Habits are more valuable than returns. For number geeks like me, this can be tough to admit. Mayby want to start saving for retirement but are still paying off our credit card at 17% interest, and student loans at 7.9%. It’s easy to put off retirement savings till we feel more ready. But the habit is more valuable than the return. So we need to find our own “No-matter-what-minimum-retirement-savings-number!”
I wish Mr. Mt and I would have done this from day one. We didn’t. We payed off the credit cards first. We made sure the student loan was handled. Then we tackled medical debt. In short, we lost nearly 3 years before we wised up. Our procrastination could have gone on much longer.
There will always be a “Next Thing.”
It’s tempting to think, “Once I get these things squared away, I will be ready to start.” But there will always be a next thing. You pay off your credit cards, but need to buy a car. You pay off your car, then work on student loans. Your student loans are about paid off, but you get engaged and need to pay for a wedding. That is paid off but now you are saving to buy a house. Your in a great home, but now that you have two kids one parent wants to stay home. The kids are in school but your parents need help. Your house is far too small. Wait, now your kids are in college. That’s life. You can’t wait till life takes a long pause in the action for you to start saving for retirement.
Find your “No matter what minimum retirement savings number!”
When we finally got our heads on straight, we decided to save the max amount for a Roth IRA. I think it was $3000 a person when we started. Ok, so $6000 all together. No matter what, that was our number. If there was a wedding across country, we HAD to make sure we could hit that target. If we needed a new car, we wouldn’t compromise on that number. If I wanted to switch jobs (I did that a lot!), we still had to hit our number. Buying and remodeling our first house? Still made sure we maxed out that IRA.
The government helped us out by slowly increasing that threshold of max IRA contributions. So we forced our savings to grow with it. But that was our bench mark. No matter what.
“But the interest rates!” you cry in pain. I know. I get it. It sucks, but here is why I still think investing and paying down debt at the same time is better course of action.
1. You are building your expense slashing/income growing skills twice as fast!
Paying off debt and investing at the same time requires personal growth. You have to learn how to lower your expenses. You have to learn to cook. You have to learn to be ok with a not so fancy car. You have to learn how to earn extra income. The learning curve is real! If you tackle two goals at once, you will learn those skills twice as well, twice as fast! Just trying to pay off debt will help your learning curve a bit. But paying off debt and coming up with extra income to invest will stretch you. It will force you to be creative. You will move out of your comfort zone to hit your goal. And that will serve you well for the rest of your life. No, you might not eat beans and rice forever, but when you are able to start making fajitas at home, you will feel like you really have arrived! If you never did the rice and bean stage, fajitas are so, “eh.” (I’m sorry I said that fajitas! I love you SO much, you know that!)
2. You are building a powerful habit
So for 11 years we have committed to maxing out our IRA’s. But we are currently taking a year long sabbatical this year. I wasn’t 100% sure how the numbers would look. So we decided it was best NOT to save this year. But…. It’s driving me crazy! After of years of sticking to our IRA max, it has also become a powerful habit.
The other habit we picked up along the way was keeping expenses low. Now, don’t get me wrong, I feel like we lived it up this year. 6 week road trip. New classic car. Bought a pop up camper. Bathroom build out. Geesh. But years of keeping expenses low have paid off. Every month we came out a little further ahead rather than behind. So we are going to max out our IRA again this year!
When our “No matter what minimum retirement savings number!” becomes second nature, we now have a habit that will consistently bring us more freedom rather than less. The longer you do it, the stronger the habit will become.
3. Take the money off the table
When we finally took that money off the table as an option to spend, we adjusted our cost of living and saved ourselves a few stupid mistakes. Before people find that “No matter what minimum retirement savings number!”, it can be easy to take on more payments and postpone the saving even longer. “As soon as we pay off the student loans, we are going to start investing.” Which totally makes sense, except I would say it only happens 50% of the time. As soon as those loans are paid off, the house is way too small and they really “need” to get a bigger place. Making it non-negotiable was a game changer for us. It saved us more than a few stupid mistakes. About 2 years after we made that commitment, we almost compromised and bought a house. A $400,000 house. At the peak of the housing bubble. But in the end after lots of number crunching, wishing, research and prayer: it just didn’t sit right. I think part of the reason was that we might not be able to max out our Roth IRA if we bought the house. I tried to justify the compromise because we would be “investing” that money into real estate (aka paying interest). Oh, a year later when we moved to Europe, that house had dropped nearly 100k in value. Perhaps the best non-decision of my life.
