According to the U.S. Commerce Department, the national savings rate is the lowest since the Great Depression, at just under 0%. That means that people are spending more than they're making, or at the very least have debt interest rates that cannot keep up with savings rates.
Archive for October, 2007
Most people don't know how much they are being charged in sponsor fees for their 401(k)s. That's because current retirement savings law, pased in 1974, doesn't explicitly require plan sponsors to disclose comprehensive information on fees. But even small fees can add up. Say a 45 year old puts $20,000 in a 401(k) account until retirement and gets a 7% return, but is charged a 1.5% fee. Instead of the account growing to $70,500, the person will only have $58,400 when he retires. That's a big difference. Do you know what sponsor fees you are being charged on your 401(k)?
A friend of mine is getting a divorce and having trouble paying the bills. She mentioned that she should be getting about $6,000 from her tax refund this coming year, and is anxiously waiting for January to roll around so she can file. She said before the divorce she had normally used the money to buy antique furniture or go on trips with her husband. I asked her why she had any refund coming to her at all. She looked at me like she didn't get my question. I suggested she set up her W-4 withholdings so she didn't get any refund at all and perhaps even had to pay $100 or so in April so she could have use of her own money the whole year, instead of giving it to Uncle Sam to use, interest-free. She had honestly never thought of this. Wouldn't it be better for her to pay the right amount of taxes as she went throughout the year, rather than having too much taken out and not having it to earn interest or pay down debt (she's having to move out of her house because she's been so strapped all year). I have to ask why, since she has about $6,000 sitting where she can't get at it that she could really use RIGHT NOW. You can do a W-4 calculation on the IRS Web site to figure out if you have too much tax being withheld each paycheck.
I've been hearing about some new programs on the Internet that entirely monitor your finances for you. There's a program called "Mint" or at least there was. Does anyone know? And other such Web-apps. You enter your bank account and credit card details and these programs import transaction data automatically, supposedly giving you data about your spending habits and giving you ideas on how to save. It seems to me like this is a REALLY bad idea. It takes control away from consumers and puts it in the hands of total strangers...how will you know if something's off? I barely trust my bank with my account information.
We kind of got off on the soda thing, which is fine, but my point in bringing up soda on the blog was not so much about drinking pop and worrying about our health. I used it as an example of consumerism (and after all aren't we on financial blogs to get insight about money, not our health?). I think we may be missing the bigger picture... I asked in the last blog post what we were going to do about consumerism, not what are going to do about drinking pop. People responded with stuff like "I don't know, drink less pop." That's not the point, the point is we are so used to consuming anything we want, that we don't even realize that less than two decades ago, pop was still considered a treat that you had occassionally, not every day. That comes from consumeristic thinking. That's why I brought up a spending plan as a means to get unncessary spending, such as buying too much pop, under control. Spending is where all financial troubles start, but somehow I think we're missing that big picture view and just getting stuck on details, like who drinks Mountain Dew or Gatorade.
I think the biggest problem anyone can have is to not understand exactly where their money goes, and you can't know that unless you have a plan and track your spending according to a plan, every day, every transaction. Most people think they have a handle on how they spend, but if you don't track it there's no way to know what you really value and where your spending priorities really are. One guy I know tracked how many 32 oz drinks he was buying every day and was shocked to discover he was spending about $72 every month on soda alone! He quit whining to me about not having enough money to pay his cell phone bill and needless to say, he quit drinking those 32 oz. guzzlers. It's okay to drink pop if you want to, that may be where your spending priorities lie, but if you can't drink pop and pay the cell phone bill too, then you have to make changes. You can have anything you want, you just can't have everything...post Depression generations cannot seem to get their mind around that concept.
The last blog on soda pop being a treat churned up a bunch of interesting comments. Most people agree that there's too much pop drinking going on! But if we all agree, then what can we do about our kids and their expectations?
I think one of the most important ways to curb the "entitlement" mentality is to create a spending plan (not a budget, these are two different things; budgets never work) and put it on the fridge. My spouse and I use it to control children's whining. It's wonderful. When they think they need something, we just point to the plan, which clearly outlines what's coming in and exactly what's going out (and which spouse is responsible for what). The silence is deafening then. The teenagers all have jobs. Numbers do not lie.
