May 1, 2006
My philosphy for savings is to do it first. Man, if I don't get my savings out of my sight quick, I may not save at all. That's what makes a 401K or other pretax plan so great. A pretax saving plan allows you to sock away money in a retirement account before the tax man comes for his share. For example, suppose you make $15 per hour. That is $600 bucks per week or $1200 if you get paid biweekly. If you decide to save 6% of your pay your payroll department will direct $72 to a 401K plan. "Hey", you might say, "won't leave my take home $72 bucks less than it was? " Hold on, there is good news. Your Old Uncle Sam will allow you to save it before it is taxed. If you are in the 25% marginal rate (that means the last dollar you earned is taxed at 25%) that will be $72 bucks not taxed at 25%, or $18 in tax savings. The $72 you put away really only cost you $72-$18 or $54. If you have a state income tax (in my state I'm in the 5% rate) you will avoid that tax too. In my state the $72 would save me $4 on my state taxes. Now the $72 dollars savings only cost me $50 because of the $22 in taxes that weren't withheld from me. Pretty cool. Of course, if you are in the 15% tax`bracket, the tax savings will be a little less. But wait! Most plans have an employer match. In my plan my employer will match the first 3% of my savings. This is the most common type of match. Some plans are more generous. In my example my employer would match $1200 * 3% or $36 bucks. So if you saved $72 dollars in the 401K it would cost you only $50 bucks and the employer would kick in $36. Pretty sweet deal, you get $108 for your $50. Here's the secret that older guys have figured out. If that $50 bucks is deducted from your pay before you get it, you won't miss it. You will adjust your spending accordingly. I promise. The best news in the whole deal here though is the big payoff at the end. Your $72 + the bosse's $36 means $108 biweekly is being socked away. If you start saving at age 30 and go until 60 and it earns 8% per year, you will amass $320,000. Not too shabby. Of course the earier you start the more you will accumulate. What is that $50 really. Divided by 14 days in each pay period it means that you have to cut back $3.57 per day. Not even a pack of smokes or a fancy coffee at Starbucks or part of a lunch out. We all have a bunch of things that equal $3.57 per day. Pick one. You will note that at the corner of my blog I have added a net worth chart. The amount shown there was amassed over the past 20 years doing this very thing. I may have been a little more agressive than you want to be but it really added up. You are going to be old someday. No sense in being broke too.