May 20, 2013

Piggy Bank

Are you financially prepped for a rainy day, the golden oldies and a date with your maker? 

If not, you should be. 

Here's how I fill the pig for the short term, retirement and death.

Short Term and Emergency Savings
Shore up at least a thousand bucks in savings, interest bearing checking or short CDs for the dry stretches.  $5K or $10K is even better, and will beat back the collectors a bit longer.  A lack of debt stretches the dough if jobless or under hardship.  That's why I encourage living more modestly than we can afford, and burning the mortgage early

If the house is obese with a side of credit card payments, you may need to hoard $20K+ in short term savings to let life continue as usual in case of a career malfunction.  Otherwise, be ready to sell a kid, tap into the retirement satchel or win the lotto.

Make sure the money is highly liquid and can be pulled out immediately if needed.  Don't intermix short term and long term savings.



Long Term Retirement Investments
Once the short dough has some yeast on it and rises, build out the 40-year retirement pot.  401K, Roth IRA, college 529, stocks and real estate come into play here.

Many employers offer a 401K savings plan with a free match.  Often this is something like contribute 5% of your paycheck to the plan, and the company will match 50% of that amount.  It's free money, you'd have to be bonkers or under extreme financial hardship not to participate.  I read the stats where large amounts of people don't partake in the free money.  Then I scratch my head and make a bowl of Rice Krispies.

A Roth IRA is a nice offset to the 401K, since you pay taxes up front, opposite of a 401K.  The Roth max has slowly inched up over the years, I think we can now funnel in up to $5,500 per. 

A mutual fund means you're pooling money with other investors, and a money manager that allegedly knows what she's doing takes care of the buying and selling of diverse assets that make up the fund. 

In recent years, I've started buying and managing my own stocks via eTrade.  Using a combination of research, common sense and luck, it's doing okay and averaging 18% across the 25ish companies in the account.  I bought some of the stock low, shortly after the 2008 market tank, which helped.  Some up-and-coming tech and research companies like Cree (they make LED light bulbs) and Tesla (spanking new corp that builds electric cars) are pretty exciting.  Should make hay if they keep it together, although they could just as easily fold.

Pay attention to investment fees, early withdrawal penalties, asset allocation, risk tolerance and tax implications when building your plan.  Hire a person that knows what they're doing if you have questions or are unsure how to get started.  Once you learn the ropes, wean yourself off a helper and try managing certain aspects of your investments on your own.  It forces you to be more educated on where to put your money, and is a fun game to watch as the portfolio recedes, then eventually catches wind and cruises.

Death
Life insurance isn't for you, but for family. 

Do it, it's inexpensive. 

My term policy costs 19 bucks a month and is worth it.  Money doesn't necessarily bring happiness, but a lack of it can certainly bring hardship and unhappiness.  If I bite the biscuit and become a fossil farm while Pigtails is young, I know my policy will pay for any outstanding debt, cover college and my daughter's set until she's an adult.

Also make sure the breadwinner has disability insurance, in case of gangrene.  My employer pays for DI at work, add on if you need more.

When to Save What
Order matters.  

My list below may need tweaked to fit your particular financial situation.  But certain fundamentals shouldn't be monkied with.  For example, it's not wise to start a college 529 savings plan for the kids until your own long term retirement plan is well fertilized.  Don't reduce your retirement savings in order to fund their college.  Otherwise, you may run dry in old age and your offspring will be stuck with your diaper and denture bills.

Ideally, we go to school, get a job, tie the knot, buy a home, shore up short term savings, start our retirement accounts, squirt out a kid, open a 529 plan, retire, yadda bang.  It doesn't always work out that way.  I lost $50,000 of my retirement to the divorce when I was barely out of my 20s.  Ouchie.  Learn to roll with it and modify your plan as life changes.

I left some things out of the list below, like a house, as I tend not to think of it as an investment that plays heavily into my short or long term saving plans.  Don't buy so big a casa that it hampers building the retirement nest. 

There are investment alternatives, such snatching up precious metals, renting real estate and buying municipal bonds.  I haven't personally gone there, but might later on.  Rather than buying gold directly, I prefer to purchase shares in companies that extract it, like GG

Broad strokes here:
  1. Short term, liquid savings of $1,000 to $20,000+.
  2. If you have a wife and kids, buy a life insurance policy with face at least 5x your annual salary. Also make sure you have disability insurance. 
  3. Contribute enough % of your paycheck to the 401K at work to receive the full company match.  Pay attention to which accounts you allocate the $ to, be aggressive if you're young.
  4. Contribute hundreds of bucks, up to $5,500 a year to a Roth IRA.  Taxes are prepaid, dude. 
  5. Annihilate debt.  Do this in tandem with the other things in this list.  Chip away at it while continuing to sock into long term savings.  Also identify ways to prevent the future accumulation of new debt.
  6. Open a mutual fund, pay a manager to buy stocks or purchase them directly via Scottrade, eTrade or Schwab.  If your company offers their stock at a discount, buy it.  Unless you work for Enron.
  7. Start a 529 savings for your kids, but don't retard your own retirement savings for this.  Sounds selfish, but it's actually the opposite.
  8. Build out medium term savings for vacations, future house improvements and metal mouth for the brat.
  9. If you have anything left, count yourself lucky and treat yourself to a plate of fried cauliflower and a tall microbrew.
Those of you with finance degrees, let me know what you think and where I'm spouting malarkey.  If people want more, I'll share some of the individual stocks that have done well or tanked in my piggy bank of can't touch-it-till-I'm-old money.

