Long-term Savings: Focus on Income Not Lump Sum

It is easy to lose perspective when it comes to the money you have accumulated in long-term savings if you think of it as a lump sum. For example, would you say $50,000 is a lot of money? Most people would say that it is a lot of money because most people have yet to accumulate that amount. Not only that, but most people save money in anticipation of spending it. So yes, $50,000 is a lot of money to spend. But consider this, currently $50,000 will produce $1,000 a year in interest income when invested in a 5-year certificate of deposit at my local credit union. One thousand dollars will not cover a month of living expenses for most people. Now does $50,000 sound like a lot of money? Not if you plan to live off the income it generates.

Loss of perspective puts you at risk of a shortfall in retirement savings

Why is this important? Well, if you think $50,000 or $100,000 or even $200,000 is a lot of money, how are you going to accumulate the $1 million to $2 million it is estimated you will need to maintain your standard of living in retirement? You will not think that big, and you will come up far short when it is time to retire.

If you think of your savings as money to be spent, you will never save very much because at some point your savings balance will appear to be a lot of money, and you will spend part or all of it. Or you will quit saving and spend the money you used to deposit into savings thereby increasing your standard of living which will put you just that much farther behind in retirement saving.

One reason the average balance in 401k accounts is so small is people spend their retirement money long before they retire. They treat retirement savings like an emergency fund and dip into it every time there is an expense they cannot finance out of their monthly income or with credit. Nearly half the households in the country cannot come up with $400 cash without tapping retirement funds or borrowing. One reason short-term savings balances are so low is people tend to spend savings once they have accumulated a few hundred to a few thousand dollars. Often savings is used as a down payment on a financed purchase of some kind. Not only does this deplete savings, but it also adds to debt; money is spent that has not yet been earned which makes it more difficult to save in the future.

The choice to live off my long-term savings changed my perspective

In 1981, when I was broke and in debt, I thought if I could just accumulate $5,000 in savings, I’d have it made. I was making $1,200 per month, the most income I had made up to that point in my young life. I had less than nothing; so of course, $5,000 seemed like a lot of money. It would have been a good start on an emergency fund; $5,000 would have replaced four months of my salary if I had lost my job.

Once I had accumulated $5,000 in savings, it no longer seemed like that much money. By that time, my wife, Rosa, and I had decided to eventually live off of our long-term savings, not spend it. That choice changed my perspective completely. The $5000 I had in savings only produced $400 a year in interest back in the early 1980’s. It would take a lot more than that to become financially independent. I became a super saver.

Rosa and I targeted income rather than a lump sum amount

It may sound strange but the account balance in our combined long-term savings, while increasing steadily, never really figured into our thinking. We were not trying to accumulate X dollars in long-term savings, anymore; we were shooting for X amount of income generated by our long-term savings. After a few years, Rosa and I had a third revenue stream from the interest on our long-term savings equivalent to full-time minimum wage employment in addition to our two full-time salaries. We became a three-income couple. That third income, the interest income, continued to grow, year after year, until the Great Recession of 2007 hit and the Fed’s zero interest rate policy became a reality a year later. With interest rates plummeting, our interest income decreased by about 40% over the next eight years, but we kept saving even after we retired in 2009, because we knew that interest rates would remain low for many years. We needed more capital to offset lower interest rates.

We set aside and spent short-term savings

Although we did not spend our long-term savings, we did budget monthly for unpredictable expenses such as house maintenance and improvement; vehicle maintenance, repair, and replacement; appliance repair and replacement; and insurance deductibles. The balances in these accounts grew until they were needed and became part of our short-term savings. We also put money into a separate emergency fund to replace our income if there was a temporary interruption in income due to the loss of a job, an accident, or illness. The emergency fund also figured into our short-term savings. If there was a big ticket purchase we wanted to make, we saved for it in a targeted savings account which we considered short-term savings, as well.

The endgame for our long-term savings

As inflation eats away at our purchasing power in retirement, there will come a day when we will tap our long-term savings to supplement our monthly income and to pay for increasingly expensive medical care. Barring a catastrophic medical expense, we do not expect to begin to systematically spend down our capital until after age 75. However, we may decide to withdraw some capital earlier to enjoy a better quality of life.

If we live long enough, we will consume most, if not all, of our capital. Right now, at seven years into retirement and three years away from Social Security, we continue to add to our long-term savings. Income is still our focus with 25 years of retirement or more to go.

