Friday, October 29, 2010

The Key to Saving is .....Saving

Want to make a million dollars in the market?  You may have to invest at least half that first, if not more!  In order to save for retirement, you have to, well, save.

CNN Money is often brilliant at stating the obvious, when it is not merely giving horrible financial advice on how to squander $50,000.  But sometimes the obvious needs to be stated, as we all tend to overlook it.

This recent video report from CNN Money points out one obvious thing about saving for retirement - you have to save.  Seem pretty obvious, no?

And yet, most financial gurus and financial help pages, books, magazines, etc. all tout investment strategies, as if you could make enough to retire on "if only" you'd invest in the right stock, mutual fund, or whatever.

Why do financial gurus tout investment strategies?  It's the same old, same old.  If you want to sell advice, you have to sell something sexy and unorthodox.  You have to sell the sizzle.  And you can't get paid to talk on TV by saying that in order to accumulate wealth, you have to save, just like no one will pay you cash-money for a "diet plan" that is a big blank book with two words in it: "Eat Less".

But in essence, those are the solutions to both savings and diet problems.  If you want to save money or lose weight, you have to do the hard things - like spending less and and eating less.

And this is where my two blogs, Living Stingy and Losing Weight Now! are absolutely brilliant, if I may say so myself.  Because in both blogs, I don't try to sell easy answers to complex problems.  That if only you could buy the right stock, you'd be rich.  Or if only you could take the right "fat burner" pill you'd be slim.  No, instead I am finding out that the answers to these problems are rather harsh and difficult and not always easy to swallow.  And that sort of stuff doesn't sell books on Good Morning America.  It does not make for happy reading, most of the time.

Then again, Thermodynamics was a much harder course than Sociology in College.  Which landed me a job?  People who take the easy way out rarely succeed in life.

People want easy answers - that you can get rich without working, create wealth from nothing, and lose weight while eating more.  But those aren't answers - they are lies, nothing more.

Losing weight is hard work!  You have to monitor your calorie intake daily, get some exercise, and weigh yourself daily as well.  It sucks, really.  It's hard and it involves deprivation - denying yourself that cinnamon bun, the nachos, or that slice of pizza.  And the moment you "fall off the wagon" (as has happened to me in the last month) the weight goes right back on!  It sucks, really.

And that sort of blog is not always fun to read.  Because day in, day out, it is pretty much the same thing - harsh advice that is often hard to swallow.  You have to beat yourself up a bit - reprogram your brain, to make sure the new habits "take" and are not just a phase you go through before you fall back into bad habits.

Similarly, saving money isn't fun either.  We'd all rather listen to a great stock tip or some other easy answer.  But the cold, hard, harsh reality is that to make money, you have to save money, as our friend on CNN says.  And that means no Jet Ski, no eating out 4 nights a week, and scrimping and saving and finding ways to make money in the margins.

And that's where profit is found in business as well.  Many employees of companies grumble and complain how "cheap" management is, trying to save a buck here or there.  But if you can cut your costs by 1% in a business with a 10% profit margin, that means a 10% increase in profits.  Do you know what would happen to your company's stock if the profits went up 10%?  Wall Street would go nuts.  And yet Joe Paycheck doesn't get that, thinking that the company is "rich" and that small economies are not necessary.

And the same is true in your personal life. As I have illustrated here before, even if you are making "good money" - like $100,000 a year, chances are, all but $10,000 of that is spoken for, in terms of mortgage payments and other fixed costs in your life.  So saving $1,000 a year through various small economies means your disposable income goes up 10%, which is a heck of a raise - and tax free.

And how do you save $1,000 a year?  Not with the click of a mouse and in all one lump sum.  No, it comes about in dribs and drabs.  You knock $50 off your cell phone plan, or $100 off your car insurance, or $200 off your entertainment budget.  A little here, a little there, and pretty soon it adds up.

That's why this blog has hundreds of entries on everything from grocery shopping to car buying to insurance costs, to.... well, just about everything involving money.  In order to "get ahead" you have to get into a mindset where you meticulously track money - checking your bank and credit card balances DAILY,  checking your spending DAILY, just as you weigh yourself daily.

And once you spend less, you can save more.  That's the easy part, the saving.  It is the cost cutting that is the hard part.

And as the CNN piece illustrates, in order to save up a million bucks for retirement, you have to put aside a lot of money over time.  And the later you wait in life, the more money you have to set aside.

If you can put aside a lot of money when you are younger, then yes, you will benefit greatly from the effects of compound interest over time.  But there's the rub - when you are younger, it is the time in your life you are least likely to make a lot of money, and also the time when you are most likely to spend more.  Try telling a 25-year-old who just got his first "good job" that he shouldn't go out and buy a brand-new Scion.  He thinks he "deserves it" even though he has another decade of student loans to pay off.

And of course, an entire marketing machine is designed to sell things to young people so that they squander most of their income at the time.  Indeed, the Scion brand was developed by Toyota to sell cars to the 18-30 year old set.

We are fortunate in that we put aside a lot of money when we were younger and it has grown to a nest egg of over a half-million dollars (in retirement plans).  That sounds good, but upon retirement, that may mean a retirement income of about $50,000 a year.  Not bad, but if we want to do more, it may be hard.

When you reach 40, and especially 50, you realize that the whole concept of buying and owning things is sort of a false religion.  Moreover, it just loses its allure.  And with retirement seeming more imminent, suddenly, many folks panic and start to think about saving for the first time.  We would like to grow our retirement fund to over a million dollars before we retire.

But at my age, this means setting aside nearly another $500,000 between now and retirement.  We may get some "boosts" along the way, selling our last remaining investment property, perhaps a small inheritance.

The compound interest calculator is an interesting weapon in this battle.  If we set aside an additional $20,000 a year between now and age 65, at 5% compound interest, we could end up with about $1.5 million in the bank.   Since we already have savings, we make out on that compound interest.  If we were trying to start from scratch now, well, ouch.  Fifteen years is still enough time to make money from our good friend, compound interest.  However, it is also the time in your life when you can least afford to risk money on high-yield equities.

So that's the conundrum right there.  Many folks in their 50's in this country are trying to play "catch-up" with their retirement savings, putting it all into high-risk and high-yield investments, with the hope that a big payday will save them.  It is a gamble - and a high-stakes one at that.  If they lose it all, or a big chunk of it, retirement will be a very sad thing for them.

When I read about other people's savings efforts and also the financial trouble they can get into, I realize that we are lucky.  But when I look at all the money we've spend over the years, often to no avail, I realize that we could easily have over a million in the bank right now, well on our way to several million at retirement.

And that's the rub.  Even for someone earning "only" $50,000 a year, if they save even a modest 10% of their income, they could be millionaires in their lifetime.  You don't have to be rich to end up rich.

And yet, so few do.  Most squander their life's work on consumer goods.  This retire-on-your-401(k) thing is going to be interesting, to say the least, in the coming years.