Okay, we've beaten this to death for now, but I still want to add a few more thoughts on the subject, after reading some comments from Peter Jeppson on the subject. There are two potential problems with 401(k)s: First, your money is tied up. Usually the 401(k) has a trustee who has already decided where you are going to put the money. Usually, it's in mutual funds. Peter calls this being "trapped." "You don't have any control over it," he says.
Second: Since the money is in the hands of professional money managers, you yourself are not growing, developing, and learning how to put money in motion to turn it for a profit.
Peter says: "A person must accept the responsibility to prepare for their own retirement. Nobody is going to look out for their retirement as much as they are. Therefore, to give up your money to someone else and not to learn about it, not to have it right in front of you to calculate how much you are earning, what is it doing for you, and what the future holds in terms of tax rate applied to that money I think is a trap. I think it's wrong. I think a person should keep control of their money and thus learn from it. I personally have done this and found that I've outstripped the 401(k) many times over."
Just one last thought worth thinking about. There's more out there, even for "Joe Average."
When I was a child, a can of soda pop was something we enjoyed on special occasions, maybe on the 4th of July or our birthdays. It was a treat. I was at dinner the other night at a friend's house and was surprised by the behavior of her children when they asked for a certain kind of soda and their mom didn't have it for them. They acted like she was starving them. We've come a long way from the days when soda was a treat, and an even longer way from the Great Depression. Post Depression-era parents didn't want their kids to go without the way they had, so they taught their children to hold their hands out in expectation. This is where I think most of our money problems stem from today...a lack of respect torwards money. Today's generation, instead of fearingthat it will not have anything (like Depression-era people), fears that it will not have EVERYTHING...including the exact type of soda they demand. People can so easily get along with so very little, but don't know it in today's consumeristic society.
While I don't discount 401(k) programs and believe people should contribute as much as their employer will match, if people are in debt and thinking they can fall back on such programs and have enough for retirement, they are sadly mistaken. Real savings of at least 10% (which most 401(k)s don't yield due to conservative investing by most W-2 employees) requires that people get out of debt, control their spending, and learn how to leverage their cash surplus (beyond just contributing to an employer-matching retirement program) to make them even more money.
Again, on the subject of IRAs and 401(k)s...yes, they're great for the "Average Joe", nice retirement foundation, and all that. But I think the biggest frustration I have with them and that many of the people I deal with have is the lack of control they feel about their investments and whether they gain or lose using these types of retirement programs. Investments in mutual funds, stocks, etc. are managed by a whole host of other people and subject to the ups and downs of the market. Not a lot of control, so hence the feelings of frustration.
I think frustration stops when we stop pinning all of our hopes for retirement and long-term security on 401(k)s, etc. I'm intrigued by learning how to better directly manipulate my own money and resources to make more money. This has got to be a better solution than handing all of our money over to others to do with as they please.
Here's something to think about when it comes to the idea of starting a small business or not: Corporations pay approximately 6% to the federal government in tax, but W-2 employees on average are paying 39%.
The government encourages the creation of small business because the more businesses there are, the more W-2 employees that will need to be hired to help run those businesses, and the more W-2 employees the more tax the government can collect.
The government wants new businesses because it's banking on more people being afraid to become a 6% paying corporation than working for someone else in a "secure" situation and forking over 39%. The more businesses, the more W-2 employees, the more money coming in. Who's winning here?
Retirement funds...always an emotional argument. I think most people missed the point of my last blog on the value of 401(k)s. As I said in the last post, they do have their value, but they seem to carry more weight in terms of making serious retirement money that can out-earn what people will have to pay in debt interest than they deserve. As all those who commented affirmed (myself included), most people will not make 12-16% returns and will over time make a modest 6-8% return in a 401(k). Great, but that will never keep up with interest expense over time, so if you have debt (think 30-year mortgage, credit cards), a 401(k) isn't the only or best way to fund retirement. Run a Time/Value of Money calculation and the numbers will prove that out.
