Putting saving first

It sounds so scary when experts tell us how much we need to save for retirement. For every $10,000 we want to spend, they tell us we need to save $250,000 (for a 4% withdrawal rate, which maximizes the likelihood it will last throughout old age). That just sounds impossible for a family making $40k a year - heck, it sounds impossible for a family making $100k a year in high-cost-of-living areas where people are likely to earn that much. But small steps lead to medium steps which lead to great results.

$25 a month is a start. Heck, if $10 is all a person can save, the $120 they've saved after just a year is a small fortune. Then, when they don't have to pay late fees and use check-cashing services to do basic banking, they can save even more. Then, when they have a couple thousand dollars, when some swindler tells them they can buy that $1500 sofa for "just $25 a month" (forever), the little voice in the back of the brain says "gosh, that's almost every dollar I've got. It took me years to save $1,500. Maybe I better buy a $100 sofa off craigslist until I can afford to pay cash for a new sofa." That is a life-altering moment that leads to financial freedom.

Cash savings means not having to sell the car for gas money. It means not refinancing the house every 2 years for living money. It means paying off the house in 30 years, and having an affordable place to live in retirement. It means having money to buy a house when everyone is selling, and being able to take that terrific job in another state, even though the employer won't pay moving expenses. It means keeping food on the table during illness or layoffs. It means being able to afford insurance so that all the little problems life throws at you - and life will throw them - don't bankrupt you.

Two years ago, on Christmas eve, our water heater died. We had just inherited a child, with private school expenses and transportation expenses and food expenses and clothing expenses that we hadn't prepared for. But we had savings, and we had a determination to get our budget under control. So we cut some expenses that we didn't need, and we dipped into savings a for a few months while we adjusted, and when that water heater died on Christmas Eve, we were blessed. We didn't have to go to the stores to return all the presents, and we didn't have to wait until the plumber that accepted credit cards opened after Christmas. We called the 24-hour plumber, wrote a check, and went to celebrate the holidays. Let me tell you, we've both been in situations where it would have been different. But we've made saving a priority - so we made continuing to save a priority - and we're not rich, but it sure feels wealthy knowing we can give Christmas presents without going into debt, even after spending 800 unexpected dollars on Christmas Eve.

Saving starts with whatever small steps we can do. Nobody needs a latte or a dinner out or a new TV. Experts sometimes make us feel like we may as well give up if we can't put away a thousand dollars a month. That's just not true. A dollar a month - if it's really all we can afford to save - gives us the small fortune of $12 after a year. $5 a month is $60 in year. $100 a month is $1200 in a year. Don't even think of it as a year, if that sounds too hard. It's just saving once a month, twelve times. Lather, rinse, repeat.

Saving is a gift to ourselves, a promise that someday, we won't go into financial crisis every time we need an oil change or a brake job or a $100 continuing education class. Eventually, after a few years, it's the gift of peace. It's getting out of debt, staying out debt, and having options. Then, as the decades pass, it's the gift of understanding money, understanding how hard it is to earn, how hard it is to keep, how much easier it is - in the long run - when we just say no rather than say "charge it!" At retirement or during an ugly layoff, it is the gift of staying fed, clothed, and housed.

A lot of experts say to pay off the credit cards before putting money into savings. For me, I needed to save first, to have the security of not needing the credit card when unexpected expenses popped up. I needed to have the sense that I could do it, that it was worth it, and what it really took. I started saving young, but things kept happening, and I eventually gave up. Just plain gave up. But when I started again, I realized that my sense of money was skewed. My idea of what was "a lot" of money had been framed by credit limits and how much I could buy for "just $25 a month" and news reports of billions, and, honestly, by the false belief that I earned my full salary every year. After taxes and deductions, after housing and food, I had less than half my salary left over, but I still thought - when spending - in terms of "I earn $X a year." After I struggled long and hard to save $1,500, I truly understood that $1,500 was a lot of money.

There's a sneaky side benefit to saving, too. If you pay 15% of your income in taxes, and you save 10%, you're only living on 75% of your income. So if you lose your job, you only need to make up 75% of your income to maintain your standard of living. If you couldn't afford to save and eat out every week, you already gave up eating out once a week - you don't have to cut back so much during lean times. It's tough to cut back after a layoff - you already feel low about losing your job, and then having to cut back makes you feel poor, on top of it. But if you cut back to what you could afford before crisis hit, so you could save, you have a cash cushion and you don't need as much. That's double the bang for the buck.

Nobody talks about the benefits of saving. They just say you should do it, save for a rainy day. I say, save for a sunny day, because savings makes those rainy days a lot less dreary. If it never rains, well, saving is still mighty good. At first, it's just less drama, but then it's dramatic benefits, being able to buy a house, being able to go on a trip without borrowing, being able to pursue a dream or retire early or put your kid through school. It's a freedom and lightness that everyone should experience for as much of their life as possible. Put saving first, before the lattes, before dinners out, before the luxuries, because financial security is the best luxury money can buy.