-Beard

17 comments:

  1. We just had a talk about this yesterday! Terms etc differ a bit between the US and SA, but the principles stay the same. We
    1. Pay extra into the bond - it's available to us and has massive impact on the outstanding amount in the meantime
    2. Have life insurance and a retirement annuity
    3. I've got life insurance on the bond for the little tiny beach house.
    4 Dear Husband invests through a broker via various platforms.
    5. And he recently started to buy gold - Kruger Rands. I think it just gives him a kick :-)

    ReplyDelete
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    1. As sunshine mentions below, make sure you also have disability insurance so your family is covered in case the breadwinner comes down with the plague.

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  2. I am woefully in bad shape and need to do something about it. Thanks for the reminder... ugh!

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    Replies
    1. Not too late unless the reaper is knocking, get on it!

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  3. Jeremy5/21/2013

    I can't wait to burn the mortgage. Try to get in an extra payment each year........

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    1. People should strive to put in much more than one extra payment per year, double payments are better if they can swing it.

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  4. Anonymous5/21/2013

    Just a SWF here, no finance guru by any means, but as one . . . matures, there is that world between life and "biting the biscuit" called disability, of which I know you are aware, Beard. Health crises still account for about 60% of home foreclosures. Always considered meself the healthiest one in my office until it was me behind the 8 ball - outta my oontrol. Nothin' worse than "present-eeism" - warming the chair each day and wondering how you'll get thru it. Whilst not a popular topic, long term care/disability insurance should also be considered at some point.
    Little Mary Sunshine :)

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    Replies
    1. You're right, I have default DI insurance at work paid by the employer, so forgot about that one. Updating the post now to include this, thanks for the reminder!

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  5. Anonymous5/21/2013

    $1000 in savings? Where I live that won't get you very far at all. Americans need to save more and stop overspending on things they don't need. The media convinces people they need stuff to be happy and people end up throwing money way. Live a simple life and save!

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    1. $1,000 will last roughly 10 minutes for many people. That's why I suggested some would be wise to shore up $20K+. If folks can't make $20K work for a long while, there is a spending issue vs. a savings issue there.

      Nobody pays attention to the media anymore, personal accountability for people that spend money on crap.

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  6. Another reason not to pick college savings over retirement is that you CAN borrow money from a bank for college (not ideal to some, but you can), whereas you can't borrow for retirement.

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  7. Keep in mind that a 529 plan reduces the amount of financial assistance availability for your child. If you're not able to put enough money into the account to cover the full cost, it will be very difficult for your child to obtain any financial assistance to cover the rest of the cost. Just something to keep in mind!

    http://www.sec.gov/investor/pubs/intro529.htm

    "While each educational institution may treat assets held in a 529 plan differently, investing in a 529 plan will generally reduce a student’s eligibility to participate in need-based financial aid. Beginning July 1, 2006, assets held in pre-paid tuition plans and college savings plans will be treated similarly for federal financial aid purposes. Both will be treated as parental assets in the calculation of the expected family contribution toward college costs. Previously, benefits from pre-paid tuition plans were not treated as parental assets and typically reduced need-based financial aid on a dollar for dollar basis, while assets held in college savings plans received more favorable financial aid treatment."


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    1. Income will likely price us out of any free financial aid, so whether we have a 529 won't matter in our case. I'd encourage people to save up as much as they can for college and not scale back savings in the name of trying to snag more government aid. Hopefully she will still be able to get a low interest loan for school. I'm intentionally saving less than full tuition, as she will hopefully be more accountable on grades if she's footing part of the bill.

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  8. Pretty sound advice. Thx! One comment. According to Dave Ramsey, your emergency fund should be equivalent to 3-6 months of expenses. We've built up 6-months worth and hold in a "high interest" savings acccount.

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  9. Anonymous8/13/2013

    I really like your response to Rachel. So many children are handed everything these days and because of that I feel they're lazy and have a sense of entitlement...which drives me boonkers!

    As far as your advice on short term and emergency savings I think it's a little lacking. I would (actually Suze Ormon) advise at least 6 months of household gross income saved for a rainy day. If my husband were to lose his job 20K would MAYBE cover 3 months....living exactly as we are today (which of course if that were really the case I know we would cut back...but just in case). I feel it would most likely take longer than the 3 months to find another job in his field and during that time we wouldn't want to discontinue contributing to our funds. Yes, it will take a VERY long time to accumulate such a large amount because of allocating only a certian percentage of your overall saving to an "oh crap" fund as we like to call it. But I do believe it's well worth the sacrifice and time. I'm overly cautious.....can ya tell? :)

    I hope all is well with you and pigtails.

    *B

    ReplyDelete
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    1. Yes, $1k is a start, 6 months is smart.

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Thanks for the note, check back for my response!