Five Steps to Financial Fitness
Let’s face it, nickel-and-dime economizing can be maddeningly ineffective. Recycling tea bags? Separating toilet paper into single sheets? Let’s get serious. Pinching your pennies is only going to make your pennies scream, it’s not going to free up the extra bucks you need to make a real difference in your retirement nest egg.
So let’s not have a budget. Let’s pretend it’s New Year’s Eve and make a savings resolution instead. What most of us need to do is develop new spending and savings habits so we don’t have to watch our old spending habits like a hawk. What follows are five steps that will help most of us free up extra retirement savings—even those of us who swear we don’t have an extra dime.
Step One: Vow to Save Your Raise, Along With Any Other Financial Windfalls That Come Your Way. The quickest way to avoid the temptation of spending “found money” is to promise to put some of it away. Decide to bank half of your raise or decide that each time you get a raise of three or more percent you’ll set aside a third of it. Or decide you’re going to put away half of your raise and your entire bonus. Or, if you’re one half of a two-income household, determine to invest 100% of one of the raises. You get the picture.
Step Two: Know What Your Spending Habits Are. Most of us have no clue what percentage of our paychecks go to food, clothing and the like - we don’t analyze our money, we just spend it. So decide for the next three to five months that you’re going to document all your expenditures. You HAVE to pay your mortgage or your rent each month, as well as your heating and electricity bills. Other expenditures, such as dinners out, expensive vacations, gym memberships, are areas that can be targeted for cost-cutting or elimination. The best approach is to invest in software such as the spread sheet program from Microsoft Works or a money management program such as Quicken.
Step Three: Resolve to Reconsider Big Ticket Items Before You Buy Them. Give pause to anything that will cost you more than a thousand bucks, unless it’s a) something that you desperately need that b) always costs more than a thousand bucks, like a car.
Step Four: Drive that big-ticket item called a car into the ground. Speaking of which, people complain about the high cost of gas but how about the high cost of the wheels that guzzle that gas? Here’s some tips on how to “drive that depreciating asset into the ground.”
First: Avoid leasing: If somebody told you that they liked the car that they rented so much that they’d decided to keep on renting, you’d think they were nuts. But leasing is essentially a long-term car rental; you’re paying through the nose for something you don’t own. Here are just two of the downsides:
a. You’re making huge down payments and huge monthly payments on something that you’re not going to own.
b If you do decide to buy the car at the end of the lease you’ll end up paying thousands more than if you’d purchased it to begin with.
The following chart shows the gigantic financial difference between somebody who leased a car, borrowed money to buy a used car or borrowed it to buy a new car.
Second: resolve to spend less on your wheels: Because it’s a depreciating asset, it doesn’t make sense to pay big bucks for the privilege of driving a car. Solution: Pay cash for a “fairly new” used car. The cheapest way to drive a car is to pay cash for a two-or three-year-old, well-maintained car that is also cheap to insure.
Great websites to help you save on wheels: www.consumerreports.org: For $26 a year you get an excellent source on how to get the best values on everything from dishwashers to digital cameras. Check out the article on why long-term car loans are a bad deal under the Personal Finance heading. www.edmunds.com: A great place to help you compare car costs.
Step Five: Trim Your Mortgage Debt. What follows are two ways that you can free up more savings by shedding unwanted interest payments.
1. Pay off your mortgage early. Raise your monthly mortgage payment by whatever amount you can afford—$25, $50, $100 or $200. Every extra dollar you put into your mortgage could save you as much as $3 in the future. Don’t forget—a huge chunk of your mortgage payment in the early years is interest. By paying just a little more than you have to each month, you dramatically reduce the amount of interest you pay over the life of your loan.
2, Refinance your mortgage while rates are low. Any fixed rate mortgage should be up for refinancing when the interest on a new fixed-rate loan falls one and a half to two percentage points below the rate you pay now. On a 30-year, $100,000 loan with no points, lowering your rate from 81/4% to 7% a year will save you $91 a month. So even if you had $1,000 in closing costs you’d be paid off in 11 months. No-point loans, which carry a slightly higher interest rate, are becoming more common. (Needless to say, if you’re planning to move in the next couple of years, refinancing is not the way to go.)
There. That wasn’t so bad, was it? Let’s face it, the worst part of doing a budget is dreading it. Once it’s over with you wonder why you put it off so long. Economizing now means you DON’T have to scrimp, save and watch your pennies once you’re retired but instead can relax and enjoy the leisure lifestyle that you so richly deserve.
"Americans need this vigorous wake-up call if they are to make it through the first half of the 21st century. They are burying themselves in debt-for education, for homes, and for toys-leaving too little for savings and investment. Jane White shows them where they are going wrong and how they can put themselves right."