Increases in Income During the First 20 Years of Work Life Key to High Rate of Saving

A painless way to dramatically increase your rate of saving is to save a percentage of all increases in income.  It’s painless because you have not had that income to spend, so increasing your rate of saving this way does not adversely affect your standard of living.  There is no need to sacrifice.  In fact, if you save only a percentage of your increases in income, you can still use the remainder to advance your standard of living.  You enjoy the best of both worlds: an increased rate of saving and a boost to your standard of living.

Most increases in income occur in your 20’s and 30’s

Recent studies show that the most advantageous time to employ this strategy is in your 20’s and 30’s.  It is during these two decades that the highest increases in inflation adjusted income occur.  In a labor department study that followed 10,000 workers’ earnings from 1979 to 2012, those that had college degrees averaged +9% per year increases in inflation adjusted income from ages 18-24, +6% average per year increases from 24-29, just under 5% average per year increases from 30-34, just under 4% average increases from 35-39.  By your 40’s you can expect increases in income to taper off dramatically.  The study showed a drop in the average annual increase in inflation adjusted income to just over 1% from ages 40-48.  Inflation adjusted income plateaus in your 50’s and may even decrease as you approach retirement age in your 60’s.

By capturing a portion of these average annual increases in income during your 20’s and 30’s to realize a progressively higher rate of saving, you accomplish two complementary objectives: 1. you save more relative to your income which makes it easier to achieve financial independence, and 2. you keep a lid on your standard of living relative to your income which also makes it easier to achieve financial independence.  By increasing your rate of saving substantially in your 20’s and 30’s, you also take advantage of time to compound the earnings on your savings.

I experienced these benefits firsthand.  In my case, I didn’t save anything until very late in my 20’s.  I spent the early years digging a hole of debt.  Fortunately, credit was not as plentiful then, and I didn’t earn that much, so my debt in dollars and cents wasn’t that much by today’s standards, but relative to my income, it was huge.  Then at age 28, my income more than doubled overnight.  All of that extra money frightened me into creating a budget so I didn’t blow it all.  And with the budget came savings.  I don’t recall how much of the increase I saved, but it was somewhere in the vicinity of 20% to 30%.  The rest went to pay off debt.  Thereafter, I saved most of my pay increases and bonuses.  In fact, Rosa and I saved a high percentage of both of our salaries by of socking away pay increases in our late 20’s and throughout our 30’s; we basically lived on the equivalent of one income, even though both of us worked full time at professional jobs.

Pain awaits those who put off serious saving until age 40 or later

Unfortunately, most in their 20’s and 30’s employ increases in income exclusively to boost their standard of living, thinking they have time to plow money into savings beginning in their 40’s.  Not only have they lost 15 to 20 years of compounding, their increased standard of living makes it nearly impossible to save enough money to attain financial independence, even at retirement age.  To make matters worse, by their early 40’s the era of large percentage increases in inflation adjusted income have probably passed them by.  This leaves them with the unhappy and difficult task of downsizing their standard of living in order to save at a high enough rate to achieve financial independence.  Because it is painful to cut back on spending once one has become accustomed to a certain standard of living, most will be in denial of the need to downsize until reality hits in their mid-50’s, making the likelihood of setting aside sufficient savings to achieve financial independence a near impossibility.

The situation is made worse for those who choose to use increases in income during their 20’s and 30’s exclusively to improve their standard of living if they postpone starting a family until their late 30’s or early 40’s   They haven’t had the expense of child rearing early in adulthood to temper their spending.  With their standard of living firmly established, the cost of raising children only adds to their spending at a time when those who had children early in their working years are shedding that expense and adding to savings.  It is improbable that those who begin families in their late 30’s or early 40’s will reduce their standard of living during this time as they will want to give their children every advantage possible.  Downsizing for them won’t begin until their late 50’s or early 60’s, far too late to set aside sufficient savings with which to enjoy financial independence.

Rather than increase our standard of living based on increases in income, Rosa and I have increased our standard of living based on our accumulated savings:  Can our accumulated savings sustain an increase in our standard of living?  That has always been the test.

Studies of historical data may not reflect your reality

According to the recent historical data, the time to take advantage of pay raises to boost your rate of saving is in your 20’s and 30’s.  The steady stream of high percentage increases in income during that time establishes, by age 40, your level of income for the rest of your working life.  If you wait until your 40’s to get serious about saving, you will have missed the bus.  But there is another reason to take advantage of pay increases early to boost your rate of saving:  you may not experience that steady upswing in income during your 20’s and 30’s; your income may go up and down throughout your working life.