By taking that money off the table and committing to your investment plan it will help keep your expenses in check.
So we are going to max out our 2016 Roth IRA.
Our narrative says, that’s just what we do.
We max it out.
Always.
There is no benefit to changing that narrative now.
It’s worked well for us this far.
Discussion questions:
Do you have a “No-matter-what-minimum-retirement-savings-number!” or a certain % you always save?
Did you wait till other things were paid off before you started saving for retirement? Which ones did you pay off first?
What would you compromise your number for? Do you think you would follow through or throw in the towel like me? =)
Do you wish you would have started earlier? Like $25 a month during college, just to build the habit?
I think just forcing yourself to do these things is key. Once you force yourself to take that money off the table, you’ll always someone find a way to survive, even though you might have been sure you couldn’t survive on that smaller paycheck before.
Starting earlier would have definitely been nice. I know back in college, I spent way more money than I ever needed to. Even just small savings could have at least built up my savings muscles back then.
“Even just small savings could have at least built up my savings muscles back then.” Absolutely! I think starting the habit, even at $25 a week is so important. Even if the actually dollar amount isn’t that impressive, getting the habit started is so powerful. I’m going to let me kids start buying stock this year. The amount they will buy is almost inconsequential, but the habit is critical.
When we were first getting started, putting $$ into retirement savings was great because it got the cash out of our checking account so we weren’t tempted to spend it. As we read and learned more and practiced our frugality, we became more intentional about where and how we save, but in those early years it was nice to have a default option.
Getting the money out of the checking account is SO important! Seeing those big numbers in checking can really mess with your spending and lifestyle inflation. It’s hard to cut costs when your checking account says you’re rolling in cash.
For me, the IRA gets maxed out in January. That’s a non-negotiable. The only reason I wouldn’t is if I didn’t have any earned income which is what is required to contribute to one. 😀
I definitely wish I started investing earlier. It’s fun to backtest and see that if $1,000 invested was the year i was born (1985) into the Vanguard 500 index fund with exactly 0 additional contributions and all the dividends reinvested, that would be worth nearly $20,000 today. That’s more than some people have when they retire.
Invest early and often is my motto. 😀
What a fun idea. I have never looked at what my investments would have been had I started earlier. Maybe it would just make me sad. =) Some day I will write a post about it, but I bought my very first investment book when I was 20. I had been passionate about saving cash and getting out of debt before then, but that was what really got the ball rolling for us. I wish I would have bought that book when I was 12 and had my first job. =)
Yes! Starting is the hardest, for sure. My husband insisted we start when we did (mid 20s) and I’m grateful we started then (though it wasn’t much). And it became a habit – the money was missed for about a month or two, and then forgotten. And we continued to invest at the same time we paid off debt, though it was just the minimum to get the company match for the 401k (just can’t turn down “free” money).
Like you, we now have an annual goal for retirement investing that we force ourselves to meet. It still sometimes stretches us a bit but we don’t allow ourselves to spend on anything until we’re sure the goal is met.
Taking that money off the table really helps figure out the rest of our spending. Starting that habit is SO important. Even if the math doesn’t pan out (because of debt), $25 or $100 a month towards investing will jump start the habit.
Great article, MM! When I got my first “career” paycheck at 22 years old, I had 15% automatically deducted into my 401(k). When I got a raise, I increased my savings by 2/3 of the raise. When my wife was working before we had kids, we saved all of her pay so we wouldn’t become “addicted” to her income. Start young, start aggressive, and let compounding take care of itself.
So, my “no compromise” number: 15% of your first paycheck. You weren’t making any money a month ago, so you can certainly live on 15% less of your first paycheck without ever feeling the pain.
That is a great plan, 15% to start then 2/3 of each raise. Recipe for success! And I totally agree with the banking one spouse’s income, such a smart move!
Our retirement number is a work in progress but we have a minimum amount in mind. We did contribute 15% of income to retirement after we both graduated, but I wish we would’ve contributed more back then. Anyway, our 401k contributes are non-negotiable to us, though the IRAs have taken a back burner in light of “other things” popping up. The 401k is an old habit for us, and the IRA a very new one, so we’re still getting used to it. You’re right that habits are very powerful, though!
