Tag Archives: saving

Things We Have No Control Over

Sometimes you have to deal with things that you have no control over. This has been more than clear this week to anyone living in the Carolinas. And it really hit home for me yesterday.

Anyone who has visited me in my office this semester had a chance to see the wrist brace that I’ve been wearing all summer.  And yesterday I finally had surgery to repair that injury.  The surgery went well and now I’m recovering at home for a couple of days. And while I’ve dealt with the aftermath of anesthesia before, this was my first experience with a nerve blocker.  The up side of the nerve block was that I had no pain for 20 hours after my surgery.  The down side was that my left arm was completely numb for that same time.  I had no control whatsoever over its movement.  It was actually fascinating to me.  My left arm was just dead weight (which was MUCH heavier than I would have expected!).  I wore a sling to support it and just had to live without my left arm for the day.  (Teeth and feet become very useful tools when you only have one arm).  I just had to find ways to work around the thing I had no control over.

Sometimes you’ll face financial challenges that you can’t control.  The unexpected auto repair.  The annual tuition increase. The rising price of gasoline.  A medical situation.  The cost of the bar exam.  Air travel for a family emergency.  Financial stress can come in any number of forms that you can’t control.  But what you can control is how you prepare for and react to these things.  A budget.  An emergency fund in savings.  Insurance.  These are all preventative measures to deal with the things you can’t control.  Loans. Credit cards. Side jobs. Selling things you don’t need.  These are all reactive measures you can take to relieve your financial stress.

We will all face things that we have no control over.  But we all have control of how we prepare for and react to these things.

Interest Rates Rising

Last week the Federal Reserve raised its base interest rate for the first time since 2006.  The Fed rate is the rate at which banks lend money to each other.  During the financial crisis of 2007-2009, this rate quickly spiraled down to zero, where it has remained ever since.  Until last week.  With the economy strengthening the Fed finally felt secure in starting to move this rate upward by 0.25%.  Tiny moves like this are expected to continue throughout 2016 until we land at a Fed rate of 1%.  Which is still very, very low.

So what does this change in interest rates mean in real life? Savings interest has been ridiculously low since the financial crisis.  And this is not likely to change anytime soon.  It will probably be late 2016 or even 2017 before we start to see any movement there, as banks are slow to pass on interest gains to savers.  Consumers of credit, however, will see changes right away.  Mortgage rates, car loan rates, and credit card interest rates will all rise almost immediately.  If you have any variable rate debt that can be converted to fixed rate debt, it’s best to do that sooner rather than later.  Most existing student loans will not see any change, as federal student loans made in the last ten years all have fixed interest rates.  But interest rates on student loans borrowed after July 1, 2016 will likely have higher rates than loans made in the year prior.

This interest rate increase is a sign of hope to me.  Hope that we are finally returning to a more normal economy.  The reality is that a 1% Fed rate is still extraordinarily low, and while credit interest rates will be rising, it won’t be by enough to break anyone.  Normalcy in the economy has been completely absent for most of the last decade, so now we move forward and learn what our new normal in America is going to be.

Saving in Your 20s

I recently learned about a viral blog post entitled, “If You Have Savings in Your 20s, You’re Doing Something Wrong,” written by millennial writer Lauren Martin.  To Ms. Martin, I have only this to say:  HORSE MANURE!!!

Ms. Martin says that the need to save money was ingrained in her by her parents (who I believe are wise people), but that she now disagrees with that philosophy.  I am going to go step by step through Ms. Martin’s theories on saving in your 20s and explain why she is incorrect.

“Refusing to give yourself the luxury of enjoying your money negates the whole point of making it.”  Not entirely incorrect.  But Ms. Martin is saying to forego retirement savings in your 20s in favor of more fully experiencing life.   And while experiencing life while you are young enough to enjoy it is absolutely important, doing it at the expense of building a retirement nest egg during the early years is just foolish.  The earlier you start socking money away in a retirement fund, the more time it has to grow and multiply.  Early savers are more likely to be able to retire younger, and less likely to have to work during retirement to be able to meet their expenses.  At the very least, folks in their 20s should be investing enough money into their retirement as it takes to earn an employer match (for those who are not self-employed).  Not earning that match is equivalent to throwing away free money.  And if there is not enough money left over after that investment for an occasional night out, then Ms. Martin has likely made some bad decisions about how much she has chosen to spend on some basics, like housing, clothing, and food.

