We can’t control bond yields, stock prices or inflation. But, there’s much we can control, including how much investment risk we take, how much we pay in investment costs, how we react to the market’s ups and downs and how much we spend and save.
Jonathan Clements, author of “The Little Book of Main Street Money”, believes we should stop worrying about the things we can’t control and focus on the things we can. This is a more humble approach to managing money – and yet one that’s often more rewarding.
Making conscious choices rather than haphazardly doling out hard-earned dollars is important.
“We can live beyond our means in the short term, by tapping our home’s equity, racking up the credit cards or borrowing in other ways. But, that isn’t sustainable over the long haul; we are constrained by our income,” says Clements, who spent 18 years at the Wall Street Journal as the personal finance columnist.
Americans have a history of not saving enough money. Clements believes we need self-control, a quality becoming scarce. Many of us eat too much, exercise too little and spend too freely. Most of us know we need to save more money, but lack motivation. Clements offers seven compelling reasons to spend less and save more.
1. The earlier we start saving, the easier it will be. The required monthly savings will be smaller simply because we can spread the effort over more months. Also, by starting sooner we will likely get more help from the financial markets, thus further trimming the required monthly savings rate.
2. Spending today doesn’t seem to buy lasting happiness. Studies show the thrill we get from our purchases often fades quickly. Tempted to buy a new car? Before you spend or borrow the money, try a cooling-off period of a week or two. That will give you time to consider whether the money spent will provide commensurate pleasure.
3. Saving regularly can give us peace of mind. If we know we’re living within our means, we are more likely to feel financially content.
4. Saving is a bargain compared with spending. Every dollar we earn and spend will be taxed, so we may end up with 60 or 70 cents worth of merchandise. If you stash that dollar in your 401(k) plan, you get to keep the money and leave it to grow tax-deferred. Any matching contribution from your employer will increase the return.
5. The tax code is stacked in favor of savers. A slew of tax-favored accounts exist – 401(k) plans, Roth IRAs, 529 college savings plans and more. If we are investing through a regular taxable account, we can take advantage of the low federal tax rate on qualified dividends and long-term capital gains.
6. Becoming a top-notch saver doesn’t take huge sacrifices. Suppose we step up our savings rate from five to 10 percent of our paycheck, thus doubling the amount we save. To achieve this, all that’s required is trimming our spending from 95 percent of our paycheck to 90 percent, a drop of just over 5 percent.
7. Diligent savers need smaller retirement nest eggs. If we’re big-time savers, we won’t just accumulate our desired portfolios more quickly, we also will need less money to retire because we are accustomed to living less expensively.
Clements’ book offers other helpful hints. We might create oddball rules for ourselves, such as insisting we will save all tax refunds, year-end bonuses, overtime pay, insurance reimbursements and money from a second job.
To ensure we don’t dip into our savings, we could try “mental accounting” – allowing ourselves to spend from our checking accounts while deciding that our savings, brokerage, mutual fund and retirement accounts are off limits. However, be careful to avoid the illusion of saving; simultaneously piling up credit card debt is counterproductive.
Finally, Clements acknowledges, “Budgeting doesn’t work for most people. When we budget, the idea is to analyze our monthly expenditures, figure out ways to cut back, restrain our spending and then save whatever remains at the end of the month.
The problem is we often get to the end of the month and there’s no money to save. Along the way, we gave into temptation, spent impulsively, blew our budget and finished the month feeling badly about our spendthrift ways.”
Instead, he recommends simply socking away money as soon as we get our paycheck – the old “pay-yourself-first” strategy.
Everything’s a tradeoff.
Kristi is a local independent financial consultant with 30 years in financial services. She is a registered representative with and securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. She can be reached in Gilroy at (408) 848-0874, or Hollister at (831) 634-1144, or at www.kristiellington.com. Her column runs on the third Tuesday of the month.
