Money Philosophies and Practices Worth Embracing
In order to achieve success in any endeavor, whether it is mastering an instrument or managing money, certain philosophies or beliefs must be developed and turned into actions. What follows are some of the philosophies which I have adopted and have served me well.
Do Not Loan Money
At first glance, that statement might strike you as miserly. Nothing could be further from the truth. I am not suggesting that you should never help friends and family in the form of monetary assistance. I am simply saying that you should consider it a gift vice a loan. A loan implies that the money should be repaid at some point in the future. There are two reasons why I believe this is a practice better avoided.
First, money has a tendency to put a strain on relationships, particularly if the recipient has a difficult time repaying the loan or is late with repayment. They are stressed because of their desire to repay the loan, and the lender is stressed because they had expectations of repayment, and likely, a plan for using the loaned funds for some other purpose.
Second, the practice can be disruptive to your retirement planning. Once you establish your retirement plan and have identified the amount you need to invest on a monthly basis to meet your goals, your first priority should be to pay yourself first.
If a situation arises and you have determined that a family or friend has a sincere need for financial assistance, and providing that assistance will not impact your plan, you should assist with a gift vice a loan. I assure you that if you loan a family member $300 of the $500 you were going to commit to your Roth IRA one particular month and they are not able to repay you, they are going to feel bad, you are going to feel resentment, and you will be $300 – not even counting the compound interest you will not have earned – further from your objective.
Conversely, if you find that you have an additional $150 at your disposal after meeting your monthly financial goals, and you can assist a family member with a gift of half the $300 they may need, they will be very appreciative, you will be glad you could assist, and there is no chance for resentment and strain on the relationship. Once you write that check for $150 it is forgotten forever and you move on and prepare to meet your next month’s goal.
Do Not Raid Retirement Accounts
Once the balances in your retirement accounts start to grow and you get well positioned on your rendezvous with retirement, there will probably be an occasion (e.g. helping a child with college tuition) when you will be tempted to borrow against your nest-egg. Generally speaking, you should not. Like the previous philosophy, I know this sounds a little miserly, particularly if we are talking about assisting a child with college costs. However, there are numerous reasons why you should not tap into your retirement accounts.
Consider the money in your 401(k). First, any money that you withdraw is no longer in its tax-protected status, doing what it does best, leveraging the power of compound interest. Second, over the long-term, you are significantly less likely to make more money by lending funds to yourself, or your child (e.g. for college), than you would have made had you left the money invested in your 401(k) account.
A third consideration, what happens if you borrow money from your 401(k) and then lose or quit your job? Answer, it is likely that you will be required to pay back the entire loan within a short time period. If you cannot pay back the loan within the given time period, you will be subjected to a 10% penalty on the balance of the funds if you are under 59½ years of age. Additionally, you will have to pay income taxes on the money because even though you might consider it a loan, the IRS will consider it an early withdrawal. If you, or a child, require a loan, you are better off seeking a more traditional loan vice dipping into your 401(k).
Disregard the Naysayers
Regardless of the endeavor you are undertaking, no matter what it is that you might be trying to accomplish, there are likely to be those that tell you that you cannot achieve, you will not achieve, or you should not pursue your goal. You are likely to encounter these naysayers at some point on your road to fiscal fitness.
I do not believe that the intent of most of the naysayers is malicious. In most cases I believe it is simply a lack of vision, an inability to see beyond the walls they have established for themselves. If they cannot imagine something for themselves, they certainly cannot imagine it for someone else.
When I first began my journey on the road to fiscal fitness, I would often mention the desired size of my nest-egg in conversations with others or the amount I was saving and investing on a monthly basis. While the amount changed periodically as I adjusted my aim upwards, the feedback was often the same. Negative. Generally the pessimism revolved around a couple of ideas.
First, there was the belief that there was no way that I could save the amount of money required to get to the desired amount. And second, why would I sacrifice so much today for some future goal?
The two things that I always keep in mind are that my goals are my own and there is nothing to stop me from taking the actions my plan dictates that I take; especially someone else’s belief of what is possible. Although you are bound to encounter naysayers, I still encourage you to engage in conversations on the topic of retirement savings.
Just as I am certain you will receive some negative feedback, I am just as certain there will be the occasional conversation, or part of a conversation, that will yield a valuable nugget of information; something useful that can be used to enhance your fiscal fitness and improve your retirement prospects.
Know What You Can Afford
How many times have you gone out to purchase a big-ticket item (i.e. house, car, or major appliance) and after the salesperson checked your credit report, you were told what you can afford? Think about that. The salesperson is telling you what you can afford.
Unless that person has access to your personal savings/investment/retirement plan, they cannot possibly know where you are with regards to meeting your retirement savings and investment objectives; and what you can afford.
Know the difference between what someone is willing to loan you (and what they think you can afford) and what you know you can afford based on your thoughtfully constructed retirement plan.
Prior to getting anywhere close to a car dealership or your local big box retailer, you should have already consulted your retirement tools, run your numbers, and know exactly what you are willing to pay and what you are able to afford in order to remain fiscally fit and stay on track with your retirement plan.