I'm not really sure how anyone got the idea that I think starting a furniture rental business is a better way to fund retirement than contributing to an employer-sponsored 401(k), but hey, it looks like some people missed that point as well. The point I was trying to make in the last blog is that 401(k)s and IRAs are not the ONLY way to fund retirement. There are lots of really great ways to put money in motion to make more money than just relying on the market and employer contributions ALONE. Yes, yes, yes, contribute to a 401(k), but open the mind to other ways of getting money to make more money for you AS WELL. That's how the wealthy get rich and stay rich. Most of them rent out their equipment, space, property, etc. They own real estate, they do hard money lending, and they are involved in angel investing and a host of other means that put them in control of their money rather than WHOLLY relying on the mercies of the market and their employer (besides, Danko proved in his book "The Millionaire Next Door" that most wealthy Americans don't have an employer anyway! They're self-employed! They have their own businesses, some even starting out perhaps with a stupid idea like lawn chair rental at weddings!) So yes starting your own business is another great way to fund retirement, even though several commented that they don't believe this will work. (If Sam Walton were alive, you could ask him if it works or you could just go down to Wal-Mart and pick up a few things you need tonight for dinner...and see how well it's working....)
There's just so much more out there than most people realize, and yes, I do teach that in my community ed classes.
Of course i do not advocate renting chairs in place of 401(k)s as a means to fund retirement...that would be absurd and I'm surprised that that's the only message anyone got out of the last post. Simple ideas, using resources you already have, money you already have, time you already have, etc. will end up putting more in your pocket over time than relying on employer-sponsored retirement programs alone. It's too bad that most people cannot get their minds around this.
Also, a few people commented that 401(k)s and IRAs are tax-free. They are not tax-free, they are tax-deferred, so there will be taxes owing at some point. You have to decide if you want to pay tax on the "seed" in the beginning (such as with a Roth IRA where taxes are paid up front) or on the "crop" with a 401(k) or regular IRA. Taxes will be paid on both what you deposited and what you earned over time on these programs. The only way to decide if this is a good deal or not is to run a forecasting calculation on it, all the way through retirement (not just to age 65) and see how much it's going to cost you in taxes to keep your money in such programs.
As for my friend who lost all her money in a 401(k) with Novell. No, she did not invest IN Novell stock, she works FOR Novell and had a diversified portfolio through the company's 401(k) employer-sponsored program. When the market took a dive (which it will at times), she lost a great deal of money on the stock she was invested in, which wasn't Novell. Nobody seems to believe this, quoting statistics about the stock market making a steady 9-10% for its investors over time if left alone. True, the market's 40-year history does show that kind of return over time, if left alone, but some companies do go under, some stocks do plunge, and not EVERYONE will make a guaranteed 9-10% return, even when they leave their money alone. The market is a risky place, plain and simple. It has it's value, but it is not a place where you really control how much money you do or do not make. There are no guaranteed returns, and everyone knows that, so why not place some of your money somewhere else, or get it to work for you even in small ways, such as through renting out lawn chairs you already have rather than letting them sit in your shed idle? If some piece of property, equipment, skill, or chunk of cash can be used over and over again to make a profit, why not use it? Yes, I have my Roth IRA, but I also have 50 bistro chairs sitting in my shed. I intend to add another 200 to them and rent them for a tidy little profit every summer. Some people don't live where that's possible, but they live where other means of making money is possible, so why not attempt it? There's nothing to lose if you already have the resource.
I think my last few blogs have probably given the impression that I think 401(k) programs and other auto savings plans are a bad idea. Of course, anything that helps people save and can be contributed to by an employee is a perk that we all ought to take advantage of (to the maximum). But I just get the distinct feeling from a lot of my friends, plus all the blogs I read here, that everyone thinks that a 401(k) or an IRA alone are going to be enough to fund retirement, and I just don't see it. For some people, maybe, but not for most.
1. You have to be lucky with the market.
2. You have to be aggressive and invest in funds that are earning 12-16% (not like most who don't have the time or resolve to deal with market ups and downs so conservatively invest and earn only about 6% or so, which doesn't keep up with inflation or debt interest).
3. You have to be in control financially so you're contributing a decent amount and not borrowing from or withdrawing from such funds to pay for overspending.
Lots of people I know put money in the bank one week and pull it out the next to pay bills...even borrowing from a 401(k) and getting penalties. It's like robbing Peter to pay Paul. I think we've been conditioned for so long to think savings and "retirement" mean 401ks or IRAs that we don't even think about other methods for funding retirement (and that don't depend on the stock market).
If you've got cash on hand, it shouldn't be entirely sitting in an IRA or a 401(k). Some yes, but not all.
Think perpetual soruces of income like rental properties, equipment rental, hard money lending. Think treasury-only checking and savings, applying savings to debt, royalties, etc.
