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.

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.