Swimmin' nekkid

Buffet is quoted as having said, "when the tide goes out, you see who's been swimming nekkid." You see who can't make ends meet anymore, with their credit cards cut off. You see who can't handle their mortgage payment and who can't handle their car payment. But, then again, you see who hasn't been swimming nekkid. You see who is keeping their house, keeping their car, quietly buying a little investment property, picking up some small luxuries and still not going bankrupt.

You start to see that the people buying generic groceries with coupons are paying cash, while the people buying the expensive brands of potato chips are using food stamps. You notice that the big-screen TVs are being loaded into couple-year-old boring cars, and the food bank is loading groceries into bimmers and Escalades. If you're smart, you notice that the geegaws of conspicuous consumption are dragging people underwater, while the sensible cars and total lack of bling that embarrassed people's kids a few years ago turn out to be tools for financial freedom.

I have tried to teach my nieces and nephews some basic finance lessons, like saving and avoiding debt. It has sometimes been hard to teach those lessons, when the kids don't see me as a financial guru or expert. People who know about money, they think, have enough of it to drive the Escalade and live in the the McMansion and wear designer clothes. I live in a totally mundane house, drive a mundane car - gosh, the kids think, if I knew anything about money, I would be able to afford better.

Which, of course, was exactly what I was trying to teach them. If I afforded better - usually on borrowed money - I wouldn't be able to build savings. Getting rich, without an inheritance, an incredibly lucrative career, or a lottery jackpot, is all about spending less than you earn. It's about plugging the budget when you start "leaking" money. It's about putting a little away, regularly, until it becomes more than just a little, and then investing it wisely so it can grow into a little something. But all those nekkid swimmers out there, living high on borrowed money, undermined that message - for my nieces and nephews and for the rest of the kids.

So maybe it's not such a bad thing that the tide is going out for a while. Young people's heads have been filled with lies about finance. They thought that people who spend a lot of money are "rich" while people who spend moderately - but actually save - are poor. "The Millionaire Next Door" showed that more millionaires are created on moderate incomes but high savings rates, than are created on generous incomes but luxurious lifestyles. Self-made Millionaires, it turned out, clip coupons and re-use ziploc baggies and they don't have to have NFL-star salaries to make themselves Millionaires.

If young people today, going out into a work force where pensions are no longer available, where life expectancies have grown faster than savings rates, where globalization means outsourcing crummy production jobs AND well-paid professional jobs, if those young people are going to have the luxury of financial security and freedom from extreme financial stress, they need to learn the spend-less-and-save philosophy (or else the tax-more-and-make-do-with-less philosophy).

When the people who only had credit are, well, discredited as financial experts, that's painful in the short-term but healthy in the long term. When savers get the goodies and over-stretched borrowers don't, it rewards responsible behavior and creates an incentive for other people to mimic responsible behavior. That's a good message for the kids.

Now it's the Insurance Companies

It's all so predictable. In the interests of marital harmony, I have avoided saying "I told you so," but my tongue is getting sore from being bitten all the time.

If you're a Californian, you're probably headed for double incentives to sell off your excess cars. The car tax is going up, and it's a darn good bet that your car insurance is going up, too. Because there's a natural cycle in the insurance industry, and most people don't realize that it rises and falls on the stock market.

The basic model for insurers is to sell insurance at just about what they expect to pay out (spread over many, many insurance customers) so that the insurance side of the business is barely profitable. But they don't pay out every dollar in the year they get it - so they invest their cash reserves and make their money on the investment profits. In a sense, the investments have been subsidizing our "cheap" premiums during all these high-growth years.

When investment markets are booming, insurance companies lower their rates to attract more customers - to attract more investment capital. Eventually, the boom fades, the investment returns slow or even reverse, and the insurance companies then scramble to layoff employees, cut costs, and raise premiums to at least cover costs. Trouble is, right when insurance companies start losing out on investment returns, their claims start increasing. People who would work through the pain in good times, take disability when jobs are scarce. People "accidentally" leave an unattended candle in the house that won't sell, they "lose" valuables and they "break" insured stuff (like cars with hefty loan payments). People make stupid mistakes when they're stressed out about the economy, and people do desperate things when the economic problems hit too close to home. Theft increases, vandalism increases, worker comp fraud increases, and the insurance companies start feeling like even their mothers only call because they need something.

Compounding the natural cycles in the insurance industry, this year we've got once-in-a-lifetime investment losses and a sudden contraction in the number of individuals (families and businesses) that can carry the necessary rate increases. When you get three generations living in one house, they're only paying one homeowners' insurance policy. A lot of people in financial distress discover that they don't need a second car, maybe not even a first car. And businesses that go out of business drop all of their insurance policies - general liability, workers' comp, key-man life insurance, business continuation insurance, et. al.

Girl Scouts aren't the only ones passing their cost increases on to the consumer.

Incongruous thought of the day

MySpace: "The W H Macy appraciation societies aims are to celebrate the William H Macy through the wearing of costumes..."

(If you don't know, William H. Macy is an American character actor, and I don't know that he has ever worn a costume, outside of wardrobe and sometimes props, like eye glasses.)