Word to the Wise on Saving

If you read my last post, you know Sophie and I sat down and started outlining every dollar she'd earn, every dollar she'd spend, and every dollar she'd save. Thinking back on it, we did it a little backwards. After all, the rule of thumb is that you should pay yourself first, where paying yourself means saving. 

Why save? Lots of reasons. Suze Orman, Clark Howard, Dave Ramsey - the "professionals" (at least the ones that I trust) all recommend having between three and six months of savings racked up for emergencies. (Emergencies these days has really meant unemployment.) But even if you're not super-worried about that, the cushion would be useful for a down payment on a car, a house, perhaps a trip to Europe.  The trick is to save for what you want first, buy it later (and never rely on credit card debt to float the in between).  More on cash savings later when we talk about Sophie's car buying decision.

On top of liquid savings (savings you can cash out on demand without penalty), you should also think about retirement savings. Yes, even you twenty somethings! I know, I know. You're in the best years of your life. You want to enjoy them. Sixty is so far away. That BMW is calling your name. Your parents aren't even retired. Why would you want to save now when you have so many years left to save for retirement?

It's actually pretty simple: the math. Although there are plenty of assumptions built into this little excel spreadsheet, and lots of additional considerations, the story is pretty clear. Saving early has its perks. 

Consider this example:

• You start out with a $27,000 annual salary and contribute 10% a year starting at the age of 22. (Assume the salary increases by cost of living ~ about 3.5% a year). When you're 59.5 (the earliest you can take that money out without penalty), you'll have $930,897  (just shy of a million) saved up.
• You start out with the same salary, get the same annual pay increases, but wait ten years (until you're 32) to start kicking in those funds. When you're 59.5, you'll have $496,730 saved up.

And that's despite the fact that your salary would be close to $100,000 right before you retire vs. a third of that today....

Read the numbers one more time:

$941k vs. $497k

Interpret that another way? In this scenario, you're saving almost half of your total retirement in the first ten years, the other half in the remaining thirty years. Wait another ten years (till you're 42),  and you'd only have $244,672 when you retire. And the real kicker? Opt to not save today and you'll find yourself playing catch up later.

Of course, the numbers will play out differently based on different assumptions. Sure, you're ambitious, you'll probably get a few big pay hikes as opposed to only 3.5% cost of living increases. And, no one questions the fact that as your salary increases, you'll theoretically have more cash to save.  Regardless, play with the numbers and the story saves the same: it pays to get in the habit of saving early. So, to roll it all up?

Save for retirement early or forever hold your peace.

Happy Budgeting

So, it's official. She liked the people, was excited about the work, and frankly wanted the job. On the other hand, she wasn't convinced whether she could make it on the offer. Now was the time to sit down and put pen to paper on her option and really have an honest conversation about what she was willing (and not willing) to compromise.

To say that it was a short conversation would be misleading. Truth be told, we walked through the numbers together, I did some more crunching over night, sent it to her, and we regrouped the next day. And it wasn't like the answer was obvious. There were lots of "but I need this" moments and "what about that?" moments. And both Sophie and I would be lying to say we've figured it all out and she's going to budget dollar for dollar in every category we outlined. But what we did agree was that the exercise gave her a general idea of whether she could make it work, and more importantly - what tradeoffs she'd need to be comfortable with making. Line by line, we outlined every dollar she'd earn, every dollar she'd spend, and every dollar she'd save. You can view (a fictitious example) here. It's pretty simple, really. The yellow boxes are for you to fill in. There are some things you'll know (gross salary) and other things you'll have to estimate (student loan rate, utilities might be an example). Fill everything in the way you think it will work out (for now), check out the orange box at the bottom and voila! You'll know how far off your offer is from what you think your needs are. Keep in mind, you're probably not done on the first try. With Sophie, when we originally looked at the numbers, we came to a surplus of $17 per month. That's pretty tight and knowing she likes to spend money on clothes, well, we had some work to do. We went back and forth through her budget, increasing numbers we thought were too low and decreasing numbers she'd be willing to compromise on, trying to get an understanding for how much flexibility really existed in her budget. A few things we played with:

• Her phone bill. Sophie is currently on a family plan with our parents. If she can convince them to leave her on that family plan, her voice plan will drop from $30/month to $10, a savings of $20. That may not seem huge - but remember, that's per month. $20/month x 12 months = $240/year, all for being a little bit strategic.
• Her car payment. Sophie had envisioned herself driving a fancy car of a specific model (a relatively new model). What that meant is - even though she was comfortable getting a n-used car - she'd end up paying a premium because the used car was still the current model. With a little negotiation, she realized she could get a new car at a lower price, a used car of a different model that was just as nice but at a lower price, and she could continue driving her existing car for one more year to save up a bigger down payment. 