“When you’re saving for yourself, you’re refusing to bet on yourself.”  Ms. Martin purports that saving while you’re young is tantamount to predicting that you won’t earn enough money to play “catch-up” later on, thus predicting your own future failure.  But why would anyone want to have to play “catch-up” when they have the opportunity to be in a comfortable position from the beginning?  Anyone who has ever watched their favorite sports team trying to come back from behind knows that this is the more stressful situation.  Why choose the more stressful option?

“When you have something to bank on, you have nothing to reach for.”  Ms. Martin seems to think that success comes from need, and that folks with a financial cushion have nothing to strive for.  Having a financial cushion actually just makes that strive a bit easier.  She could strive toward owning a home, having a family, or traveling the world.  All things that are much easier to do if you are financially secure.

Ms. Martin asks, “What memorable experience does money in the bank give you?”  None. But it also helps you avoid such memorable experiences as “that time I couldn’t pay my rent and got evicted,” “that time I had a medical emergency and took on $20,000 in debt,” or “that time I had to work until I was 75 years old because I didn’t start saving for retirement until my kids finished college.”

“When you die, you can’t take your money with you.”  True.  But most people look at their savings as a bell curve.  You save for retirement and watch the savings balance grow throughout the working years.  But then you retire and start living on those savings, and watch that same balance decline.  No…you can’t take it with you.  But it sure is nice to have it there if you’re planning to live PAST your 20s.

treat-yoself

“When you deprive yourself, you don’t learn how to TREAT YO SELF.”  And if you never deprive yourself, you will have no appreciation of what is actually a treat, and it will eventually take greater and greater treats to stimulate your sense of luxury.

“When you’re 40, you’re not going to look back on your 20s and be grateful for the few thousand you saved. You’re going to be full of regret.”  Ms. Martin, as someone who knows what it is like to be 40 (and older), all I can say is that you are wrong.  When I look at my retirement savings statements for the accounts from my early years…my 20s…I am VERY grateful for the little bit of money that I saved then…and I’m amazed by the size it has grown to.

I remember my 20s being lean years in my early career.  And I’m grateful that my parents, like Ms. Martin’s, instilled in me the need to save money even at that time.  I don’t feel like life has passed me by or that I have not treated myself.  I feel wise.  And I hope that Ms. Martin wises up before it is too late for her to realize just how wrong she has been.

The Power of Compound Interest

The power of compound interest never ceases to amaze me.

I’ve read countless articles about how important it is to contribute to retirement funds beginning with day one of employment.  They say the funds will grow and grow, so the earlier you contribute, the better.  But I didn’t really get it until I recently took a look at my own retirement account statement.

When I was in graduate school I received a small stipend from my graduate assistantship as an academic advisor.  During those two years, a percentage was held out of my pay and went into the Ohio Public Employees Retirement System.  I remember being annoyed at the time because the $300 per year that was held out of my pay was a significant amount of money to me at that point.  But there was nothing I could do about it.

A few years later, when it became clear that my career was not going to be in the Ohio public university system, I rolled that small retirement fund into an IRA.  It was still a really small amount at that time.  Maybe $700…which is still larger than the $600 I had contributed.

Now fast forward 20 years to 2015.  That IRA that I started with just a few hundred dollars is currently worth over $3,600.  I never contributed another dime to that account.  Just the initial $600.  But it has grown to six times its original size.  And it still has many years to grow before I retire.  This is the power of compound interest.

When you leave law school and venture into full time employment, you should start saving for retirement as soon as possible.  It may seem like a better choice to wait until you’ve made a dent in your student loan obligations.  But it’s not.  The earlier you start saving for retirement, the more time your money will have to grow.  Contribute early.  Contribute often.  Retirement savings is never something that should wait until later.