Tag Archives: retirement

How do we measure up to national averages?

One of the main concepts of frugality is that life isn’t a competition when it comes to finances. I try to avoid comparing myself to other people, because we inevitably fall short in terms of material possessions.

Just for fun, though, I took a look at some national averages to see where we fall on the spectrum. I was actually surprised to discover that in some ways we’re right on target. I had hoped we’d be considerably more frugal than the national average, but it turns out we’re pretty average.

Housing

I couldn’t find any hard and fast statistics newer than 2004. As of 2004, the average American spent 21% of their income on housing costs. But that was 5 years ago, and so much has changed since then. According to CNN Money, mortgage costs should equal no more than 28% of your income. Our rent is about 26% of our monthly income, so it looks like we’re pretty average in that respect.

Savings

This is my favorite category. :) As of February, the national personal savings rate reached 4.2%. We save a minimum of 21.5% of our after-tax income every month. Yay us!

Food

I’m sort of bummed about where we fall here. According to the USDA food plans, families of 2 living on a “thrifty” food plan spend $82.10 a week on food. Doesn’t sound too thrifty to me. We typically spend $60 a week at the grocery store, but our monthly food costs are closer to $400 total, or $100 a week.

We’ve become increasingly lazy about monitoring food costs, and those extra trips to the grocery store and occasional meals out really do add up. So we’re closer to the “low-cost” food plan, which is about $104.60 a week (again, that doesn’t really sound “low-cost” to me). We’ve always struggled with food spending, and this little comparison exercise has really opened my eyes. We need to crack down.

Debt

The average American owes $8,329 to credit card companies. We owe $0 to credit card companies. Woo hoo! When it comes to student loan debt, we fall above the national average, though. The average American student graduates with about $21,900 in debt (that’s $43,800 per couple). We owe about $60,000 to student lenders, or about $30,000 each. That’s about 37% more than the average. :(

Retirement

Again I struggled to find recent statistics for what the average American saves for retirement on a monthly or even yearly basis. I guess there are too many factors. But a number that gets tossed around a lot as a “recommended savings amount” is 15% of your income. We’re just getting started on retirement savings, and we made the decision to start slow for now at a 3.5%. Not so good, but our plan is to ramp up our retirement savings when we finish paying down our debt and get our liquid savings where we want it to be.

This was an eye-opening exercise that really showed me where our strengths and weaknesses lie. We should be able to easily cut our food costs, netting us about $160 a month for savings and debt repayment. We just renewed our lease, so there’s not a lot we can do about our housing costs until we move, but when we move we’ll try to get below the national average. I’d like to fall on the lower end of the scale in all of these categories (except savings and retirement, of course).

How does your budget compare to national averages?

Thoughts from a first time investor

At the beginning of the month, we started contributing to Roth IRAs. We were both so excited to be getting our retirement savings started. Now about a month later our accounts are already down $1.60. No, that’s not a lot, but when you only have $100 they don’t have far to fall.

My point isn’t to whine about the $1.60. I knew going into this that the stock market is volatile, and that we’d see some downturns — especially right now. The point isn’t what’s in my account today but what will be in my account in 40 years.  It’s just a strange realization as a first time investor.

I’m used to putting money away in a savings account. The interest isn’t much, only 2.4% right now. But at least when I put $50 in my savings account, I know that $50 will be there next month. My savings account is about security, not income, so it doesn’t bother me that it will only earn a few cents.

Now that we’re investing in the stock market, it’s difficult to realize that some of the money I put in is already gone. It just doesn’t seem right after years of saving for security. It’s discouraging to know that my money could be growing in a savings account — at the very least staying put — but in my retirement account it’s being slowly whittled away.

It’s also tough to know that I won’t see that money again for 40 years. I like knowing that our emergency savings is there if we need it. The same isn’t true for our retirement accounts. We can’t pay bills with that money if we get into trouble. Investing for retirement doesn’t feel like saving — it feels like paying another bill.

