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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Dollars and Sense, Part II

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Happy 2016, Readers! It’s that time of year again when I don my financial cap. Chad and I began our journey into finance in the late 90s when Chad attended a course on budgeting and investing. Keeping close attention to our spending and saving has become a hobby of sorts. Earlier, I wrote about dating while on a budget and the modern piggy bank: Virtual envelopes. Recently, I noticed a few flaws in our finances while reviewing the previous year’s expenses.

Chad and I create a monthly budget spreadsheet every year and attempt to record all expenses (still working on that). Then in January, we review our budget and make necessary adjustments for the following year. While fully embracing my “budget nerd,” I noticed a flaw in our system: Large, once per year expenses.

While home and car insurance and property taxes were planned, many expenses throughout the year interfered with the budget: Snow plow services, senior pictures, garbage/recycling services, hay for the farm animals, car tags, etc. These bills ended up being paid at the cost of other things in our budget. Date Night is a big deal to me; losing a few to a budget error motivated me to improve our financial plan. That’s where the previous year’s budget sheets helped. I was able to see many expenses that did not fit in our regular budget, which month the expense was needed, and how much extra was needed for the future.

After some organizing, I formed a plan. Adding a line to our budget for Miscellaneous Expenses took care of many larger expenses (If you try this, be sure to record those miscellaneous expenses for future reference). However, some expenses exceeded that amount. We saved for larger bills by adding just a bit of extra money to the savings account where home and car expenses were paid.

Where will this extra money come from? Personally, I enjoy eating out, not just date night. While little money is spent (usually $5-10), the frequency adds up, so limiting the number of trips per month was a first step. I also admit that I bring home too many animals.  Can anyone recommend a support group?

Can your budget be modified? Morning coffee from Starbucks?  Are you expecting a tax refund? Adding that amount to savings could create extra funds for occasional expenses. On the other hand, if you’re receiving a tax refund, perhaps readjusting withholdings would create enough monthly income for a Miscellaneous Account. The government doesn’t need an interest free loan.

In closing, as Michelangelo said, “I am still learning.” Last year, I noticed we weren’t saving for our next vehicle. After a few adjustments, the Car Account is slowly on the way. I’m really hoping my car holds out for a couple more years! Between adding money to a Miscellaneous Account and setting a bit extra in savings, our finances are another step closer to where they need to be. Keeping a budget helps meet our needs and pursue a few wants.

Happy budgeting and thanks for reading!