That has been our experience.  Rosa and I each had career changes that set our joint income back, once in our 30’s and once in our 40’s.  Our joint income declined again in our late 40’s when Rosa took a year off and then worked part time as a substitute teacher for several years afterward in order to be a caregiver for her mother.  She then worked full time for several years as a paraprofessional, making a fourth of what she would have earned as a teacher.  The last three years of her working career, Rosa returned to full-time teaching which sent her income skyrocketing.  However, at that time, income from my business had declined.  When we had those declines in joint income, we saved less; when our joint income recovered, we saved the increase.

Despite the studies, you don’t really know how your income will grow throughout your working life, so it is only prudent to take advantage of any and all pay increases, whenever they occur, to boost your rate of saving.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages

Freedom from Responsibility: Dependence Disguised as Liberty

Freedom from responsibility is becoming the new mantra for those who believe that the societies of the advanced economies are unfair.  They believe that certain classes of people have been victimized by society and therefore are entitled to compensation.  The welfare state is and has been an expression of this idea.  People are not held responsible for their choices in life, instead society is made to assume that responsibility.

Advocates for a guaranteed basic income want to take this idea a step farther; they want society, by means of a government stipend, to pay every member a guaranteed basic income to cover the basic necessities of life: food, shelter, utilities, and so on.  Just what constitutes basic necessities is never made quite clear but proponents use the government’s poverty threshold as a guide to how much the stipend should be.

According to proponents, a guaranteed basic income would wipe out poverty as every member of society would be given the means to support themselves.  They would be free of worry about meeting their basic life needs, free from the need to work jobs that they didn’t find fulfilling, free from the need to work at all, free to devote their time to pursuits that may not produce income such as artistic endeavors, community service, caregiving, education, and such.

A guaranteed basic income has found support across the political spectrum in the United States, including Libertarians who see it as a more efficient and effective replacement for a complex and expensive welfare system.

The paradox of freedom from responsibility

If freedom from responsibility didn’t undermine personal liberty, it would hold as great a promise for the elimination of material suffering as its supporters claim.  The paradox is that freedom from responsibility isn’t freedom at all but dependency fueled by entitlement.  A person who never takes responsibility for himself never learns the life lessons that come with it.  Without that experience, he is never able to assume responsibility for himself and remains forever dependent and convinced that his basic living expenses are someone else’s responsibility.  This is hardly the description of a free person, but rather that of a perpetual teenager who continues to look to parents for food, shelter, and other basics of living while he goes on his merry way, oblivious to the real world, certain that he knows everything, because he has learned nothing of life.  True freedom requires a maturity that can only come through the experience of being responsible for one’s self.

The need to support one’s self motivates like nothing else:  it focuses the mind and drives the effort needed to overcome obstacles and accomplish tasks; it instills discipline; it clarifies the relationship between productivity and pay; it forces a person to examine her values and prioritize the allocation of time and money.  Through trial and error, a person learns life’s lessons, acquires survival skills, and matures into a responsible adult.

Entitlement mentality precludes growth

It is reasonable to ask:  Wouldn’t a person who receives a guaranteed basic income have to learn these same life lessons if he is to succeed in covering his basic living expenses, in living within his means?  Wouldn’t he go through the same trial and error process, acquire survival skills, and mature into a responsible adult?  He could but he won’t because he doesn’t accept that responsibility.  A feeling of entitlement will hold him back:  he wasn’t responsible for earning that money, so he won’t be responsible in spending it.  If he can’t make it on the guaranteed basic income, he will blame the responsible party: society by way of the government.  He will perceive the problem to be an inadequate stipend: it is simply not enough to live on.  It won’t be his fault; he is not responsible.  It will be society’s fault; they are responsible: the definition of poverty needs to be updated and the stipend increased to fix the problem.  This cycle will repeat itself perpetually, because there will never be enough of a stipend until the person accepts responsibility for himself.  When that happens, no stipend will be necessary.

Entitlement vs Accomplishment

What about the other benefits attributed to a guaranteed basic income:  the freedom from the need to work jobs that aren’t fulfilling, freedom from the need to work at all, freedom to devote time to pursuits that may not produce income, such as artistic endeavors, community service, caregiving, education, and such?  These benefits can be and are enjoyed by people who do not receive a guaranteed basic income:  they obtain new job skills that lead to more fulfilling work while holding down full-time jobs; they make financial independence a priority and accumulate the resources necessary to make work optional; they work full time while pursuing interests in their spare time that do not produce income.  The difference between these folks and those who would enjoy these benefits as a result of a guaranteed basic income is that they earned them, and because they are earned they are valued.  There is a big difference between entitlement and accomplishment:  the former is the assertion of a right, the latter is achieved through an investment of one’s time and energy.

