Get These 3 Things Right
Let’s keep simple the challenge of saving enough for a comfortable, secure retirement. Adopt these three guidelines, and much of your work will be done.
1. The Biggest Purchase Most of Us Make
How about we junk yet another conventional wisdom: for many people and even families, buying a home isn’t necessarily the financially smartest housing option. But for those who choose home ownership, getting the purchase right is crucial to long-term money success. Even at today’s low interest rates, mortgages cost a lot. Every $100,000 borrowed at 4% over 30 years costs about $72,000 in interest. And don’t forget PMI if you make a down payment under 20%.
But how do you know how much you can spend on a house?
Set your house price search criterion based on the biggest mortgage that your lender says you can get.
Outline a long-term, big picture financial plan (get help if you need it) that includes ample retirement saving, kids’ education, and a sizable contingency. With this laid out, how much room is left for a mortgage payment?
Take your lender’s or realtor’s recommendation and buy too much house, and you’ll be squeezing something out of your budget—usually saving, right? Oh, I know—the house will go up in value, it’s the best investment you can make, blah, blah, blah. Yeah, maybe. But I suggest a couple of items for your leisure time:
2. Have a Plan
Some argue that budgets (which I call “plans” because of the way I recommend you use this tool) are unnecessary. Maybe for some a budget or financial plan isn’t helpful. But for most of us, I have a really hard time visualizing how one achieves any long-term goal without a roadmap for how to get there. I mean, I suppose that, given enough time, energy, and tenacity a guy could wander pretty much aimlessly and eventually end up at a desired destination. But wouldn’t it be a lot easier to plan a route, know whether you’re on track and how far you have to go (and how far you’ve been!), and be ready and able to make adjustments for detours that always come up during any long journey?
You don’t need to track and plan for every dime that you earn and spend. But everyone should have a Big Picture financial plan centered on these questions:
- Do you want to retire one day (by “retire,” I mean stop or greatly scale back actively earning money)?
- What sort of retirement lifestyle do you want, and how much is it likely to cost, very roughly?
- How large does your nest egg need to be to support your retirement?
- How much on average must you save each year to build the nest egg you need?
- How many kids do you have or aim to have, and what’s it going to cost to get these dependents to age 18 and then through university?
- How much spending is simpatico with the other elements of your financial plan, including of course your expected lifetime earnings?
3. Listen to Your Little Man/Woman
Have you seen the 1944 movie Double Indemnity? It’s a good one. Over the movie’s course, insurance claims adjuster Barton Keyes (Edward G. Robinson) makes regular reference to his “little man.” Keyes wasn’t referring to his conscience. His little man was a sort of alarm, or sense of uneasiness that something just didn’t pass “the smell test,” didn’t add up, didn’t feel right.
What does Keyes’ little man have to do with your financial success? Just this: We all know what it takes to save enough cash so that we can one day, if we choose, retire comfortably and securely. We all know.
I’m not saying we walk around with a retirement spreadsheet and a catalog of money dos and don’ts locked in our frontal cortex for easy reference. But I am saying this: When we blow the emergency fund on a vacation, or borrow $2,000 at 20% on our credit card to buy something for which we lack the patience to save for, or buy an Audi (like the Joneses) when a Hyundai would perfectly meet our needs, our little man or woman speaks to us. What’s our typical reaction? We ignore or internally shout down our little man. “Shut up, I deserve this!” or “But this is such a bargain!” or “I work so hard, I should be able to splurge!”
The little man/woman always knows the truth. Get in the habit of hearing your little man/woman. He or she is probably talking to you even now. 🙂