Month: August 2018

If you’re like most people, saving money is easier said than done. You know you should be putting away a few more dollars each month, but things add up and life happens. Maybe you have a budget, maybe you operate more by feel. Either way, it may be a good idea to start charging yourself a set dollar amount each month.

What do I mean by “charging yourself”? Imagine your paycheck hitting your checking account, and before you even have time to see the new funds, $500 has been automatically moved to your savings account (or another account that is considered off-limits). Pay yourself a set amount each month, and keep it in your savings account – somewhere that you vow not to touch. The key to executing this plan is to make the payment automatic. Use technology to your advantage. Set your default behavior to your ideal self. If you’re going to deviate, make yourself go to an effort. It’s too easy to say, “ehhh… I’m just going to do $400 this month, I will make up for it next month.”  If you’re going to skip a month or contribute less than your normal amount, force yourself to go to the effort of opting-out of the transfer.

There are numerous studies showing the impact that defaults have on human behavior. 401(k) plan participation skyrockets for companies that auto-enroll employees and put the onus on them to opt-out should they so choose. You can do the same thing by auto-enrolling yourself in monthly transfers. Another benefit of separating your money into two accounts and keeping one “off-limits,” is you can better track your savings over time as you see the savings account grow.

There are a ton of strategies that people take to help them save more. It’s simple to tell yourself, “don’t spend as much,” but the actual execution is tougher. So set-up an automatic transfer and watch your savings steadily pile up.

How do you handle your paycheck and money? What’s worked an what hasn’t? I’d love to hear from you.

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photo: Hanalei Bay – Kauai – March 2018

There was once a time where if you worked for 30 years at a solid company you knew your retirement would be comfortable- similar to your current lifestyle in all likelihood. This was all thanks to something called a pension plan.  These plans fall under the category of what’s known as a defined benefit plan. When a portion of your paycheck went to your employer’s retirement account, you were guaranteed a certain benefit per year upon retirement. The employer bore all the investment risk, as employee assets were pooled together and invested.  If the company and stock market did well, the company did well and had plenty of funds to pay employees. If not, the company would still be on the hook to pay employees the same amount.  Today, pension plans are few and far between, with fire and police departments being some of the only organizations offering these defined benefit plans.

Now, defined contribution plans are the norm, and they come in many shapes and sizes. The most common is the 401(k). This plan allows an employee to make a defined contribution from their paycheck (see where they got the name?), and there is often an employer match. However, the investment risk falls on the employee, and how much is available in retirement depends on how well the investments perform.

The switch to defined contribution plans gets companies off the hook for a lot of administration costs and investment risk, which shifts to the employee. However, with greater risk also comes a greater possibility for reward, as a well invested employee with a little luck could have a nice nest egg waiting for them at retirement. Employees can also rollover their 401(k) plans to their own personal IRA if they leave a job, and make their own investment choices.  Defined contribution plans are also conducive to the current trend of employees changing jobs more frequently, as 401(k)s lend the employee a few options when separating from the employer.

In short, employees today have more freedom than ever before, but also more responsibility and risk. No longer can most people just put their head down and work and have their company tell them exactly what their paycheck will be in retirement. Educate yourself, ask questions, and seek help if needed. You must decide what % of pay to contribute to your retirement plan, determine when you are able to retire, and take overall responsibility for your financial well-being. It can be daunting, but there are tons of resources available to help you come up with a plan to take win this new retirement savings game that most of us will be playing.