Children are good at asserting their rights, they feel entitled to everything.  They don’t mature into independent, productive adults until they take the responsibility to earn that which they need to survive and prosper.  Taking responsibility for themselves sets them free.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages

Why We Prepaid Our Funeral Expenses

When Rosa’s father died at age 85, twenty-two years ago, we experienced, firsthand, the benefits of prepaid funeral expenses. He had spent the last three weeks of his life in intensive care, and the ordeal had thoroughly exhausted Rosa, an only child, and her mother. What a blessing to discover that all the funeral arrangements had been made and paid for in advance: the mortuary, the plot, the marker, the casket, the service—everything. Prepayment eliminated a lot of decision-making with regard to funeral arrangements and anxiety over what Rosa’s father would have wanted and how much to spend.

Rosa called the funeral home to have them transport her father’s body from the hospital to the mortuary. The next day she met with a representative from the funeral home to review the arrangements her father had purchased and set a date for the service. The personnel at the funeral home spent their time assisting her rather than selling her. And best of all, Rosa knew that this was exactly what her father had wanted.

Niches of our own

We were impressed with the benefits of prepayment and wanted to spare our surviving relatives the anxiety and guilt associated with making funeral arrangements for us. Within the next year, we took the first step and contacted the same cemetery Rosa’s parents had chosen; we purchased two niches in the cemetery’s mausoleum as a permanent resting place for our cremated remains. The cost of the niches also covered cemetery fees for opening and closing the niches for internment of our remains and for perpetual care. We received a contract of sale, a certificate of ownership, and a document that certified that a fund had been established for the perpetual care of the cemetery and mausoleum.

Our prepaid funeral arrangements

Twelve years later, Rosa’s mother died. She had prepaid her funeral arrangements, as well.  In dealing with her death, we gained valuable knowledge of the cost of a direct cremation (cremation without a service). The laws had changed since Rosa’s father’s death.  Now the state required a mandatory waiting period prior to cremation. This added to the storage and transportation costs for direct cremation.  The additional expenses persuaded us to go ahead and prepay our funeral arrangements.

Our prepayment involved both a funeral home and a life insurance company. We sat down with a member of the funeral home staff and reviewed the prepayment contracts which contained a detailed menu of options, selected the options that pertained to a direct cremation, reviewed the terms, and signed the contracts—one for each of us. The contracts stipulate that the funeral home will provide the services we selected, when required, at no additional cost. In other words, we locked in the price of those services at 2005 levels.

Our prepayment contract is funded by a prepaid life insurance policy through a separate life insurance company that specializes in policies to fund funeral expenses. The funeral home took our applications for the insurance. We chose a five-year, interest-free, monthly installment plan to pay the insurance premiums which totaled exactly the amount of the prepaid funeral expenses. The entire proceeds of the life insurance policy are paid at the death of the policyholder to the funeral home for the services indicated on the prepayment contract.

Not all funeral expenses are covered by prepayment

Prepaid funeral expense contracts do not cover all funeral expenses, only those provided by the funeral home. For example, in our case, crematory fees, death certificates, and newspaper obituaries are not covered. These fees are standardized and relatively small in comparison to the funeral costs that are prepaid and so will not be a burden on our surviving relatives.

Rosa and I created an end of life document that includes the details of our prepaid funeral expenses, the location of the pertinent documents, and our wishes for a memorial service to be held in our home in lieu of a funeral service.

Is prepayment of funeral expenses right for you?

Prepayment of our funeral expenses has proved to be a good choice for us, but is it prudent for you to prepay your funeral expenses? Here are some considerations:

  • Is there a better use for your money?  Prepayment of funeral expenses should be a relatively low priority for you. An emergency fund, paying off debts, adequate insurance coverage for health, property, and life, and adequate funding for retirement all should come before prepayment of your funeral expenses. However, if you are free of debt, have an emergency fund equivalent to at least six months of living expenses, are adequately insured in the critical areas of your life, and are on track to fund your retirement, then prepayment of funeral expenses can be a good use of your money.
  • How committed are you to your marriage? A married couple that prepays funeral expenses that includes cemetery property are making a commitment to their union. If the marriage ends, one or both of them may have to sell the cemetery property or lose the investment.
  • What is the likelihood that you will still be living in the city in which you purchased your cemetery property at the time of your death? Most people plan to be buried in the city in which they have lived, but who knows for sure where that will be? Who knows where life might take you, even in old age? You may end up living with one of your children half a continent away when you die and your remains will have to be transported back to the city in which you prepaid the funeral arrangements or your child will have to try to have the prepaid funeral contract transferred to a mortuary in the city in which your child resides. Either of which will require time and trouble on the part of your child and incur additional expense.
  • What is the likelihood that the mortuary you intend to use for prepayment will still be in business when you die? Rosa and I chose a funeral home that had been in business for decades, had an excellent reputation, and was financially stable. Your prepaid funeral contract is only as good as the mortuary you do business with. Make sure you are dealing with a sound and reputable institution.

