Many people of my generation, the Baby Boomers, have made a mess of their finances. Some boomers—those born between the end of World War II and 1964—have lived beyond their means for decades. Now a large number of them face an old age of continued work and lower living standards. I know many of these people because I am of their generation (I was born in 1952). Their rocky retirement is a great shame, one that disturbs me as this blog has documented.
(Please see http://gregorybresiger.com/the-quiet-crisis-in-america-part-i-a-lack-of-savings-makes-the-last-)
An Old Man’s Plea to the Young
But the same misfortune doesn’t have to happen to the generations just behind me, the Generation Xers and Millenials. Indeed, it didn’t have to happen to boomers if they had just taken a few sensible steps; if someone had counseled them at an early age in basic concepts of money management.
So, since I often come across many young professionals in their 20s and 30s—let’s call them Christine’s and Jonathans—I want to impart a few, relatively easy, commonsense money management lessons. Successfully applying these practices can help them avoid financial pain in twenty or thirty years.
They will help you avoid an old age of having to survive solely on Social Security payments or other skimpy, ill-conceived, government programs that could be cut during one of the government’s periodic crises. This is a pathetic way to live out one’s last years. They should be one’s best years, years when one can afford to live out one’s dreams.
Step One: Don’t Pay Outrageous Credit Card Interest
Just do this religiously. You could save $100,000 over a lifetime, maybe more. Pay off your card debts each month. How does one ensure that one avoids six figures in useless spending over the course of a half century?
Say someone starts with credit cards when he or she begins at a university and constantly carries debts from month to month. Let’s say the person ends up, over the course of 50 years, paying on average $2,000 a year in interest. That’s $100,000 in money lost because someone had to have a certain possession right away. It’s not only the overspending that hurts someone, it is the opportunities missed because of poor spending habits.
A large part of that $100,000 could have gone into investments (1,200 a year at nine percent annual interest yields you $471,000 over 40 years). Some of the $2,000 a year savings could have also gone into buying things one really needed without incurring interest.
By the way, the $2,000 a year saved in credit card history doesn’t include the good credit rating one earns over the course of a lifetime. It also doesn’t include the cashback card companies are willing to give to good payers ($50 a month in cashback payments come to $600 a year or $30,000 over a 50 year period. That’s all because you paid off your cards each month).
Step Two: Invest Automatically and Rationally
Rationally means buying good investments such as index funds that don’t soak their customers with ridiculous charges. The savings over the long term help you get better returns than the guy who is paying sales commissions and high expense ratios so the fund company’s executives can live large.
Rationally also means investing for the long term. Warren Buffett famously says he invests for the long term and has no exit strategy. You don’t have to be as extreme as that. But remember, you are investing for the long term—20, 30 or 40 years or more—-and you easily live with the market going down some of those years. That’s because the market tends to go up over the long term.
In fact, for the young person, ready to stay in the market for many years, some bad years are good. You get bargains when a good investment is temporarily down. Remember one of the worse years in the history of the market, 2008, was immediately followed by the best. But don’t try to guess which one will happen when. Set up an automatic investment plan and let it go on for years.
Start as soon as possible. Even $100 a month is a great start when you have thirty or forty years in front of you. Increase your contribution as you make more money. For instance, when you receive a raise, put half in your pocket and the other half in your investments.
“It is critically important to start saving now. Every year off investing makes your ultimate retirement goals more difficult,” writes Burton G. Malkiel in “A Random Walk Down Wall Street,” which is a great investment book. “You can only get poor quickly,” he warns. “To get rich, you will have to do it slowly, and you have to start now.”
Step Three: Let Others Help
Don’t have the money to invest in your retirement?
Maybe you do and you don’t know it. Remember you can sometimes have a couple of friends who will help you. For example, many 401(k) plans have employer matches. The employer will put in, say, up to six percent if you put in six percent. Put in the six percent and get 12 percent. That’s six percent free money!
Also, with qualified retirement plans—plans that qualify for special tax treatment— the government will reduce your taxes—oh, those pesky taxes!!!—-if you contribute to a 401(k) plan. And, if you have an IRA, let’s say you contribute $5,500 in a year. You can often qualify for a tax break. Say you put $5,500 into your IRA and you are in the 28 percent tax bracket. Your $5,500 contribution gets you a tax deduction of $1,540. So you actually only contributed $3,960, but your IRA increased by $5,500.
Just do it.
Step Four: Spend and Consume at a Reasonable Level
Spending is like eating. Take what you need, but not more. You’ll avoid the obesity plague that is infecting much of the West. You don’t need to pig out. They’ll be another meal in a few hours in which you can eat again. Unfortunately, many people are convinced that they must eat everything now just as many people who go to a mall become convinced they must go on a spending spree right now.
So many times high pressure tube pitches make it sound as though if you don’t buy something, terrible things will happen to you. It’s a sales pitch akin to the ridiculous promises made by pols on the hustings.
When considering big spending, take a deep breath and think: What you want or need to buy now and what can wait for tomorrow or years from now. Remember the words of the philosopher Pascal who said many of the problems of the world could be avoided by sitting quietly and thinking.
The following is not an observation based on philosophy or verifiable science but I nevertheless believe it to be true: When you spend your money on frivolous things, it is uncanny how often, when something of real importance comes up, you don’t have the money to buy it. You wasted it on silly stuff.
Often, it is good to live with less. That’s because, when you can finally afford a certain purchase, you realize you didn’t need it after all or you find you really enjoyed the thing because you waited. You enjoy it more because you know, when you buy it, that you can afford it. You’re not worried about what you will do when the bill comes along with a credit card statement that has a 20-percent interest rate.
To the Christines and Jonathans: Managing your money well won’t solve all your problems, but it will be one less big problem in your life.