New year's resolution - Pay yourself first
By Don Kuehn
The new academic year is a good time to make a few "new year’s resolutions" about how you handle your money and how you can become a better saver and investor. This column is about money—your money: how to keep more of what you make and how to make more from what you keep. The focus will be on investing strategies and pitfalls, as well as ways to save for long-range goals. Most people need encouragement to be confident that they can meet the universal goal of a comfortable retirement, no matter how much or little they earn.
You don’t have to look very hard to find research showing that Americans don’t save enough and lack basic financial knowledge. Many don’t know how much they need to save to reach their goal of buying a first house, sending their kids off to college or retiring at an early age. Getting over that first hurdle—taking charge of their financial future and kick-starting their plan—eludes many Americans.
It seems like there is always something more pressing than reading how-to books or articles about money management. The kids need braces; the brakes go out on the car; a home repair puts you behind the eight ball in saving and investing; or credit card debt has you swamped.
Well, let’s start with a couple of basics.
Resolution No. 1: Where can you get your hands on a little extra cash to start a savings plan? Many, if not most, education employees are fortunate to receive annual raises. Whether you call it an increment, a step adjustment, COLA (cost-of-living adjustment) or a longevity raise, follow this rule: You lived without it last year, so resolve to put it aside this year. Save it before you can spend it. Pay yourself first. Sign up for automatic deductions through your payroll department. If you can, cut back on a few "extras" and add that amount to your plan.
Where should you put the money you save this way? Someplace you won’t be tempted to tap into. Open a money market account with one of the big discount brokerage firms, start an IRA, buy shares at the credit union, open a 403(b) plan through the payroll department, even order U.S. Savings Bonds—anything to get you started. Your first goal should be to have an emergency stash equal to six months of take-home pay.
Resolution No. 2: Pay off your debt. The greatest threat to your long-range financial health is accumulation of debt—particularly credit card debt. The added cost of late-payment penalties, interest accumulation and new debt taken on to replace the old, has led to a stunning statistic: About 43 percent of American families spend more than they earn each year.
The average household carries almost $8,000 in credit card debt. At 17 percent interest and a minimum payment of $115 per month on that balance—and assuming the card is never used again—the balance would be paid in full in March 2030!
Medical advances continue to stretch the life expectancy of Americans far beyond what was envisioned when Social Security set the retirement age at 65. Today, a 65-year-old man has a 50 percent chance of living to 85 and a 25 percent chance of making it to 92. A 65-year-old woman has a 50 percent chance of getting to 88 and a 25 percent chance of seeing 94. But a couple, both age 65 now, has a 50 percent chance that one of them will live to 92 and a 25 percent chance that one of them will live to 97. The implications of saving for retirement are enormous.
Realistically, you could spend as many years in retirement as you did in the workforce. Think about that for a minute. All these years of work give you a chance to accumulate enough wealth to sustain your standard of living for the 20 or 30 years (or more) that you will live beyond your career. Or you can P-A-R-T-Y till it’s all gone.
If you don’t resolve to get serious about saving—and do it right now—you will never be able to maintain an acceptable standard of living on your own. That means getting help from your children, living in a government-provided facility (if there are such things when you retire) or continuing to work far beyond your normal retirement date. For most of us, these are not attractive options.
Saving for short-term goals and investing in the stock market (either directly or through no-load mutual funds) is the only way you will be able to prepare for your own retirement. Many people are skittish about investing. They think the stock market is a foreign land where inhabitants speak a kind of dialect that only the initiated can understand. Perhaps they have been raised by parents or grandparents who have handed down a fear of stocks based on Depression-era fears and experiences. Too bad.
The history of the market is one of ups- and downs, for sure. But even through corrections and bear markets (when the market valuations drop more than 10 percent), stocks of U.S. companies have been the most predictable vehicle to grow savings and beat inflation.
When you buy a stock, you buy an ownership stake in a company. Every share represents a piece of the business’s equity. Many, but not all, companies pay dividends on their shares. Dividends represent a small percentage of the profits the company has earned.
From 1926 to 2001, the stock market returned an average annual gain of 6 percent to 7 percent after inflation. There has never been a 30-year period in which you would have lost money in stocks. Even during and after the Depression, the worst was a 1.9 percent annual return.
When you buy a bond, whether corporate or municipal, you are lending money to the issuer on the promise that you will be repaid after a set time period. Time is money, so usually the longer the repayment period, the higher the interest rate. That’s called the "yield curve" and lately it has been pretty flat—little premium is offered for tying up your money for longer periods of time.
Bond rates vary widely depending on whether you are talking about high-grade corporate bonds, "junk" bonds or bonds issued by municipal districts (such as road or sewer districts). And so-called cash investments like T-bills and savings accounts showed only a 3.8 percent gain from 1926 to 2001.
So, if you want your money to grow, you simply have to resolve to get over your fear of the stock market. Today, more Americans—upward of 78 million people—invest in the stock market than own pets or have college degrees. The popularity of the market has reached almost half of all U.S. households (more than have children at home). It can’t be that hard.
There's plenty of help for readers who have never gotten into the "investing thing." Go online to learn about investments and teach yourself how to grow your money. You may have to wade through a few advertisements to find what you want, but be patient, and don’t sign up for any subscription services until you know what you are doing. Here are a few places to start:
http://www.smartmoney.com Look for tabs on "personal finance" or "mutual funds." After each article, more articles are archived. Some features are only available with premium services at an extra fee.
http://www.motleyfool.com Look for links to personal finance, "Fool's school" and retirement on the home page menu bar.
http://www.cbs.marketwatch.com Go to "personal finance" and look at subtabs on investing, mutual funds, retirement, etc. Especially good is "getting started."
http://www.fidelity.com Under "planning and retirement," look for estate planning and the retirement resource center. There are several planning tools and calculators that let you plug in your own numbers and visualize your financial situation.
If you are a seasoned investor, resolve to boost your contribution to your portfolio by at least the amount of your annual raise. A few hundred—or a few thousand—dollars invested today will yield big returns later.
If you think that your state retirement pension plan is going to keep you in the lifestyle you expect to enjoy after years in the classroom, think again. At best, it will provide only a subsistence living, and you will be looking for ways to augment your income after you retire. Can you say, "Want fries with that, mister?"
Don Kuehn is a retired AFT Senior National Representative. This column is intended to increase knowledge and awareness of issues of importance to members and retirees. For specific advice relative to your personal situation, consult competent legal, tax or financial counsel. Comments and questions can be sent to firstname.lastname@example.org .