Options for prepayment of funeral expenses

There are different ways to finance a prepayment of funeral expenses. Each has its advantages and disadvantages:

  • Prepaid funeral plan through a funeral home. The funeral home establishes an irrevocable funeral trust with a financial institution. The money you pay them goes into the trust. Such trusts are regulated by the state in most states. Contact your state consumer protection agency to determine what consumer protection is available should you purchase such a prepaid plan. This form of prepayment has two primary advantages: 1. You determine where you are buried and what kind of funeral and burial you will have. 2. You lock in the cost of services for which you prepaid. The main disadvantage of this form or prepayment is that either the funeral home or financial institution may go out of business and you could lose your investment.
  • Life insurance. You take out a life insurance policy to cover the costs of your funeral at the time of your death. You can leave an end-of-life document that outlines your wishes for burial, funeral services, location, type of headstone and casket, total costs, etc. The primary advantages of this form of prepayment are that it is not tied to a funeral home and, depending on when you purchase the policy, what type of policy you choose, and how soon after you die, it may cost you less than a prepaid funeral plan. Funding prepayment of funeral expenses with a life insurance policy has three distinct disadvantages: 1. Costs are not locked in, so you will have to account for inflation when determining the face value of your insurance policy. 2. Costs for life insurance vary depending on what type of policy you purchase, when you purchase it, and the state of your health at the time of purchase. 3. Even if you leave detailed instructions regarding your funeral and burial, someone will have still have to implement your wishes and make difficult decisions under time constraints while grieving. Life insurance does not eliminate the anxiety and potential guilt over funeral arrangements in the way a prepaid plan does.
  • Joint bank account. You establish a joint bank account specifically for payment of your funeral expenses and fund it with an amount you estimate will cover the costs. At the time of your death, the joint account holder can pay for your funeral expenses using the money in the account. As with the  life insurance option, you can leave an end-of-life document that outlines your wishes for burial, funeral services, location, type of headstone and casket, total costs, etc. The primary advantages of this form of prepayment are immediate access to the funds in the bank account and the security of the funds if deposited in an institution covered by the Federal Deposit Insurance Corporation (FDIC). The disadvantages are similar to the life insurance option: 1. Costs are not locked in, so you will have to account for inflation when determining the you put on deposit in the account. 2. Even if you leave detailed instructions regarding your funeral and burial, someone will have still have to implement your wishes and make difficult decisions under time constraints while grieving. A joint bank account does not eliminate the anxiety and potential guilt over funeral arrangements in the way a prepaid plan does.
  • Prepaid funeral plan funded with associated life insurance contract. You purchase a prepaid funeral plan from a funeral home of your choice. The plan is funded by a life insurance contract through an insurer associated with the plan and funeral home. At the death of the insured, the entire death benefit of the life insurance contract is paid to the funeral home to cover the contracted funeral services. The primary advantages of this form of prepayment are: 1. You determine where you are buried and what kind of funeral and burial you will have. 2. You lock in the cost of services for which you prepaid.  3. The money you use to prepay funeral expenses is protected from loss because he funeral home and insurance company are separate entities: If the funeral home goes out of business, the proceeds from the insurance policy will still be available to pay for funeral costs. Insurance companies are heavily regulated by the states. The state insurance commissioner will step in to guarantee the rights of policyholders if an insurer gets into financial trouble. The main disadvantage of this form of prepayment is if the funeral home goes out of business, you could lose the locked-in cost benefit of the prepaid funeral plan.

Once you prepay funeral expenses, keep the documents in a safe place. Make sure your spouse and appropriate family members know of the existence and location of the documents; they will need them when you are gone.

Rosa and I didn’t want to burden our loved ones with the arrangement and payment of our funeral expenses. They should be allowed to grieve their loss unencumbered by that terrible responsibility. So we took the responsibility that should only be ours and planned and prepaid our funeral expenses.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages