The January Finance article presented the progression of your career, throughout your life.

This month, we will cover the other half of Finance:  building and enjoying your life.

Make your choices wisely   

When you are just starting out, saving money seems impossibly difficult.

Money that you do not spend on whimsical purchases, repeated trips to restaurants or impulsive spending can be spent on the things that really matter to you – i.e., making them affordable.

Debt, of course, is expensive, and is to be avoided religiously.  

Buying a house requires a mortgage. Buying a house inexpensive enough that you can pay off the mortgage in 15 years is far better than buying a house to impress your friends.  A 30-year mortgage requires the payment of so much interest that you will end up paying twice the sales price. 

Buying a car that can be paid off in three years likewise decreases the amount you pay in interest.

Pay cash for everything else.  Pay off any credit cards in full every month.  Interest eats you alive.

Your employer’s 401k savings plan  

When you are just starting out in life, with college behind you, possibly a new marriage, and with a new job, your investing is likely to be fairly limited:  your employer’s 401k plan.  Money is always tight at that stage in life, and it can feel like putting money into a 401k is just something beyond what you can afford to do.

However, employers usually match your contribution to a 401k.  That match is typically up to a certain limit; e.g., six percent of your salary.  

The right answer is to contribute at least as much into your 401k as will get you the greatest possible contribution from your employer.  

The employer’s contribution is free money!  Make your contribution to your 401k to get as much of that free money as you can.

The average wage is about $64,500 per year.  If you contribute 6% of your salary to a 401k, that would be about $4,000 saved per year (plus your employer’s matching amount).  If you contribute 15% of your salary, that would be about $10,000 saved per year.  

That seems like a big sacrifice when you are just starting out.  But you have to save enough to provide for yourself when you retire.  Social Security will help, but it is never enough, unless eating canned dog food sounds good to you.

Part of every paycheck you get has to go into saving for your retirement.  A 401k (or an IRA if your employer does not offer a 401k plan) is the ideal means of putting money aside for retirement.  By doing so, you reduce the income taxes you will pay now, which is not a trivial amount.

Your 401k plan includes selecting what kind of investments – stocks, bonds, or money market – you want to use to grow your savings.  

Money market is a very conservative choice – too conservative.  Typically, the interest paid in a money market account is barely level with inflation.  Inflation reduces the value of your money, meaning it takes more money to buy the same thing.  

Bonds are only slightly better.  Bonds are sold by governments – national, state, or local – as a means of borrowing money.  Your gain is the interest rate charged for the bonds.  That interest rate is typically just slightly better than the interest paid on money market accounts.  

Stocks are the best but riskiest means of growing your savings.  Some years the value of your stocks will actually decline.  Which years that will be is generally impossible to predict.  

Historic examples of bad years include the high inflation of the Jimmy Carter Presidency (1977-80), the 2000-2002 recession, the 2008 recession (due to the housing bust caused by Presidents Clinton and Bush), and the 2022-2023 recession caused by President Biden’s big spending package.  But on the whole, the good years will more than compensate for the bad years.

In addition to your 401k savings (which is “pre-tax”), open up a separate regular (after-tax) savings account.  While banks and credit unions offer savings accounts, the best option is to open an account with Schwab or Fidelity Investments.  Both have offices in downtown Greenville.

This account’s primary purpose it to build up savings to buy a car, a house, or other big purchase.  

While you are likely to get a loan to pay for a car or a mortgage to pay for a house, you will need a down payment – typically 10% to 15%.  The size of the down payment will not only reduce the monthly payment for the loan, but it is also likely to reduce the interest rate on the loan itself – particularly with a mortgage.

Having a savings account at Schwab or Fidelity Investments offers the pathway to your next big step:  buying stocks.  Both charge minimal fees for investing through them.

Read this month’s Investors Column for more about buying stocks.

With proper financial management throughout your life, by the time you retire your investments should be worth enough to keep your standard of living at the same level as it was during your working years.

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