Monday, April 6, 2015

Save, Saving, and Savings

Saving money isn't easy to do.  You have to do more than merely decide you want to save, you have to create some saving in order to have savings.

There are two kinds of people in this world, those who accumulate wealth, and those who dissipate it.   And never the twain shall meet - well, rarely.  But you can switch from one mindset to the other.

The dissipators posit themselves as victims of a greater conspiracy, because no matter how hard they try, nor how much money they make - often hundreds of thousands of dollars a year - they cannot seem to get ahead.  They can't save a penny, and obviously, this is someone else's fault.

The former understand money, accumulate it, and exploit the latter and their weaknesses.

And the beauty of this system, is that it is all a matter of choice.

The ugliness of this system, is that our country is moving from a pension-based economy (which favors dissipators) to a savings-based economy (which favors accumulators) - whether you like it or not.   In today's 401(k) world, you don't have a choice - you have to save up money, or you will be in a world of woe come age 65.

Why we have made this switch is the subject for another posting.  Suffice it to say that we did, there is nothing we can do to change it (in your lifetime) so you might as well get used to it.

As a youngster, I was a dissipator, and spent every dollar I made and borrowed a dollar more.   Most people think this way.  I was on a website the other day and a young fellow commented that "old people" in their 40's or 50's (!!!) could "pay off their mortgages using their credit cards if they wanted to!"

Note the naivete of this statement on so many levels.  He posits that anyone 15 years his senior is "old" and that wealth is measured in how much credit card debt you can accumulate.  Oh, and the idea that old people would have a mortgage - but that is a common misconception.

My friends Brad and Shelia have pensions, and they are doing well.  Combined, they make over $100,000 a year, and they have a mortgage, in retirement.  Brad buys a new (to him) car every few years, and they take trips and generally enjoy life.  Brad confides to me that he basically has nothing in savings which is OK, as they are government pensioners, and unless Uncle Sugar goes bankrupt, they are literally set for life.

Brad and Shelia are dinosaurs.   They are lucky to have lived in the era they did, and they paid their dues in to a system that today, simply doesn't exist.  Even government workers are being forced into a 401(k) kind of environment.

So, you, the young person starting out, how do you save up a million bucks (or a half million at least) so you can retire?

It ain't easy, that's for sure.   But first you have to save, and to save you have to have some saving in your live, in order to produce savings.   What do I mean by these three terms?

Well, let's first illustrate how not to save.   Belinda works in a retail store and they offer her a 401(k) plan which matches dollar for dollar her investments.   Oh, those were the days!  Few people are this lucky today.

She decides to contribute 10% of her income - an heroic amount at her income level  - to the plan.   She is living with her Mother and living pretty frugally.   The problem is, she spends every dollar she makes right now, and if 10% is taken out of her pay, she will end up 10% short at the end of the month -which she does, and as a result, her credit card balance keeps increasing.

Worse, she decides that now that she is "doing so well" with her 401(k) that she should get an apartment of her own, as it is really hard to get laid when you are living with Mom.   Now bear in mind that she did  not get a raise or anything, and in fact, her disposable income arguably went down because she was contributing to her 401(k).

So, without an idea where she will get the rent money from, she moves out and into her own apartment.  Needless to say, her credit card balance really starts to climb now, and pretty soon, she is in a credit card crises.   So she borrows from her 401(k) plan to help make her credit card payments.  Now she has yet another debt to pay (borrowing more money is always throwing gasoline on the fire of debt) and before long, she is in bankruptcy and is evicted.

Yes, drugs were involved.

But you don't have to be stoned all the time to "struggle" with debt and "struggle" to save.   And yet it isn't all that hard.   First you have to find the saving, in order to save.  What do I mean by this?

Well, to some extent - the exact extent, to be precise - my first attempts at "saving money" were about the same as Belinda's - and yes, drugs were involved.  I would resolve to "save money" and like a vague resolution to "lose weight" it would go nowhere.   In order to lose weight, you have to budget your calorie count, keep track of your calories and exercise, so that you have a net calorie deficit, and over time, lose weight.  Otherwise, nothing changes.

Vague promises to "save money" or to "lose weight" end up coming to naught, and in both cases, the person involved gets depressed, becomes convinced that nothing will ever change in their lives, so they might as well enjoy themselves in the here and now by racking up more debt or eating an entire birthday cake.   Same deal, different day.