Saving is fun for me because I love to watch our money grow. The more money that accumulates in our account, the more secure I feel. I can’t say the same for our retirement accounts at this point. Right now investing is anything but secure. Not only are we losing some of the money, but we can’t touch it for 40 years.

I’m sure I’ll get used to the difference as we continue to contribute. I also know that this is nothing compared to people who have seen their investment accounts cut in half in the past 6 months. I guess I’m just really beginning to understand the investment process in a way that I didn’t understand it before.

How do you keep your spirits up as the stock market goes down? Do you avoid looking at your accounts? Maybe that would be best for now.

Do you know where your money is going?

One thing I’ve learned from the mortgage and lending crisis — you can’t be too familiar with the terms and conditions of your loans, investments, and credit cards.

Now that we’re facing a credit crisis, it’s more important than ever that you’re familiar with the policies of your lenders and investment firms as some institutions are making changes to their policies.

Take some time this month to educate yourself on where your money is really going and whether you’re getting the best deal.

Banking

  • How much interest are you earning on your savings and checking accounts? What are your options for increasing your interest rate? (Consider moving your savings to ING Direct for a 2.5% interest rate.)
  • Are you paying monthly fees for your accounts? If so, it’s probably time to switch banks. There are many banks that offer completely fee-free accounts.
  • How much do you pay for ATM fees and other transactions? You may be surprised to find out how much you’ve been spending on certain transactions.

Credit Cards

  • Is your account still open? Some credit card lenders have started closing dormant accounts, so if it’s been a while since you used your card, check and make sure it hasn’t been closed due to inactivity.
  • What is your interest rate? This may have recently changed, so check your statement or call for the most current information.
  • What is your credit limit? It also may have recently changed, so make sure you know exactly how much it is. A lower credit limit can affect your credit score.

Investments

  • How much are you paying per transaction? If your fees are high, consider investing in lump sums less frequently to make the most of your fees.
  • If you’re paying high fees, consider moving your investments to no-load mutual funds through discount brokers or investment firms.
  • Take some time to check out the prospectus report for your investments. Is it time to change your portfolio?
  • How much time do you have until retirement? If you’re planning on retiring in 5 years or less, it’s time to move your investments out of the stock market and into low-risk bonds. If you’re young, now is a great time for stock market investments because prices are low and you have plenty of time for the market to rebound from its current state.

Mortgages and other loans

  • Are you eligible for refinancing or consolidation? If your credit is good, now might be a good time to consider refinancing for a lower interest rate.

It can be a pain to track down this information, but it’s worth it to know where you stand. Not only is it important to know where your money is going, but it’ll give you a chance to determine if you’re getting the best rates, fees, etc. As long as the market continues to fluctuate, I suggest you take stock of your finances every 3 months to make sure nothing has changed.

We’re saving for retirement!

Last week, I questioned when we should start saving for retirement. I got a lot of great advice from readers (thanks!). After talking it through and doing our own research, we’ve made the decision that the sooner we start, the better — even if we can’t afford to make huge contributions at first.

Neither of us receives a company matched retirement plan, so we made the decision to put all of our retirement savings into a Roth IRA for now. We’re in a very low tax bracket now, and tax brackets are only going to go up. With a Roth IRA we can pay very low taxes on the money now, and then withdraw it later tax-free. Someday we may have the opportunity to get company matches, and if that happens we’ll start contributing to a 401K up to the match.

We only have about 3 months worth of expenses in our emergency fund. We didn’t want to raid our savings for an initial investment, so we looked for an investment firm that didn’t require a minimum investment.

Our main priorities are student loan repayment and liquid savings right now, so we can only afford $100 a month toward retirement or $50 for each of our accounts. We’ll increase that amount later as our income increases and our debt decreases.