15% is an amazing start! But I think a lot of people look back and think, “Shoot, I didn’t even know how good we had it! No kids! No Mortgage! Why didn’t we save more?” Boy that hindsight. =)
I so wish I started getting very serious earlier. Much earlier. I have always participated in my 401k and saved a small amount each month but none of it was enough. But I am glad I was able to get out of debt, once I did get serious, while keeping my small, but slowly growing, savings in tact. I agree with you 100%. The debt interest vs. savings interest probably didn’t always make sense, but it would have been very discouraging to use all my savings for debt relief, which I could have done. Instead I forced myself to live on less while I paid it off, which i think helped keep me on track mentally.
I totally agree that it is better to try to live on less while hitting both goals. All those skills will continue to pay dividends after you are out of debt! Then people can really ramp up the investing.
We haven’t figured out our exact retirement number, but for now we’re just saving as much as we can. I’m a super saver and I’d like it beefy anyways. It would be a great thing to know, though, and a great motivator!
I wish I’d been more aggressive! I think I started out at something like $30 a month into my IRA before slowly ramping up. But, yes, just doing that meant learning to live on less than I made and deliberately making some choices about spending less to maintain or increase my savings rate.
But that’s a common refrain, I don’t think I’ve ever heard anyone say “I WISH I hadn’t saved so much money!” even if they wish they’d spent money on particular things like more travel or paying down debt. But it’s the lattes, clothes, cars, nights out, etc. they will talk about wasting money on instead, not their retirement accounts.
That is so true. There were months and years we really stretched with our Roth ira, way past the point of comfort. But I always said, if something goes horribly wrong, we will pull it back out. We never had to, but that was a comfort while we stretched ourselves to invest. =)
The last year we got into the habit of saving the hubs income and my quarterly commission checks. This filled up our e fund and we’re on track to max out retirement for 2016. Now that he’s home with our toddler and just works 30ish hours a month, his paycheck and therefore our savings rate has dropped considerably. We haven’t really adjusted spending to try to ramp it back up. This motivates me to find a number that we can commit to each month, instead of just defaulting to “whatever his income/my commission is”, because we could certainly tighten our belts a bit!
We also save $700/month towards various sinking funds…insurance, car, etc. But that money sits as cash in our Capital One accounts, it isn’t invested.
And YES I wish I had started a Roth IRA in high school. I was waitressing and making great money…I was fairly good about saving it for college spending money, but I could’ve set aside at least 10-15% and wouldn’t have noticed at the time. Remember the days of zero expenses, besides movie tickets and American Eagle purchases? Ugh.
Hey, I waitress in high school as well. And that was good money! I was really good about saving, but didn’t have a clue about investing. It took a lot of years till I figured that out.
Somehow, we do the same in an opposite way! 😉
We live on a fixed budget, for years now…. everythin else is invested. We do have some itmes we do: max out what we can max out. Living in Belgium, sadly this is less than 5 K for my wife and me together.
And I wanted to pay off our mortgage. That plan is now gone…
That’s interesting. Is more of your retirement savings via the government like our social security or via your employer?
Belgium has a different system than the US.
Retirement saving via our employer is not a choice we make. It is decided at company level for you. this is the only pre tax contribution we have…
Most of our retirement saving is in taxable accounts. The amounts we can save via employer or tax advantage accounts is really low: 3,1K per person per year. And that is always after tax money.
That brings one advantage: no worries of timing…
Thank you for this post. I just wanted to tell you that it has motivated me to start adding to my Superannuation (Australian version of retirement savings) Right Now. I have put it off while paying off debt, and I’m a stay at home mum and therefore my Super hasn’t grown whatsoever since I stopped work. I looked into it and if I can spare $20/week, which I can, then at the end of the year the government will put in $500. That’s a 50% tax free return, which makes it a pretty unbeatable investment. It’s not a lot but at least it is something – I don’t want to be destitute in retirement, especially as I am unsure how long it will be before I go back to work and start getting some employer contributions again.
Thank you so much for taking the time to write this comment. Wow. Just made my week. $20 a week sound like it will provide an amazing ROI. As you get started you might find more and more little ways to stash some cash. Just keep going. I’ve taken a lot of years off myself, when I had bio kids and when we adopted. You might find a few little ways to make some money while you are home with your sweet baby as well. It all adds up. Keep up the good work, and let me know how it goes!