MANAGING YOUR MONEY : PREPARE YOURSELF : Building Up a Large Nest Egg : Experts suggest having up to six months of living expenses stashed away. Here are some of the techniques you can use to develop a saving habit.
As baby boomers gray, the reckless financial abandon of their youth is giving way to the creeping caution of middle age--and the realization that saving for the future just can’t be put off any longer.
To be sure, this new outlook isn’t catching on overnight. The nation’s savings rate is still low--just slightly more than 5%. But just three years ago, before the full brunt of deficit spending, credit card sprees and breakneck borrowing landed on the economy, the rate had dipped below 3%.
The result in some cases, experts say, is that wage earners have simply forgotten not only the value of saving but how to do it.
The key step to starting on the savings road is having a definite plan. Decide what your saving goals are--retirement, college for the kids, a down payment on a home--and create a schedule for meeting those goals. But make sure that you don’t put so much money into long-term savings that you have nothing left for immediate needs.
The traditional guide is that wage earners should save 10% of their before-tax income--just for retirement. Savings for a down payment on a house, education, a car or a CD player come after that first 10% tithing toward our golden years.
Probably the best way to begin saving is to pay off your credit card debt. No investment will pay dividends approaching the 19% interest that some credit card companies charge. After you’ve paid the cards off, you should pay for your purchases in cash--or pay off any future credit card charges completely each month.
Financial advisers also suggest that people make savings automatic. You could, for example, join a credit union and have your money placed directly from your paycheck into a savings account. Most credit unions pay slightly higher interest than simple passbook accounts pay.
Another automatic way to save is to let a mutual fund withdraw an agreed-upon amount out of your checking or savings account each month. Virtually all money markets have such methods of payments.
A simple way to boost your savings is to figure out what percentage you’ve been saving this year and increase it by even a single percentage point next year. If your income was $65,000 in 1990, and you saved 5%, you would have $3,250 socked away. Assume that you’ll be making $70,000 in 1991 and set a goal of saving 6%, or $350 a month. By the end of next year, you will have $4,200, plus interest.
Company-sponsored retirement plans are the best place to start saving for retirement. Lawrence A. Krause of Lawrence A. Krause & Associates in San Francisco, author of two books on money management, called 401(k) plans “no-brainers” because they are so easy and because money put into them is tax deferred.
Many employers will match what you put in. If you’re earning $50,000 and put 6% of your gross income into a 401(k), you will have contributed $3,000 by year’s end. If your employer puts in 50 cents for every dollar you invest, you will have $4,500 by year’s end. You’ll also be saving about $1,000 in income taxes. If your plan earns a conservative 6% interest, your account will be worth $25,360 at the end of five years, $165,500 at the end of 20 years.
The disadvantage is that you’ll pay a stiff penalty if you withdraw the money before you reach retirement age--59 1/2--unless you use it for a few select expenses such as a down payment for your first home.
One savings trick, some experts say, is to fool yourself into saving. “Pretend you have an increase in your rent or mortgage payment,” Krause said.
Krause suggested that once you’ve paid for the month’s shelter, write a check to cover the “increase”--as little as $50 would suffice--and save it. Put it in a place that is not readily accessible, such as a U.S. savings bond that matures in five or so years, and forget about it until next month, when you buy the next bond.
Of course, salting away $50 a month isn’t going to go very far toward retirement, Johnny’s college education or even your next Chevrolet. But it’s a start. And once you get going, you can both increase the amount that you save and transfer those savings into higher-yielding investments. The point is that before you can invest, you have to have something with which to do it.
“The key to saving is to limit the amount that goes into your checkbook,” said Earl D. Osborn of Bingham, Osborn & Scarborough, a San Francisco financial planner. “The way 99% of people work is that they will spend whatever is in the checkbook.”
Krause believes that roughly 50% of your assets should be readily accessible in money market accounts, savings accounts or stocks that have immediate cash value. Another 25% should be in semi-liquid investments, such as deferred annuities, which can be sold, albeit at some loss in value. The remaining 25% to 30% ought to be “in assets you can afford to tie up,” such as real estate.
Some people feel secure with as little as $2,000 or $5,000 in accounts for emergencies. But the general rule of thumb is that you should have enough money available for three to six months of living expenses. If your mortgage payment, food, insurance, utilities and other costs are $2,500 a month, you should have $7,500 or more in readily accessible accounts.
This fund can be raided from time to time for special purchases--as long as you quickly replace what is taken out. The accompanying chart will help you determine your monthly expenses. It also will help you cut costs so you can boost what you save.
At the start, saving is all work. But once the account starts to build, interest will seem to make it compound faster, and you can start looking for modest investments. “It is a mind set,” Krause said of saving. “Once you start, you’ll become more sophisticated.”
TIPS
* Decide what your saving goals are and create a schedule fr meeting those goals.
* Pay off your credit card debt. No investment will pay dividends approaching the 19% interest that some credit card companies charge.
* Make savings automatic. Try joining a credit union and have your money placed directly from your paycheck into a savings account.
* Figure out what percentage you’ve been saving this year and increase it by even a single percentage point next year.
HOW MUCH YOU SHOULD SAVE
Figuring out how much you should set aside for savings is the first step in setting up a savings plan. There are a couple of quick ways to do this. One rule of thumb is to sock away 10% of your before-tax income. To determine that number, multiply your annual gross income by 0.1. Another rule of thumb is to save 5% of your after-tax income. To find this number, multiply your after-tax income by 0.05.
To find out how much you have available for savings, use a worksheet such as the one below. Calculate your expenses by going through canceled checks and credit card statements. To find out how much you spend on food, for example, look at a month’s worth of receipts and multiply by 12.
After-tax income:
1. Your annual gross income 2. Total taxes withheld 3. Subtract line 2 from line 1. This is your after-tax income Expenses:
4. Mortgage or rent 5. Child care/education 6. Credit cards/loan payments 7. Auto expenses 8. Insurance premiums 9. Utilities 10. Phone 11. Food 12. Clothing 13. Entertainment 14. Medical/legal expenses 15. Personal care 16. Add lines 4 through 15. These are your total expenses 17. Subtract line 16 from line 3. This is the amount left for savings and investment 18. Divide line 17 by 12. This is your monthly savings target
THE HIGH COST OF RETIREMENT
The tables below indicate the first-year savings needed by a 30-, 40-, 50- and 60-year-old starting today to reach the equivalent of three levels of yearly income by age 65. The calculations assume a 4% annual inflation rate; an 8% after-tax return on investment; life expectancies of 85 years for the single retiree and 87 for married; a 4% annual increase in savings and a 4% annual increase in retirement spending. Expected Social Security benefits and contributions to pension plans may be subtracted from the total savings needed.
Age $36,000 $48,000 $60,000 30 7,604 10,139 12,674 40 13,313 17,751 22,189 50 27,313 36,579 45,723 60 100,577 134,103 167,629
Source: Planned Asset Management
