Thrifty Spending Issue 74

FEATURE ARTICLE:  Save now or save later?

Most people have good intentions about saving for retirement. But few know when they should start and how much they should save.
Sometimes it might seem that the expenses of today make it too difficult to start saving for tomorrow. It’s easy to think that you will begin to save for retirement when you reach a more comfortable income level, but the longer you put if off, the harder it will be to accumulate the amount you need.

The rewards of starting to save early for retirement far outweigh the cost of waiting. By contributing even small amounts each month, you may be able to amass a great deal over the long term. One helpful method is to allocate a specific dollar amount or percentage of your salary every month and to pay yourself as though saving for retirement were a required expense.
Here’s a hypothetical example of the cost of waiting. Two friends, Chris and Leslie, want to start saving for retirement. Chris starts saving $275 a month right away and continues to do so for 10 years, after which he stops but lets his funds continue to accumulate. Leslie waits 10 years before starting to save, then starts saving the same amount on a monthly basis. Both their accounts earn a consistent 8% rate of return. After 20 years, each would have contributed a total of $33,000 for retirement. However, Leslie, the procrastinator, would have accumulated a total of $50,646, less than half of what Chris, the early starter, would have accumulated ($112,415).*

This example makes a strong case for an early start so that you can take advantage of the power of compounding. Your contributions have the potential to earn interest, and so does your reinvested interest. This is a good example of letting your money work for you.
If you have trouble saving money on a regular basis, you might try savings strategies that take money directly from your paycheck on a pre-tax or after-tax basis, such as employer-sponsored retirement plans and other direct-payroll deductions.
Regardless of the method you choose, it’s extremely important to start saving now, rather than later. Even small amounts can help you greatly in the future. You could also try to increase your contribution level by 1% or more each year as your salary grows.
Distributions from tax-deferred retirement plans, such as 401(k) plans and traditional IRAs, are taxed as ordinary income and may be subject to an additional 10% federal income tax penalty if withdrawn prior to age 59½.
*This hypothetical example of mathematical compounding is used for illustrative purposes only and does not represent the performance of any specific investment. Rates of return will vary over time, particularly for long-term investments. Investments offering the potential for higher rates of return involve a higher degree of investment risk. Taxes, inflation, and fees were not considered. Actual results will vary.
MONEY SAVING TIP:  Buying a bigger home than you need.
In 2001, Americans spent about 12 percent of their income on “residential and transportation energy,” but this year they’re projected to spend almost 20 percent. Living in a big house with unused rooms or bigger rooms than you need is like driving a stretch limo: You’re buying energy for unused space. A bigger house means more furniture, higher maintenance, higher taxes, and more time spent taking care of it. When home prices were rising, there was some logic to leveraging potential profits by buying the biggest. Now, however, that extra space is nothing but a cash drain.
Now that foreclosure rates are at an all time high, if you’re thinking about taking advantage of the low prices and mortgage rates, stay within your means. Just because a big house may have a small ticket, does not mean you can still afford to maintain it.

DID YOU KNOW…your debit card transactions may not deduct in preferred order?

Debit cards are like cash in some ways. But in others, they can be a completely different animal.

“People might think that when they use their debit card that transactions will come out of their account in the same order (in which) they are using their card,” says Rebecca Borne, senior policy counsel for the Center for Responsible Lending. “What a lot of banks are doing is reordering those debit card transactions before they come out.”

The model of processing larger purchases first, favored by some institutions, also produces maximum fees if a customer overdraws an account, she says.

You have no control over the order in which your bank processes daily transactions. But you can sidestep fees by not opting into fee-based overdraft protection programs, Borne says.

If you don’t opt in, when your balance hits zero, the card stops working. And if you’ve already signed up for fee-based overdraft protection, you can cancel it just as easily.