A week or two ago we had a couple of friends over, they are a married couple in their late 20s--Joellyn knows her from from animal rescue work. They are interested in buying their first home sometime very soon.
Knowing what I do for a living the conversation turned to how to invest their 401ks which then moved to how much to put in to their 401k. Karen (not her real name) then said that a friend of hers puts 10% into her 401k and wasn't that crazy. Crazy too much or crazy too little I asked.
Too much.
Oh boy. I managed to keep the lecture to less than 30 seconds to minimize offending them but this is a great microcosm for attitudes about saving. These people are young, have decent jobs, no interest in following the market and while they may have some basics to learn about personal finance they know they need to save something. I don't know if they have credit card debt so I do not have a complete picture but they have accumulated something for a down payment for a house.
That they are trying figure out how much should be saved as opposed to whether they should save at all and that they have saved something for a house probably puts them ahead of most people their age but again they have plenty to learn.
I have mentioned a few times being particularly (or peculiarly) conservative in these matters. Over time stuff comes up, maybe you get laid off, maybe you want to venture out on your own, maybe something else but when these events do happen you can either be prepared or not. Being prepared means being able to last a little longer than the next payday.
Everyone likes stories about people who took some sort of career risk and then it worked into something viable. Anyone confronted with this at some point who would rather not max out every credit card in their wallet would probably like to have a cushion in their checking account to confront whatever the event is.
Using this logic it makes sense to save as much as possible in case it ends up being needed. Tying in an investment angle, an increased savings rate can also help offset portfolio mistakes and bear markets (that's help offset, not avoid). If a reasonably balanced $1 million portfolio only needs to generate $2500 per month and then the $1 million drops to $775,000 the withdrawal rate would still be below 4%. That's pretty good after such an ugly drop.
Things like this are consistent with a point I made in a video a couple of about just not wanting to have to worry about certain things. More correctly reducing the chance that you would have to worry about these sorts of things. You can't control the outcome, just your behavior.
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15 comments:
I found yesterday's "bad news" to actually be good. The savings rate went up for the first time since May, however, May was the government hand out, so to me, that wasn't real savings. This time it was real savings. I've said it before, but I really think this kick in the shins (to keep this G rated) is exactly what we needed. Attitudes, as you've pointed out, are such that debt is OK, living beyond your means is OK and saving is a fool's game.
Off topic question, have you (or a reader) had an ETF/N that you use go tango uniform? I know it's liquidated at the NAV, but I see an ever growing ETF death watch list and I have to think there might be more to it than that. I'm trying to put that possibility into my risk analysis.
Bill i dont follow. ETF own the underlying stocks and so just close out. ETNs can return zero which is what i think happened to the Lehman etns.
10% of what you earn can be very different to 10% of what someone else earns. I like to travel and probably spend 10% of my annual income on holidays, without buying an asset or having anything material to show for it!
But it keeps me sane. I travel responsilbly and try to choose accomodation that has a decent multiplyer effect for the local community - ie never one of those horrible all-inclusive fatter farms - and try to experience as much of the local specialities as I can. We only get one opportunity, after all.
But, I certainly buy into your thesis of investing as much as possible for the future - over time your investments will grow, unlike your holiday memories which fade and new car which will need replacing at some point. And paying interest on bad debt is stupid.
OK, ETF x closes out. Does this happen end of business? Beginning of business? I guess what I have in mind is if ETF x closes out after or before market and the market gaps up/down substantially am I at risk (short term)? Do I get settled in cash or with the underlying stock? I understand the ETN debt risk, but I'm just referring to the short term risk of an ETF going tango uniform.
closed out in cash.
nav calculated at the close of market on the last day. there is opportunity cost in that it takes a few days to get the cash but there is no market risk in the interim.
Roger, not to get too personal, but I'm curious if your wife shares your views on spending and saving. I ask because mine doesn't. I'm very much like you, while my wife enjoys nothing more than spending every available cent. Like a lot of folks, it's the source of lots of marital friction.
that is a great question. so we've been married since 1993. when we first got married we did not make a lot of money so by necessity there was not much spending--she was on board with not using credit cards before i met her.
she says that I convinced her about being frugal (or cheap). being prudent has allowed us to do take advantage of some very neat things and do a lot to our house (paid as we went, not with borrowed money) so she sees where i was coming from.
she would say "we get to spend a lot of time in Hawaii and I don't have to worry about making money" she works her butt off on the dog rescue but it does not pay.
very much a meeting of the minds.
Thank you Roger. To anon & wife, if I may. I fought that battle. I won it by making her get a part time job and her own bank account (the family account is still 50/50, of course) for the pie in the sky type junk she wanted. An amazing transformation took place ... :)
Protectionism update
http://news.bbc.co.uk/2/hi/business/7866308.stm
Thx Bill B. Like Roger and anon 7:31, we travel quite a bit (we're retired.) She's coming to realize that every cent not spent on shoes can be saved for a day in the sun.
I'll try the part time job strategy. I probably won't be posting tomorrow :)
A friend of mine had an interesting strategy for his free spending wife.
He had complete control of the bank accounts; they both had a rather large salary.
She had *one* credit card, and it had a limit. So she could just max that every month.
Great story Roger. I agree people don't have a grasp on saving and investing. I liked your blog a week or so ago about people not investing in their 401k even though they get a free match. I think a basic beginning investment and saving class should be required of all college seniors before they enter the working world and have no clue what to do. Larger companies should also staff planners to help employees see the big picture.
I told my 19 year old son, who by the way is majoring in finance, that the most important financial decision of his life would be who he chooses to marry.
I regularly attempt to assist those who ask (and as a volunteer credit counselor some who don't, really) follow prudent living and investing habits - not sucking up to the feast at the public trough.
I know I have done my job if they see me later in life and admit to being a Conservative.
Question on a quizz show takeoff:
Host: What is a bachelor?
Contestant: One who has not considered marriage.
Host: Wrong. One who HAS consideed marriage.
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