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

How To Defeat Common Merchandising Tactics and Save Money

The lifehacker.com website recently posted an article titled 10 Sneaky Ways Retailers Fool You Into Spending More.  It educates consumers about the merchandising tactics retailers use to increase purchases so consumers will not be manipulated by them.  Awareness is a fine thing, but six months after having read the article, will you still remember those merchandising tactics, let alone have an appropriate level of awareness to resist them the next time you enter a retail store? It is not likely.  You need more than awareness; you need a routine.

Personal finance routines prevent impulsive spending

You can permanently inoculate yourself against retail merchandising tactics intended to get you to spend impulsively by practicing a few basic personal finance routines.

  • Set short and long range financial goals.  Goals keep you focused.  When you are focused, you are less likely to be influenced by merchandising tactics.  If a purchase does not advance you toward the attainment of your goals, why spend money on it?
  • Identify financial priorities.  A firm knowledge of your priorities keeps you focused on what is most important to you.  You are less likely to be distracted by merchandising tactics designed to get you to spend frivolously on low priority items.
  • Create and maintain a budget.  A budget is a spending plan; you spend your money on paper before you actually spend it.  If you have already spent your money on paper, merchandising tactics will not tempt you to spend impulsively, because there is nothing left to spend.  If an item is not in the budget, it does not get purchased.
  • Make a detailed shopping list and stick to it.  A shopping list is your plan for your trip to the store.  Stick to your plan, and merchandising tactics will fail to influence you to overspend.  Never enter a store without a shopping list.

Practice these personal finance routines and you will be your own person when you roam the retail stores.  Merchandising tactics will fail to influence your spending.

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

The Most Important Part of Personal Finance Has Nothing To Do With Money

While personal finance primarily deals with money management, the most important aspect of personal finance has nothing to do with money. I am talking about your values, your perceptions of what is most important in your life. Your values are the yardstick by which you measure to what extent you are succeeding or failing at life. Values determine your priorities. Priorities drive the decision-making process. Decisions regarding spending and investing are at the core of personal finance. If you find you are having trouble getting your finances under control, your values may be the root of your problem.

Where do values come from?

You derive your values from your parents, religious background, ethnic culture, society, mentors, and experience. For example, if your religious upbringing emphasized giving, you may value donating your time and money to charitable enterprises. When you cannot give as you think you should, you feel guilty. While we know where values come from, it is not always obvious how you came to have a certain value. For instance, if your parents were frugal, you may value saving as an adult, but not necessarily. You may resent your parents for not spending more than they did when you were a child, and as a result, you value consumption instead of saving. Your experience with frugality was negative so you adopted the opposite value.

While we know where values come from, it is not always obvious how you came to have a certain value. For instance, if your parents were frugal, you may value saving as an adult, but not necessarily. You may resent your parents for not spending more than they did when you were a child, and as a result, you value consumption instead of saving. Your experience with frugality was negative so you adopted the opposite value.

Values can change.

No matter what your upbringing or background, your values can change. Those things that influenced your values during your youth continue to influence your values throughout your life. Say you value consumption, but over time, consumption leads to financial hardships, and this causes you to value frugality later in your life. People often value money over time early in life as they perceive they have less of the former and an abundance of the latter. As they age, they may come to value time over money.

What values are compatible with successful money management?

Here is a partial list of personal values that are compatible with successful money management: abundance, balance, confidence, control, discipline, economy, financial independence, flexibility, freedom, frugality, individuality, industry, investing, optimism, order, organization, patience, prosperity, prudence, self-control, self-reliance, and thrift. If you possess many of these values, you have what it takes to be successful in personal finance. You may only need some guidance or tools to gain control over your money. If you possess values that are incompatible with successful personal money management such as expedience, status, and/or conformity, you will probably find it difficult to be successful at personal finance until your values change.

What are your values?

The important thing is to examine your values. Some may be obvious to you, others may require some digging. Honest answers to the following questions can help you begin to identify some of your values.

  • How do you spend your time?
  • How do you spend your money?
  • Who are your friends and what do they value?
  • What do you do for a living and how do you feel about it?
  • What motivated you to purchase the particular make and model of the vehicle you own?
  • What motivated you to purchase the particular house you own?
  • How do you feel when a close friend receives a financial windfall?
  • How do you feel when your neighbor purchases a new car?
  • How do you finance large purchases?

You can change your values

If you find that some of your values are incompatible with successful money management and this is hampering your ability to gain control over your finances, there is hope. You can change your values. You do it by substituting a value that is compatible with successful money management for one that is not. For example, substitute discipline for expediency or thrift for consumption. Now make that new value a part of you by taking action that reflects the new value. For example, act on the value of discipline by saving a portion of each paycheck. Repeated action that reflects the new value is the key to successfully changing your values. Compatible values form the foundation for successful money management.

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