If you understand how averages and median compare, you know that for every saver with a million dollar retirement account, a hundred people will be $10K less than that average to balance out. This forces the median, the halfway point, far lower than the average. In fact, the same report cites that 39% of those age 55 and older have less than $25,000 in their retirement accounts. To be clear – No, we are not saving too much, not by a longshot.

There’s a point to be made that a reasonable retirement goal might be more motivating than one that appears so far out of reach. It’s also safe to say that retirement spending is better correlated with preretirement spending than with preretirement income. This is tougher for a younger person to analyze. I got married at 32, bought my first ‘real’ house at 34, and became a dad at 36. At 40, I had a real grown up budget, 20% to the mortgage, 10% to the college account, 15% to retirement, etc. Not tough to see the math show that 45% of our income was budgeted to things that would be gone when we retired.

In the end, the question isn’t about averages or rules of thumb, it’s about you. Only you can calculate your Number.

written by Joe \\ tags: ,

Nov 22

And today, a guest post from Derek -

I once heard this statement at a business seminar and I have never forgotten it, “Put all of your eggs in one basket and watch that basket grow.” I know a few people that own multiple businesses and do not have the proper system that allows them to escape from any one of their businesses. They are constantly performing a juggling act with their businesses and seem to never get ahead. They just don’t understand it, but when I stand there on the outside looking it, I can see very clearly that they lack focus.

Without the proper focus, their businesses are all struggling. They fail to get traction because there is not a consistent focus on any certain business. Instead, the owner jumps from one emergency to another, never taking the time to do what is necessary to make their business grow. If they were to sell off all but one business, they could almost certainly increase sales and revenue of that business, perhaps to a size that would be greater than all of their businesses combined. Focus is a powerful thing, and if you put everything you’ve got into that one idea (or basket as it were), you can grow your business more rapidly than you ever thought possible.

Take This Principle Into Your Retirement Fund

We are often taught to diversify when it comes to investing, and this is most certainly a good idea, but no one ever said that you should have six or seven different investment firms handling your money. If this is your method for your retirement funds, you might actually go mad before you reach retirement age! Let’s say you are actually able to keep all of your funds straight. With all of these different brokerages, what are the odds that you will actually earn more money than anyone else? I am willing to bet that with all of that confusion you are putting on yourself, you will almost definitely do worse.

By putting all of your money into one super fund, you will allow yourself to do everything you dreamed of in retirement – skiing, hiking, traveling, cruises, and spoiling your grandkids. There are so many things that your retirement fund can do for you. Don’t waste it by trying to complicate your investments. Superannuation is the answer to all of your retirement needs. Click here to find out more about superannuation.

written by Joe

Nov 21

I’ve frequently said to “do the math” and this guest post just helps drive home this point -

When you’re figuring out where to put your money, you have to do a lot of math and planning. The planning part is to help you figure out how to amortize your finances throughout your life, and the math part is to make sure you get the best possible return on your investment.

Today we’re going to look at online savings accounts, but first I want to focus just a bit on these two questions of math and planning, so you understand where I’m coming from.

How much money do you have, and when are you going to need it?

This is always the first set of questions you need to ask yourself before you put your money into any type of savings vehicle, from an online savings account to a Roth IRA. How much money do you have right now? Do you plan to earn more money that can be saved (vs. money that must be spent right away) in the future? Do you expect your earnings to grow over time, or do you expect your earnings to decrease soon? (A young person starting a career might expect earnings to grow; a couple planning a family might expect earnings to decrease if one partner quits a job to take care of the baby.)

When are you going to need your money? Are you planning to buy a house? Move to another state? Do you anticipate becoming the primary caretaker of young children or aging relatives? Do you want to go back to school?

Before you can start thinking about how to save and invest your money, you have to take some time to answer all of these questions.

Understanding money math

Once you’ve taken a look at the planning question, it’s time to start understanding all of the mathematical terms involved in saving money. Do you know what APY means, for example, and how to calculate it? Do you know whether a given interest rate is calculated daily, monthly, or yearly? Do you know how to effectively calculate the risk of any given investment?

If you’re not up on your money math, it’s time to take a refresher course. Joe Taxpayer has many great articles on how to calculate the true value of investments, savings accounts, and financial opportunities. Take some time to read through this site, and learn how to apply Joe’s tips to every new financial offer you encounter.

Online savings accounts: a good mathematical solution for short-term savings

There are a lot of solid, fixed-rate investments out there, including certificates of deposit (aka “CDs”) and goverment-backed Treasury bonds (not to be confused with Treasury bills — and read this if you want to learn all of the math behind Treasury securities).

However, one of the most solid investments out there, especially for new savers, is the good old-fashioned savings account. Compound interest is one of the first lessons we learn, financially, and it still applies. An online savings account is even better than a brick-and-mortar savings account because the money saved on overhead goes back to you. Online savings rates by Discover Bank, for example, are at 0.80% APY as of November 14. That means that if you put an initial $1,000 in the account, then add $200 every month, by the end of the year you’ll have $3,418.39 including interest.

Why are online savings accounts good mathematical solutions for short-term savings? Because any gains made by putting your money into a higher fixed-rate investment, such as a CD, are wiped out if you have to pull that money out early. Remember the questions we looked at earlier regarding when you think you’ll need your savings. If you put all of your money into a 24-month CD, and then you decide to get married/buy a house/have a baby, you have some problems to solve.

If you’re thinking short-term, the online savings account with a high interest rate is the way to go. Or, if you’re thinking medium- to long-term, combining an online savings account with some longer-term investments is a great way to have money when you need it as well as plan for the future.

If nothing else, your money should at least rest in an online savings account before you transfer it to your Roth IRA or 529 College Savings Plan. Every day you have extra money is a day it needs to be earning interest for you — and online savings accounts are set up to help you make that happen.

In conclusion: the next time you come into some savings, start thinking about math and planning. If you plan on spending your money soon, put it in an online savings account; if not, use what you know about money math to find the best possible long-term investment.

written by Joe \\ tags: , ,

Jan 25

I was going to title this post something like, “My Daughter, The One Percenter.” I know each of us thinks our own child is special, but it never hurts to get some extra validation. Independent data that proves it beyond a doubt. A brief story from CNN talking about kid’s allowance and savings was interesting to me -

kidsavings

First, Jane2.0′s allowance happens to be the $15 average. We started giving her the number of dollars to match her age, at about 7 or 8. Now, at 14, I round up, so $15 it is. It’s the 1% that surprised me a bit. In the age of gadgets and electronics, a week’s allowance isn’t enough to buy much, and I’d have imagined more kids would be savers. When J2 wanted a MacBook laptop for her birthday, we said that $1000 was more than we were planning to spend on a 12 year old’s birthday present. We agreed to pay for half, and she would take the other half from her savings. We felt this served as a good lesson, the benefit of saving her allowance and money she started to earn babysitting, and it would also prompt her to be more responsible with the laptop.

Enough bragging, she’s off to a good start, understanding the value of money and learning that the cost of a purchase can be converted to the number of hours of babysitting or week’s worth of allowance to buy the item. How about the 99%? All of the kids who are getting an allowance but spend it as fast as it comes in? It seems this snippet of a story may be the preface to the longer tale of the low saving rate in the US, and why at the back end so many have failed to prepare for retirement.

written by Joe \\ tags: ,

Jun 11

Today, a Guest Post by Kristy Ramirez -

life savings penny jar

With the global financial crisis that our world is experiencing – beginning in 2008, and countries like Greece, Italy, the U.S. who are witnessing the collapse of their economic system, it’s no wonder we worry about where to put our hard earned cash. 

What is safe anymore?  

When we think about the crisis that put these countries in dire situations with unemployment skyrocketing, housing prices driven down to depression era values and more homeless people than ever before, not to mention the stock market crashes and losses of over 2 trillion dollars of retirement savings for so many, it’s unnerving to most people who want put something away for retirement, or a rainy day.

For Americans, the loss was catastrophic, with 401(k) plans dwindling, and an overall decline near 20 percent. So many people lost their live savings and nobody did anything for them. They have nothing to fall back on, and this event has been considered by the “WashingtonPost to be one of the greatest casualties of the current financial crisis. 

Bankers are now looked upon as ‘the bad guys’, mostly because they are being blamed for all of this crisis due to their greed; selling off mortgages, taking bail-outs for their horrific and greedy choices, yet not reaching out to help their customers, but instead foreclosing and selling individual mortgages off to the highest bidder.

But – believe it or not, there are still some good banks out there, and fortunately they offer a safe refuge in which to save money, and earn a little too.  Remember, in the U.S. at least, your money is federally insured.  It wouldn’t be wise to put all of your money into one place; however, if you stay within the insured limits, spread out between different types of accounts, you are safe.

Here are some safe havens for your retirement, and/or savings:

Checking accounts:

Banks and credit unions offer interest-bearing checking accounts, and the best part is they are safe.  The accounts are insured for up to $250,000, so if the bank were to crash and burn, you’d get what you had in there, back. 

Of course the interest rates are not even worth mentioning, however, it would be wise to put a little aside here, just in case.  You have full access to your money at all times.

Learning to SaveSavings accounts:

These accounts are safe as well, as they are insured for up to 250,000.  Different banks offer different rates, and they are usually dependent on how much you actually have in there, however, you won’t lose everything should the bank fail.

Again, you have full access to your money should you need access.

Certificates of deposit:

These are also known as Term Deposit accounts, or TD’s and also CD’s. These are federally insured deposit accounts that you purchase in time increments. The maturity dates can range, depending on your choices, from weeks to years. And, of course the longer you invest, as well as the more you invest, the better the interest rate. These are safe and are offered by banks, brokerage firms and credit unions.

CD’s and TD’s offer interest income, with low risk, but cashing out can be costly if you do so prior to the maturity date.  So if you put cash here, make sure you won’t need access to it prior to its maturity.

The most prominent disappointment with these accounts is that the interest rate you purchase your CD/TD at is where it stays.  If you buy a 5-year CD – and the interest rates rise, you’re out of luck.   Consider this when looking into Time or Certificate deposit accounts.  Experts suggest buying 2 or three, and having them expire within a month of each other to avoid missing out on interest increases.

Money Market accounts:

A Money Market account is a form of a deposit account that pays you interests, and the rate, dependent on how much you put into it.  They earn higher interest than a typical savings account, but have different requirements, such as higher minimum balances and restrictions on withdrawals. 

These are very low risk, and are also federally insured, so you can’t lose your principal. Make certain that you stay within the insured levels that are at this point in time, $250,000, or you could lose your investment.  Be sure you check with your credit union or bank to verify the exact insured amount because it is generally $100,000.

The benefit of a Money Market account is that you are allowed to write checks (most are 3 per month) should you require cash, without penalty as long as you don’t dip below your minimum balance. 

Money Market funds:

savings bondsThese are quite different than Money Market accounts, because they are short-term investments that mature in a year or less.  The interest rates vary depending on risk, but generally they are safe because a low risk fund usually invests in Treasury securities, CD’s, federal agency notes and municipal securities, which are fairly stable.  Some even include government bonds, which have a history of being safe and stable. 

Money market funds are a bit riskier than a standard savings or Money Market accounts because they are securities, and are not insured, however they have been deemed safe as long as you stay away from the more risky funds.

The benefit of these funds is that you can write checks, and can sell or buy at any time. Plus you get your money (interest earned) in monthly dividend checks and the interest rates are much better than a standard savings or checking account. 

A very wise (and successful) investor once recommended that putting your ‘eggs’ in one basket spells trouble.  So don’t be afraid to spread out your savings to include many different accounts, and if you have a little to spare, try investing in more risky accounts such as higher risk mutual funds that bring high yields, to get to your goals quicker.

Remember though; don’t risk more than you can afford to lose.

Kristy Ramirez is a frugal mom and writer. In her time away from work she manages the family finances and is living debt free.

written by Joe \\ tags: , ,