The secret to saving is to first establish a budget and figure out where you money is going.

Second, once you have gotten your budget figured out, find some area of the budget you can cut and then cut that amount out and apply it to a savings program.  This is your saving.

Unless you have a corresponding budget cut, you can't realistically have a corresponding savings.   Without making a sacrifice in some part of your life, it simply isn't going to work.

OK, well, what do you cut?   I often cite Cable TV as one area to cut.   Why?  A number of reasons.  First, you don't need it to live.   Second, it has all sorts of bad normative cues - people watch it for an average of 4.6 hours a day, and that is wasting your life away.   Third, it is chock full of advertisements for consumption and bad deals.   All these ads say the same thing: "Give up!  Don't bother saving!  Don't try to get ahead!  You never will!  You cannot!  Just indulge yourself in the here and now!" - and that is a horrifically bad message to get.  They sell the idea of spend every penny you make and borrow a dollar more.

The fourth and most important reason is that it is a recurring subscription expense and these are often costly, over time, as they add up, both in terms of monthly expenses (as subscriptions stack up) but also over time in terms of compound interest.   $100 a month spent on cable comes to $125,000 in your 401(k) by retirement.  Any kind of regular monthly payment is a good place to look for cuts.  That and sacred cows.

But there are other things you can cut as well.  $5 a day at Starbucks can be $300,000 in retirement - or as much as a half-million, over a 45 year working life, if invested at 7%.   And yet most people say they "cannot save money" but say this while sipping a mocha frappachino and munching on a scone.

Or you could make your own lunch instead of buying one for $10 at work.   Again, all it takes is a few dollars a day over a working life to add up to hundreds of thousands of dollars at retirement.   Ever wonder why those married dudes at work are brown-bagging their lunches instead of going out to a Chinese restaurant with you and your friends?  They get it, you don't.

Or maybe the interest you are paying on your "miles" credit card - many folks pay $100 a month or so and think nothing of it - carrying a revolving balance of $5000 which never seems to get paid down.

It could also be just driving your old car another year, or when you get a newer one, getting something less flashy and more practical.  Or maybe giving up that "smart" phone which is making you an uhappy and unpleasant person to be around anyway.

The list goes on and on, and is only limited by your imagination.   And much of what you think are "necessities" in life, really are wants, if you stop to think about it.

Budget, find something to cut (save), then put aside the same amount of money (saving), and watch it grow over time (savings).

But you can't do one without the other.   And the big mistake I see most folks make is not figuring out this first step.   And I know this because it was the first mistake I made.

When I told a financial adviser, at age 25 or so, that I wanted to start saving for retirement, he said, "Well, get about $5000 or so, and I can set you up with a mutual fund!"   The problem was, I didn't have $5000 nor did I know of any way to go about accumulating it.

I figured it out a few years later.   When I made more money, instead of spending more, I tried to contribute more to my IRA and 401(k).   It wasn't easy, as the temptation to spend was always there.   And like a dieter or an alcoholic, I was constantly struggling with the desire to "have it all now" versus the desire to be financially independent.

And it wasn't easy, and I could have done better, and at age 50 or so, I realized this.   But I did save some money, and that has made all the difference in the world.

Today, I know a number of people - perhaps the majority in this country - who are heavily in debt, have little or nothing saved for retirement, and have all the latest electronic toys, new cars, and a fancy house.   They think they are "rich" - and their children certainly do as well (they keep calling to borrow money, and Mom and Dad keep doling it out as though they have it).   But in reality, they are only a few steps away from the poorhouse.   One job loss from bankruptcy and foreclosure.

In 2009, we saw this happen.   People lost their jobs, and they quickly lose it all.  They go from having granite countertops, leased cars, a maid service, and new smart phones for all the family, to being basically destitute.   From six-figure salary to nearly homeless, and it needn't be that way.

Are you finding you can't "save money" in your life?   Find something in your life you don't need and cut it out entirely and then put that money into a savings plan.   It won't happen overnight, but over time, you will build up an estate - an amount of money that you can retire on, and live independently from everyone else, if you so choose.

The alternative, retiring on Social Security alone, is rather grim.