August 22, 2014

I Don't Need Much, Just Three Million Dollars.

I have always been one of those people who lives paycheck to paycheck. This is not because I have an excessive spending habit nor is it because I am careless. I don't buy expensive shoes or designer handbags. I've never been on a cruise or to Hawaii. My car is 11 years old. The simple fact is this: I help too much, I eat out too much and I make too little money to sustain these habits.

I majored in Finance in college and am very passionate about people being educated in their own personal finances. I like to keep people informed and will challenge them on how they allocate their funds (I do this to my father and sister constantly. And surprisingly they still talk to me!). But imagine my shock when I realized that I was spending more a month than I was making. While I can chalk up my last few months of spending to helping out my family, a travel-heavy summer, a number of wedding and graduation gifts as well as unexpected expenses like getting my car fixed, I don't have an emergency fund (should be about ~$1000) nor do I have a savings account of any kind (should have at least 3-6 months worth of monthly expenses). Somehow in trying to educate other people, I lost sight of my own monetary situation and I needed to get control.




So the other day, I signed up for Mint, in an attempt to get a better handle on things. It's not that I owe that much per say, it's just that I owe enough that there's nothing left over at the end of the month. (Well, that's not entirely true. I have about $47 left.) So to get a better idea of what I'm spending, I track. Every. Single. Dollar. I can set budgets, set goals, and I can do it all from one website or app. It logs my payments, my spending, my bill due dates, even the fluctuations on my retirement accounts. Everything! If you're having trouble with your finances, I recommend this product. And the best part? It's free (and they didn't pay me a penny to tell you all that. In fact there are other products out there that are very highly rated. This one just happens to be the one I use). 


Thankfully, one thing that I have done right is set up a few retirement accounts. With my old job, we had a 401K with an employer match and I contributed to that as soon as it was made available to me. I also set up a Roth IRA. If you are an US citizen, are employed or plan to be employed (talking to you, college students!) and are not aware of what these items are, please stop what you're doing and read about them. Some of my favorite resources out there are the threads on r/personalfinance (via Reddit) or Investopedia and NerdWallet. Please, do yourself and your future a favor and research the financial tools available to you. And there are so, so many options out there.


A perfect example of the effect that a 401K can have on your financial well being is this one, from NerdWallet. In a nutshell, what it says in the article is that you should start contributing to a retirement account as soon as you are able. It also says that if you made a ONE TIME $5000 contribution to a 401K at the age of 22, with compounding interesting (aka interest that earns interest) and an estimated annual rate of return of 8%, you could have almost $140,000 in that account by the age 65. And this is based off a one time contribution. So if you never, ever made another contribution in the lifetime of the account, it could potentially increase 28 times over. And you literally have to do nothing to achieve this. No extra hours at the office. No winning lottery tickets. Nothing. Amazing isn't it? Imagine how much you could make if you continued to add to it every paycheck? With the right guide, the possibilities can be endless.



Graph courtesy of Nerdwallet.com

Now to be fair, not everyone has $5000 at their disposal at 22 years old (or right now for that matter). I didn't (still don't). I started my 401K with chump change. I contributed 4% of every paycheck I earned, because that is what my employer was willing to match (which is free money, kids). If I worked for a minimum of 3 years as a full time employee I was considered "vested", meaning that any contributions my employer made I was allowed to keep. This means that when I walked away from my job after six years, I took the total amount of contributions made to the account with me.

What struck this little revelation was an article I read on retirement. Truthfully, I cannot remember where this article is located, but the author indicated in a very direct way that if you expect to live off an income of approximately $100K a year, you need to save at least $2.5 to $3 million dollars during your working life. Now that seems like a lot of money to have as a yearly salary, and obviously the amount depends on what debts you've incurred (vacation home? RV? yearly trips to Tuscany?) but consider this: 


For the average individual that has children, it was recently estimated that each child will cost approximately $250,000 over the course of their first 18 years. If you help them with a basic four-year-college, tack on another $200,000 per child (keeping in mind that tuition in the US increases at a rate of about 5% a year, so if you want your child to go to an Ivy League, you can expect this number to be a little higher). If you buy them a car, send them to private school, pay for daycare or braces, these costs can increase. And any parent will tell you that just because your child is an adult, you don't necessarily stop helping them financially. So is $100K a year a lot? Yes, and you could probably live on less. But the lesson is the same. Decide at what age you want to retire (for most, it's 65-70). Now decide to what age you think you'll live (here's a life expectancy calculator for the lazy). Take the difference between those numbers and multiply it by the amount of money you think you'll need annually. That's about how much you're going to need to save before you can retire.



Example

Retire at 65. Live until 90. Need $75000 per year.
90 - 65 = 25 
25 years x $75,000 per year = $1,875,000 for retirement

Can you see why I panicked a little?


So don't wait! Get started! Keep a budget, do your homework and find products that work for you. They have target funds, index funds, mutual funds and growth funds; you can start a Traditional IRA or a Roth IRA or a 401K or an annuity. And the lists go on. Don't know what you need? Swing by your bank or a local investment office near you. They often have financial advisers (make sure they're licensed!) that will give you a free consultation to help you figure out a game plan and establish some goals.


You can do this! We can be old and happy and take European tours! It is possible!


Coming up, introducing you to the local biker gang. We've become friends!

XOXO

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