This year is the year I buy more of the nice outdoor bistro chairs to add to my collection and start renting them for weddings. My friend did this and she makes $350 every week just on chair rentals. Last summer she made $4,200 in 12 weeks. There's no overhead and she stores them in a shed in a her backyard. I think she invested $2,000 to get all her chairs and she recouped that in the first summer she did weddings. An idea that doesn't depend on the stock market; she controls the taxes on it based on having her own business, writing off expenses on Schedule C and keeping taxes to a minimum.
My other friend put all her money in her 401(k) with Novell. It was up to $355,000 when the market took a severe downturn a few years ago. She lost all but $10,000 of it and doesn't have enough time to ever make it all back before she hits retirement age.
Just some thoughts...
Through my contacts, I've just heard about a way to keep track of all your spending using your cell phone. (I want it now!) Apparently, after you make a purchase, you just call up a number, a voice prompts you to note which category you spent money in, how much you spent, and then that night you get an e-mail showing balances in each category and what you have left to spend.
I'd love to voice dictate rather than have to write things down. I want this new tool. I'll post when I have more info on what it's called and when it's available for anyone who's interested.
Most people take for granted that when they earn a dollar, they have most of that dollar to spend (most people do consider that they've lost some of it to taxes).
But how much of a dollar do we really have to spend?
1. 40 cents of every dollar gets eaten up in taxes (federal, state, medicare, local, gasoline, sales, property, etc.)
2. 30 cents goes to debt interest on cars, homes, credit cards, etc.
3. 6 percent goes to inflation (an old figure now since inflation is on the rise).
What does that leave? 24 cents of every dollar that you actually have to use at your own discretion. And people wonder why they have a tough time saving...
I knew my blog slamming auto savings would garner some reactionary comments from those who are successful at saving money on such programs. And I guess I should give such programs the credit they deserve. They can be VERY helpful, but only for a few. Of course such programs have helped thousands of people save some serious cash, as IMASAVER pointed out to me, with he or she's $19,000 in interest and not having withdrawn a dime this whole year. But unfortunately, IMASAVER is the exception, not the rule. It's wonderful that this person is doing so well, and the reason they are is likely because they have their spending under control. But what about debt? If you have a mortgage or are paying interest on consumer debt, whatever people make in 401(k)s, IRAs and savings accounts cannot keep up with the debt interest. Another thing is taxes. Most people do not understand the full affect that taxes have on whatever they earn in interst on their savings programs, since when you run the numbers using a financial forecasting calculator, you will find that 75% to 95% of savings and retirement funds are subject to some form of tax, and that eats away at whatever interest you're earning. Unless that rate is down around 25% you're not making any money in the long run (and you can get it down, but you have to be aware of how high it is first!) You might get some nice bank statements showing interest earned, but it gets eaten up in other ways if everything isn't working together and few really understand that. The long and short of it is you have to have your spending, debt, and taxes under control and all working together AT THE SAME TIME in order to really come out ahead. A forecasting calculator that looks at the Time/Value of Money will show you what your money's really worth.
Nika asks why such savings programs don't work for most and do I have any statistics. Yes, here's the stats and I've already explained above why such programs don't work for most people.
1. According to the U.S. Department of Commerce, Bureau of Economic Analysis for 2007, as a nation we’re saving just under 1 percent of disposable income, which is 6 percentage points lower than the average savings rate for the past three decades.
2. Inflation is a problem but consumerism lives on!: According to a September 2007 article in Forbes quoting statistics from the U.S. Commerce Department, despite rising prices, American consumers continued spending in August. What was especially surprising was that they did so while earning less – a pattern that is not sustainable.
3. The Commerce Department reported in September that personal income rose 0.3% in August, a decrease from the 0.5% rate in July, while consumer spending rose 0.6% in August. Spending was expected to increase 0.4%.
Consumer spending goes on and on, that's why auto savings programs don't work for most. If your spending is out of control, you may earn money in such programs, but you'll more than likely have to take it out to make up for how you spent!
I've been reading a lot about automatic savings programs lately, but the idea is ludicrous for most people since having one dollar automatically deposited to your savings, only to have to withdraw it the next day because spending is out of control is not really savings.
If your savings programs (401ks, IRAs, passbook savings, etc.) aren't making you more money than you're paying out in debt interest, they're not really savings programs.