And one really important thing that I refused to play with (secretly I was controlling the spreadsheet and telling her the outcome, so she didn't know this was really going on)... I wouldn't budge on her 401k contribution (which I had budgeted 10%). If you're not familiar, a 401k plan is your future. Ok, maybe that's a bit over the top, but it is a retirement plan offered by majority of employers. And I know you're young, you have light years ahead of you with much greater earning potential, but I can't stress enough how valuable it is to start saving now. This deserves an article all on its own, so I'll leave you with a few parting words: at a minimum, contribute what you need to get a match. For example, there are a lot of companies that match a certain portion of the first 4% of your individual contributions - therefore at a minimum, you should contribute 4%. (It's free money, even if you don't get access to it till later in life). At a maximum? Contribute the absolute maximum you think you can handle. You can always bring it down later if you've guessed too high, and getting into the discipline of automatic savings now will save you lots of angst later. And lastly, consider the number you decide on as non-negotiable in terms of what you're willing to compromise. More on this later, but you should get into the habit of paying yourself first. In future posts, I'll walk you through the worksheet in more detail, reveal who FICA is (I'm not so sure myself), and dig a bit deeper into why I'm so caught up on retirement savings. But for now? You just want to know if you can make your offer work, so have at it. Remember - you may need to budget for things not currently contemplated in this worksheet (pets, for example). But hopefully it'll provide a good starting point for you.

Happy Calculating.

The Perception of the Job Offer

So this is the inspiration of the blog: A 22 year old named Sophie with a job offer, complete with a certain salary, and a whole lot of uncertainty as to what she could make work.

It's sooooo low, she says. 

Admittedly, Sophie's expectations were a bit high. Within the last two years (before the economy tanked, I might add) her boyfriend-of-the-moment had received an offer (in a much more expensive city) unheard of for the average undergraduate (or post-graduate, for that matter) looking for a first full time job. All in all, it's fair to say her benchmark was a bit high to begin with... 

It makes me feel like crap, she finishes.

The words rolled through me.... makes... me ... feel.  

Wait. Feel?

It occurred to me - it wasn't actually the number that mattered. In fact, Sophie hadn't sat down to put pen to paper on what that number meant. She just knew it was far less than she was expecting. So it wasn't the actual number that was bothering her, it was her perception of the number and herperception of what that meant for how much they wanted her.

So before we talked about the math, the budgeting, the nitty gritty; we spent some time talking about the more important things.

• Did you like the people?
• Did you like your future boss man?
• Did you get a good feel for your future peers?
• Is the job what you want to do?
• Can you see yourself working there?
• Can you see yourself living  in that city?
• Does the job build your resume? Give you growth opportunities? Give you a foundation for your career?
• Before you heard the number, were you excited?

Her answer, across the board (the lucky duck), was yes. And so we proceeded to define the real issue: no longer was it about a specific number, but instead about the tradeoffs she'd have to make in order to make that number work, and whether those tradeoffs were worth it to her to be in a job where she felt at home.

Disclaimer

First things first. I am not a professional. I repeat: not a professional. Aside from perhaps a few finance classes and a nerdy addiction to excel, I have no more classical training than you, the guy sitting next to you, or your pet. The tradeoff to that? I have nothing to sell. No financial gain. No incentive to what I post here. And since professionals often do have something to sell, well - how bad can free advice be?

So if I'm not a professional, who am I? I am ten years senior to my youngest sister, an amazing, bright, energetic (and dare I say spoiled) twenty-two year old graduating from college and taking her first steps into the real world. A few weeks ago, she got her first job offer. In distress, she called me. She wasn't sure what she was being offered would be enough. So I whipped up a fancy little excel spreadsheet, walked her through some budgeting options, and in the end, she had a much better understanding of whether or not it would be enough (and some of the tradeoffs she'd have to make to make it work).

Fast forward a few weeks, and she's sent it to her friends. "They love it," she says. And so starts the inspiration for this blog. A place to post tools to help those (my sister, her friends, and their friends) just starting out with financial management and decisions.


So, here's the plan. While, yes, I'll post things every once in a while based on chats with my little sister, I'm open to trying to answer your questions, too. Just shoot me an email at what.the.heck.is.fica@gmail.com.