After looking at several investment companies, we determined that T. Rowe Price is the best fit for us. The initial investment is $1,000 unless you opt for an automatic savings plan of $50 a month. Perfect.

Tony brought up a good point that I hadn’t considered. “Will we be able to stop contributing on the automatic plan if our financial situation changes?” I wasn’t sure if participating in the automatic plan without a minimum investment would require a time commitment for automatic investment.

Before we opened the account, I called customer service with a list of questions. They were very helpful, which only cemented my decision to go with T. Rowe Price. The answer to Tony’s question is yes, we can temporarily stop contributing. If we haven’t made a contribution for several months and our account balance is still under $1,000, they will ask that we bring the total up to $1,000 or close the account. But once our account balance reaches $1,000, we can contribute as much as we want whenever we want.

It will take us about a year and a half to reach $1,000. We decided that we could afford to make room for $100 a month at least until that point.

Because we have so much time until retirement and with stock prices where they are, we decided to invest predominantly in stocks.

T. Rowe Price offers a convenient option for beginning investors. You can select a diversified retirement fund based on the time you have until retirement. If you have a lot of time, the fund is more aggressive with a greater percentage of stocks. As our retirement year draws near, the investment portfolio will gradually become more conservative. The fund we selected is about 90% stocks with a very diverse portfolio and only 10% bonds.

Because we’re beginners, we decided to go with this option. In a few years when we have more knowledge and more money to invest, we can easily move our money to different funds if we choose. For now, this is a safe bet for us.

I’m feeling really good about our decision. Yes, that $100 would be helpful toward debt or liquid savings, but it will get a much greater return in a retirement account for the next 40 years. Starting now will increase our chances of reaching our retirement goals, and more importantly will get us into the habit of investing for retirement.

If you’ve been thinking about doing this for yourself, I strongly urge you to start researching now. I think you’ll be surprised at how easy it really is.

When is the right time to start saving for retirement?

Obviously, the answer is as soon as possible. But it’s hard to know when it’s time to really buckle down when you’re young and in debt.

Tony and I are 24 and 25, and I had hoped to start saving for retirement this year. But the more I look at our finances and goals, the more I hesitate to start now.

As a grad student, Tony obviously doesn’t have access to an employer-based retirement fund. Neither do I in my current job. So any retirement saving we do at this point will be on our own.

We’d like to open a Roth IRA and start saving a little every month, even if it’s just $50 each. We can always increase that amount later. But then I start thinking about our debt and our likely cross country move in less than two years and all of our other goals, and I can’t help but feel like that money would be better spent on debt and liquid savings at this point in our lives.

I know that saving for retirement is essential, especially for my generation. But I feel like 20-somethings in debt should focus more on becoming debt free. Otherwise, we could wind up paying student loan debt until it’s time to send our own kids to college.

Even though our income is relatively low, I almost never feel deprived. This is one area where I really feel the constraint of our low income, though. After our bills are paid and our necessities are covered, there just isn’t enough left over to save for emergencies, save for our future, and pay down debt. If I split up the extra money between the three, I feel like we’re not making any headway on any of them. But if I concentrate my efforts on one or two, then I feel guilty for foregoing the third.

My fear is that it will only get harder, especially since we plan to live on one income. If we can’t find room in the budget for retirement savings now, how we will be able to once we increase our financial responsibilities and have children?

I trust I’m not the only 20-something in this predicament.

When did you start saving for retirement? Is it crazy for me to wait another couple years?

Guest post from a new investor looking for advice

This is a guest post from one of my most frequent commenters, Bobbi. She doesn’t have her own blog, but I hope she’ll considering starting one now! There’s no better time than the new year!

I’m also going through a similar dilemma with my year-end bonus, so I can definitely relate. Please weigh in and help Bobbi make a decision about what to do with this money and how to start saving for retirement now.

