Dollars and Sense Part III: An Open Letter to the Class of 2016

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As both high school and college graduates are preparing to take that next step, long term financial planning often takes a back seat to other pursuits and interests. While my husband and I have, for the most part, made sound financial decisions, there are a few bits of wisdom I wish we would have known and applied earlier. So here is an open letter to all graduates, sharing the pearls of wisdom we learned along the way.

To the Class of 2016,

While your parents may have started discussing this with you, long term financial planning is probably the farthest from your mind right now. I want to share three of the investing tips we learned along the way, specifically those things we wish we knew in our late teens and 20s.

First, if you are working and at least 18, you are eligible to sign up for a retirement IRA. The Roth IRA is a powerful retirement savings plan, which allows the investor to add up to $5,500 per year. While there is no upfront tax advantage, your money grows tax free, and in retirement, all withdrawals are tax free, and investors are not forced to make RMDs, Required Minimum Distributions. Meaning, the government does not force you to make yearly withdrawals from the account (The Traditional IRA requires a yearly RMD starting at age 70 1/2). Roth IRAs grant the investor the flexibility to make retirement withdrawals when needed.

In addition, investors often utilize multiple accounts because many businesses offer a retirement plan with a company match. This means for every dollar you add to your individual retirement plan through work, the company will match a portion of your investment (up to a set amount established by each individual business). In the future, if you work for a company that offers a match, invest in your company’s plan before any other contributions. A company match is extra money for your retirement!!! A common investment strategy begins with maxing out a company’s retirement plan (401K, 403B, etc.) utilizing the company match, then using any extra funds available for a Roth IRA.

The final bit of information I wish we had known at your age is just how much additional money is earned by investing early. Every $1,000 you invest in your late teens and 20s is the equivalent of your parents investing around $4,000 as adults in their 40s. Historically, an investment account doubles every 8-12 years. Think about that for a minute:

$1,000 becomes $2,000
$2,000 becomes $4,000
$4,000 becomes $8,000…

Imagine being in your 50s with $500,000 saved? Watch yourself reach $1,000,000!

Many might ask, between regular bills and loans, just where am I supposed to find any extra money? While budgeting entails another post, Hubby and I kick ourselves sometimes when we consider what a difference forgoing the occasional weekend pizza, the impulse purchases, or those fancy coffee drinks could have added to our financial security. Those extra $5-$20 truly add up! As a starting point, could you invest $500 per year by giving up a few extras?

So as you begin your financial journey, please remember these three things:

  1. Sign up for a Traditional or Roth IRA in the near future. Note: In my opinion, Roth IRAs provide an excellent starting point and unique benefits in retirement.
  2. If your employer offers a retirement plan with a company match, invest money there first; then apply any extra to your Roth.
  3. Remember how much farther investing in your 20s will advance your financial goals.

Just where can one sign up for an IRA? Ask your parents, browse on-line articles, and educate yourself on the best path for financial independence! Investing can be confusing and retirement seem so far off; however, take the time now to learn about retirement investments. A financial advisor can help with questions and concerns. Google “Roth IRA calculator” and enter whatever you think you can save; see just how large your nest egg can grow! The financial decisions you make in the next ten years will greatly affect your future! Be smart!

Best of luck,

Maggie

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Date Night on a Dime

 

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I LOVE date night! We are foodies, and enjoy trying new restaurants and seasonal specials. However, with three kids, a mortgage, and other expenses, Chad and I have to be careful balancing this in our budget. So here are a few frugal ideas that have helped us continue our tradition of a regular couple’s outing:

  • Go out for breakfast or lunch instead. The overall cost will be less, and many upscale restaurants offer meals at this time of day, so couples can visit new restaurants without breaking the budget.
  • When going out for dinner, skip or limit alcoholic drinks. Adding a few drinks greatly increases the bill by the end of the night.
  • Instead of a meal, try going out for a few drinks and appetizers. This is a fun alternative and usually combines well with other outings.
  • Look for opportunities and adventure in your area! A few years ago, we found a cocktail hour at the Grand Rapids Art Museum. We received free admission, bought a few glasses of wine, sampled the complimentary hors d’oeuvre (Thank goodness for spell check!), and spent an hour or so enjoying the art work while listening to a talented classical pianist.
  • Try a stay at home date! Sometimes we purchase some of our favorite meat, cheese, and wine, and just enjoy hanging out together at home.

What are some of your fun, yet affordable outings?

Dollars and Sense

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How many of you are dreading that one piece of mail due to arrive soon? The credit card statement! At some point in our lives, we lean too heavily on easy credit, and it comes back to bite us. This is the first of a few money organization posts to help avoid unnecessary debt.

Many of us are skilled at developing and maintaining a budget; however, what about those expenses that do not fit neatly in a monthly plan? This is where the use of virtual envelopes can streamline a family’s finances. Virtual envelopes are small savings accounts where money can be added and saved throughout the year. I use my local credit union. (Note: Their technical term is just a sub-savings account. I named them virtual envelopes, each labeled for specific use.)

Gifts: How many of you despise the monthly credit card bill that arrives after Christmas? Or the birthday present you figured to pay later? I have a “Gift Fund” virtual envelope set up through my credit union. Every paycheck, a certain amount goes in and when birthdays arrive or Christmas, we have a budget to work from (or at least an amount to start with and add from our monthly budget).

Vacations: How many of you take vacations with only the current paycheck, then the following month dread the credit card bill with all the unexpected purchases? Yes, even vacations require a budget. Setting aside a virtual envelope for the year’s weekend adventures, day trips, or spring break is a useful tool for staying on track or even planning for that once in a lifetime trip (see how we saved over a seven year period for our family trip to Ireland!).

Any other envelopes needed? Do you heat with propane and need to save for winter fill ups? Do you need funds for specific teen activities, camps, driver’s education, etc.? A little planning and organization now will prevent future credit card anxiety. Do you have more needed “envelopes” than money? Pick the two or three that interfere with your budget the most. Even in my own hyper planning, I still have neglected to start an envelope for future vehicles…baby steps. Those of you who usually receive tax refunds in a few weeks, consider starting your family’s fiscal year on a positive note by paying off credit cards and setting up a few virtual envelopes.

Happy Budgeting!