More month than money

April 15, 2016

Running out of money before running out of month is a common problem not restricted to the working class. Our national savings rate reveals that, on the whole, we Americans are pretty dismal savers. Having a hefty income, more often than not, brings hefty expenses as well.

For quite some time now, we have been spending as much (or more) than we earn, because consumer debt levels are near all-time highs. Our political leaders seem to want us to both spend more to stimulate the economy and save more to fund the looming deficit. A neat trick, if our incomes don’t go up and we’re already up to our necks in debt.

If you want to have a comfortable retirement, educate your kids and achieve other goals, you must save and consider investing. Our personal balance sheets need the strong dose of equity corporate America currently gives itself. Since we can’t sell shares in ourselves, we must resolve to save and consider investing more. Saving just $25 per month, invested at 6 percent, yields over $25,000 in 30 years. Anyone born after 1981 has at least 30 years before they turn 65.*

How can we help ourselves to increase our rate of savings? First, establish a long-term goal. A well-established, written goal is the foundation of all financial planning. Increased savings may appear to come at the expense of one’s current lifestyle, but just do it! It is a goal that’s worth working towards if you want to have any hope of success.

The next imperative is to pay yourself first. When you sit down to pay the monthly bills, you should write the first check in the form of an investment toward a long-term goal. In today’s automated society, this is easy. If your company has a 401(k) or similar savings program, e.g., a 403(b) for non-profits, that’s the place to start. You get an income tax deduction for your savings contribution and the money grows tax deferred until you take it out, which is usually after retirement when you are in a lower income tax bracket.

If your company does not have such a plan, you can fund an Individual Retirement Account (IRA), Roth or traditional. The use of automatic debits to the checking account and/or payroll deductions is a marvelous way to begin this program. It will also illustrate the amazing powers of compound interest and dollar-cost averaging over time. Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss and declining markets.

The third key is to avoid the overuse of consumer debt, even if it means cutting up a credit card or two. Go ahead, you’ll probably feel better and your wallet will close easier. Almost anyone with a credit card can get a 12 to 25 percent guaranteed return simply by paying off credit card debt. As a society, we need to learn that the offer of a pre-approved credit card with a $5,000 limit does not translate into a $5,000 increase in lifestyle.

You’ll notice an absence of budgeting in these suggestions. It’s not that budgeting is a bad idea; in fact, it’s a pretty good one for some people. However, most seem to lack the discipline it takes to really make a budget work. It’s far too easy to rationalize a budget-busting expenditure, as politicians in Washington are constantly proving.

Most people spend to the level of their income. Their lifestyles automatically adjust upward with every increase in salary. By paying themselves first and avoiding the credit card temptation, their lifestyles will miraculously adjust to their new level of income. After a few months, they won’t even miss the money they’ve begun to save.

*This is a hypothetical example and is not representative of any specific investment. Your results may vary.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Randy Neumann is a financial professional with and securities offered through LPL Financial Member FINRA/SIPC.