First, I would like to say that I feel truly blessed to have a job in these hard times, much less to have received a “year end” bonus from my employer. Thank you Bob! Second, thank you to “Living Well on Less” for letting me guest post.  This is my first. :)

A little background: I am a mid-40 something woman with a grown daughter. I don’t spend more than I earn (anymore), and I work for a small business that has been in business for 10+ years. The business is doing pretty well in spite of this crazy economy (we are very versatile in what we do). However, I do not have a 401k or retirement at all so I am trying to build my own. I have no mortgage, so I am able to save every month.

My dilemma is what should I do with my bonus ($2,000) and I am hoping your readers can give me some advice. :) I am not an investor right now, but one of my goals for 2009 is to learn more. Right now I need to do something simple. These are the choices I am considering:

  • ING savings account – 2.75%
  • FNBO savings – 3.252%
  • My Credit Union ‘daily interest’ account – 1.29% (daily)
  • 24 mo CU CD – 4.69% (12/09 maturity date)
  • IRA – Roth or standard – ?
  • I have a credit card @ 0% interest until March with a balance of $1500.
  • Car loan around $19,000

I don’t know much about Roth IRAs and I’m not even sure I can open one with this amount. I am leaning toward taking half and paying on the credit card and putting the other half in some sort of savings. I would love to hear what your readers would do or if they can give me more information on the IRAs.

Thank you and happy holidays to all!

I recommended that she pay off that credit card debt and start the new year with a clean slate! What do you think she should do? And can anyone give her some advice on the best way to save for retirement when you’re getting a bit of a late start?

Tempted by the end-of-year bonus

I wasn’t expecting to receive a bonus from my employer this year. We’re in a recession, after all. So imagine my surprise when I received a bonus of about a week and a half’s pay. That’s quite a lot of money considering how little we spend.

I find that extra money is a lot easier to control when it’s expected. For instance, we know we’ll receive a tax refund this year. We’ve been anticipating it all year, and we already know where it’s going (savings).

However, when someone hands you a check out of nowhere, it can be tempting to blow it. After all, I was doing fine 5 minutes ago before I received the money. It’s not like I’ll miss it if I just spend it, right?

I have a feeling that no matter how committed I am to frugality, I’ll always have these moments of temptation. In that moment of weakness after I looked at the amount on the check, I started thinking about new furniture, a new TV, and a thousand little, inexpensive things I could use this money to buy. It would be a lot of fun to just blow this money. But then it would be gone, I wouldn’t be any closer to reaching my goals, and I’d regret it.

I quickly reminded myself that we’re in debt, and we’re nowhere near reaching our financial goals. Blowing money on things we don’t need is a good way to keep ourselves from reaching those goals.

So what is the practical side of me considering using the money on? Here are some thoughts I’ve had:

Summer fund

Two months of the year, Tony doesn’t receive a paycheck for teaching. He’ll find a part time job, but chances are it won’t pay as much as his monthly stipend. Last year we adjusted our budget and tightened things up to accommodate for our lower income. I’m considering throwing my bonus into a savings account to help us a little during those summer months of lower income.

Emergency fund

Our emergency fund is about 1/3 of the amount we want. This money could help us beef it up a little.

Debt

This is the least appealing option. After all, my bonus is dwarfed by our $60,000 in student loan debt. However, every little bit does help.

Retirement?

This is a tough one. Tony and I are 24 and 25, and neither of us has a retirement account. We’ve wanted to open a Roth IRA for some time, but it has taken a back seat to debt and savings. I’m considering using this bonus to jumpstart our retirement saving. While I don’t think it’s enough to open an account (I think I need at least $3,000 for that, but I’m not sure), it could at least get us started until we have enough saved to transfer it to a Roth IRA.

While I really want to get started on retirement saving, I’m hesitant since we are considering moving in a year and a half. We really need all of our savings to be liquid so we can use some of it for the move if that’s what we decide to do. So I’m leaning toward putting off retirement savings for another two years until we’re settled down somewhere.

I could use some advice. What would you do?