Wednesday, November 4, 2015

This is Really Important

Before you fill out your budget, before you spend a penny, do two things for yourself and your future. Pay yourself first. Take 10% of your take home pay and put it in the bank. Then take something (I’ll never tell you how much or where to give, Christianity is a religion of freedom and grace) and return it to God. If 10% to savings is a pipedream given your current circumstances, don’t beat yourself up. Start with something. Start today.

In my last post, we looked at some pretty prosperous Americans who didn’t even have a $1,000 Baby Step 1 emergency fund. I believe that your emergency fund should ultimately reach six months take home pay, in cash, stored in an insured savings account or money market fund. Again, don’t beat yourself up if it seems impossible. I was well into my early 40s before I reached that goal. Given the length of time out of work suffered by those who lost their jobs in the last recession, Suze Orman believes your emergency fund should be able to cover eight months of your normal expenses.

There aren’t many people who are telling you to save your money for tomorrow.

Businesses want you to spend more than you make. A car company that sells you a new automobile on credit, not only makes a profit today, but they own a piece of your future. By the time you pay off that five year loan, your car is worth less than ½ of what you paid for it when it was new. Many politicians don’t want you to believe you can make it without Government assistance. They want large numbers of poor people who believe they are helpless voting for their party and their programs. You don’t believe me? Check out the income, perks, and net worth of some of our political leaders. Ask yourself, “How did they get all that money if we are all so helpless?”

In an article entitled, America is Full of High-Earning Poor People, by Allison Schrager, graphs are presented that I can’t copy into this blog article. Reading her graph of financial asset holdings for American families earning $50,000-$75,000 a year it appears that their average financial net worth is about $25,000. For Americans earning $75,000-$100,000 that number would be around $72,000. That would include all savings, taxable investment accounts, and tax favored retirement accounts. Remember median household income is $55,000 a year, so these people are doing pretty good.

These numbers give me the same kind of queasy feeling I experienced just before the real estate crash of 2006. I knew something bad was going to happen. I just didn’t know how bad or when. My generation, the Baby Boom, isn’t doing too well. Many of us believe that we will need to work into our seventies in order to have enough money to retire. Real health issues and age discrimination make that an unlikely scenario. Delayed retirement also handicaps the aspirations of Gen-X and the Millennial Generation, looking to move up in the workforce.

According to the Census Bureau if you are an American between the ages of 55 and 64 your net worth would be:

$39,057 30th Percentile
$144,200 50th Percentile
$333,750 70th Percentile

If you are over 65 those numbers become:

$68,783 30th Percentile
$171,135 50th Percentile
$334,870 70th Percentile

Net worth not only includes your financial assets, but any equity you might have in your home. Even if you are in the 50th percentile at age 65 and you sell your home, a 4% draw on a $171,135 portfolio of stocks and bonds would generate a monthly check of $570. Add something on the order of $2,500 a month in Social Security to this number.

As you can see, the average American is looking a pretty scary retirement scenario.

One more thing to worry about—debt. Returning to Allison Schrager’s article, the leverage ratio for an American family earning $50,000-$75,000 a year is running around 38%. Families in the $75,000-$100,000 a year range are only doing a tad better at somewhere around 36%. We are still hovering near record levels of individual debt that ultimately needs to be paid down prior to retirement.

Which brings us back to the first paragraph; you know what you need to do. You know how to do it—one dollar, one step at a time. I can encourage you to start an emergency fund, pay down your debts, and contribute more to your 401(k), but I can’t do it for you. You are going to make those decisions every day for the rest of your life. Those little bits of money will grow. Over time, the miracle of compound interest will begin to work for you instead of eating you alive.

If you persist, you will find financial freedom.

No comments:

Post a Comment