I haven’t posted in two weeks due to my new and growing obsession. I’m in the midst of a financial rebirth. Which I believe is due to a mid-life crisis. Not only did I recently turn 50 (May 2013), but both my brothers and my father died during a short span of time prior to that milestone. For those of you who follow my blog, I do tend to go on about all the dying. But it’s relevant to the crisis, so it can’t be helped.
The dying has foist upon me the role of financial manager for my mother (which includes three modest homes) and overseeing my father’s business. Other than mindlessly putting money into my 401(k) year after year, I have spent numerous decades with my head in the financial sand. The result: I’m far behind where I’d like to be.
It’s time I pulled my head out.
For a girl with no children and a decent income, I should have a pretty significant nest egg. How in the hell did this happen? I’ll tell you how it happened. The same way it happens to lots of people. When you’re young, you don’t think about retirement. You think there will be plenty of time to save later. It’s too much fun to spend money now that you’re earning it. And if you’re female, you think you’ll marry a man with awesome financial acumen who will magically plan your financial future. When you’re young you don’t understand the idea of compound interest. It doesn’t occur to you that saving just a little, just a tiny snowflake, will turn into this massive giant snowball barreling down a hill, gathering speed and momentum and size, with no effort on your part at all. Except the effort of tucking away the insignificant little snowflake to begin with.
I had a decent little snowball in a 401(k) back in the early 90s, but I decided to cash it in and use it to help pay for law school. I haven’t run the numbers, but at this point I suspect that my fancy law school degree and its fancy price tag has me at about the same place I would have been had I continued to work and save money; had I not incurred massive amounts of student loan debt, which at the time came with a 7.5% interest rate, and that was after consolidation. All for a career that had (has) me toiling away for most of my waking hours.
Along with the fancy degree and legal practice comes the mindset. Lawyers need to drive fancy cars, wear fancy clothes, and live in fancy houses. They need to fill the fancy houses with fancy furnishings. They need to eat fancy food in fancy restaurants and drink fancy wines. Some think they need fancy pets that come with fancy papers. (Thank goodness rescues are becoming more in vogue.) I fell for most of this, although with not quite as loud a thud as some of my friends. And now, at 50, I’m calling bullshit on myself.
First, while I do drive a formerly-fancy car, I bought it used (or as fancy people call it, pre-owned), and it is now 11 years old. From time to time I feel a pull to buy a new fancy car. Particularly around the holidays when I’ve been watching too much television with the romantic bow-adorned cars sitting out front in the snow-covered circular drives, or the keys for the “old” car being tossed into Salvation-Army buckets. “I’m going to have to get a bigger bucket,” says the cute little elf. I get online and see that the 2014 model of my car goes for nearly $60,000. I paid nowhere near this much for the car 11 years ago. Having been free of car payments for many years, other than periodic maintenance, my car is free. My keys are not going into the elf bucket until this sucker dies. And when it dies, I’ll buy a more sensible car (e.g., Ford Focus) with a sensible price tag. With cash. I figure it’s got at least another 100,000 miles on it.
Second, I live in a 1500-square-foot condo in a non-trendy part of town. For years I considered moving into a house with a view; a view that came with double the price tag. I could have afforded it–I could have made the payments with no discomfort. But the recession made me leery and I held off. Now, I’m glad I did. I see that my condo is a perfectly fine place to call home. And it’s small enough that it keeps me from filling it with more crap than I need. I recently refinanced (another component of my budding financial transformation) at 3.5 percent for a 15-year mortgage (it was a 30-year with 23 years remaining), increasing my payments by less than $100 a month with a payoff date 8 years earlier at age 65. Although I do plan to pay it down more quickly. For just $100 more a month, I can reduce the payoff (and interest) by two years. The goal is to pay it off before I retire, and I’d like to retire before I’m 65. But I get ahead of myself.
Third, as for fancy trendy clothes, I’ve never been much into that. While I have been known to spend too much on designer clothes, generally they were classic styles that could still be worn, if only I didn’t have this middle-age thickening midsection. I did used to be a little Carrie Bradshawesque when it came to shoes, but I’ve outgrown the whole idea of tottering around in uncomfortable heels. Saving money is the new sexy. Besides, if I want new clothes, I can drop ten pounds and go shopping in my closet.
So back to the theme of this post. Let’s be honest. Money is scary to a lot of people. Financial planning is daunting. But if you learn something about it, money provokes much less anxiety. All you need is a plan. It’s never too late to start.
Here’s what I’ve learned over the past six months and here are links to a few key sites to help you on your road to financial independence:
The best way to make your money grow is to buy index funds. One word: Vanguard. Don’t buy into the slick marketing campaigns for the actively managed mutual funds. The expenses charged for managing the funds eat up any amount by which they beat the market–and these funds beating the market over the long haul is rare indeed. But don’t take my word for it. Spend some time researching the issue. Start with the Bogleheads site and the Bogleheads books on investing.
Max out your 401(k).
Currently for singles, $17,500 per year is the max. “But I can’t afford to put away $17,500 a year! I have bills!” you protest. Check out this blog for ideas on how to live on less. Mr. Money Mustache is my new hero. After reading his blog and using a good retirement calculator (link below), I am more motivated than ever to stop spending money foolishly. Which generally means mindlessly.
After you’ve maxed out your 401(k), if you’re 50 or older, max out your “Catch-Up.” Learn what this means.
I’m not going to spoon-feed this one. Take charge and do a Bing search. (Note, I did not use the G word. I’m getting a little annoyed with the privacy issues over there.)
Save 50% of your net pay.
“50%! No way!” Again, stop whining and go read Mr. Money Mustache’s blog for tips and tricks. He’ll also bust you out of the consumerism mindset. Whenever you feel drawn to blow money on something stupid, read one of his posts and be reminded how cool it is to be a Mustachian. And turn off the television. There’s nothing worse than watching television for obliterating common sense when it comes to spending money.
Once you’ve maxed out your 401(k) and your Catch-Up, before considering a taxable account, max out your HSA.
This is one of the more esoteric of the neat new tricks I’ve learned. The money you put into your HSA (health savings account) is pre-tax and the earnings on investment returns grow tax free. Most HSA accounts allow you to invest the money in mutual or index funds once you’ve saved a threshold amount. If you can afford it, you should let it grow rather than using this money for medical expenses. Instead, use your after tax cash for medical expenses, letting the HSA money grow, with the same tax-advantaged status as the money in your 401(k) or IRA.
Figure out your retirement number.
Instead of wandering around aimlessly, as I did for many years, you need to make a plan. The first thing you need to do is figure out your retirement number: how much you need to have working for you in your investments before you can stop the daily grind. Even if that number isn’t perfect, you’ll have a goal. It’s funny how a little thing like a goal can turn into a snowflake can turn into an avalanche. Todd Tresidder wrote a book I like for finding that number. Also see his Best Retirement Calculator. According to this and the 50% stashing rule, I should be able to say “F You, Mega Law Firm!” by the time I’m 63. Sooner if the market cooperates.
Last night, as I was drifting off to sleep, I imagined where I’d be spending my winters in 13 years. Summers will be in a little cabin on Lake Superior. As for winters, maybe I’ll keep the condo. Or sell it for a little house in the country. Or on the ocean. I won’t be working so I won’t need to live near Congress Avenue. The world will be my oyster. With a little planning, it can be yours, too.