We rely entirely on our 401k
The sad reality for most of us is that we did not have a “saving” culture in our youth. Yes, when we were kids our parents gave us a piggy bank and we saved our pocket or birthday money to buy ourselves that special gift that we wanted. In many cases, as we reached our teens we forgot about saving. Our parents or grandparents did not grow up in a society that was filled with loans and dept. It was a simpler society. Once where you paid cash for what you wanted or you simply did not buy it.
As society changed so did our reliance on loans and credit. We stopped saving and for many middle-class Americans, we now rely solely on our 401k to provide for us in our retirement. This is not going to be enough for us to retire with ease and we will constantly worry about running out of money.
Also, remember that if you only have your 401k you will still have to pay tax on that amount when you take your retirement. So a portion of what you have been putting away over the years will go to the IRA, leaving you short on your monthly income through your retirement plan.
Many of us rely solely on our 401k’s as we keep saying to ourselves we will get around to saving more for the future. Reality is that we don’t. So in addition to our 401’s we should also be putting money away monthly into a Roth IRA. This way when we retire we are able to access these funds – in many cases, these schemes/funds will give us “tax-free” amounts in our retirement and help reduce our future tax payments to the IRA.
Health Savings Accounts (HSAs)
For many of us, we see a medial plan with a savings portion of it as a real grudge monthly payment. We really need it but we are so loathed to pay it out every month. But this monthly payment, in the long run, will have great benefit to you. Having an HDHP – high deductible health plan allows you to have a medical savings account (HAS – Health Savings Account).
These HSA’s give us the opportunity to have tax-free savings that we can utilize to pay for either our current or future medical expenses. Currently, the government allows us to “save” up to $3 500 individually or around $6800 per family if you have an HDHP (high deductible health plan). These saving deposits are deducted from your annual income on your tax returns, which in turn reduces the amount we owe to the IRA. These savings grow on an annual basis at a tax-free rate and are there if you need it.
There are often medical issues that will pop up and our medical plans may not always cover these expenses. So by having a medical savings stash, you are able to access those funds to cover the bills on care that your HDHP does not cover. If you don’t access your savings during the year to cover medical bills then your savings continue to grow.
Remember that things like visits to the chiropractor or cosmetic dentistry or even eyewear are not covered by your medial plan and you will have to pay for those out of your own pocket. It’s important to have medical savings. You don’t have to use it but you won’t have to go into debt to get them either.
Procrastination over retirement savings
We are all guilty of this one. We keep saying that we are going to start saving and investing in our retirement but we rarely do as we keep finding that other financial obligations (in many cases servicing debt and credit card payments) that keep us from diligently saving for our retirement on a monthly basis. The earlier we start saving the brighter or retirement years are going to be.
We often say things like, I want to pay my student loan off first or I want to buy and house and pay it off and then I can start saving for my retirement. Whilst these are admirable goals to want to achieve you are selling your retirement in the future short.
Retirement funds need time to grow. Imagine if you planted a seed on a Monday, do you really believe that by Friday it will be a tree? The earlier you start saving for your retirement the better. We have the opportunity now to change the way we do things in our homes. Imagine if your parents had instilled in you a saving culture and you saved a dollar a week for every week you have been alive. Imagine how much money you would have in your retirement savings now.
It’s never too late to start saving. If you have left it to later in your life to start saving for your retirement you are going to have to supplement your 401K with other investment accounts to ensure you are adequately providing for your financial wellbeing in your retirement years. Get yourself debt free as soon as possible and start putting money away for your future. Remember you are the one providing for yourself.
We forget to update
We take out life insurance policies in our lives or when we start working we designate our parents as our beneficiaries on our parents our 401k’s. All great gestures but things change in our lives; we may get married or even divorced and we have forgotten to change the beneficiaries of our policies or our 401’s.
Remember you have filled in and signed a legal document in terms of your beneficiaries and even if you have it written in your will the payout of the money will go to whom you have designated as your beneficiary. This legal document overrides any will you may have left behind.
We all live our lives saying this will never happen to us, but the reality is that it does. You will be well advised to review these documents on an annual basis. In many instances, your life circumstances will have changed. You may now have children and a spouse yet you forgot to update your beneficiary form on your life insurance.
Diarise a date annually for you to check all your legal documents and beneficiaries. Its sound tedious but will realistically take less than an hour of your time yearly to make sure all these documents are up to date with your current living status. If you have a financial advisor that you work with they will also remember to check these details for you and ensure that your beneficiary documents and your will are up to date. I’m sure you don’t want to be leaving your savings to an ex even though you may have remarried, but forgotten to change your beneficiary forms at with your insurance company.
We spend money on things that lose money
When we buy a car we have monthly payments on the vehicle for a few years. Yes, you have a vehicle but every time the wheels turn on it your “asset” become worth less than the day before. You may have a transport “asset” but in the long run, all you have is something you have paid a whack of money for that realistically, has little value now.
The same thing goes for a swimming pool. Yes, you have a stunning puddle of water that you can splash around in. It costs you money every month to maintain and fill and you think you have an “asset” but realistically, all you have a large hole that you pour money into every month.
Think twice about buying a new car. Are you doing it because you really need a new car as the one you have it literally falling apart or is it because you just want a new car? The best vehicle to have is a paid-up vehicle. Keep your cars for as long as possible and instead of paying those monthly installments, use the money you were paying on an installment and add it to your savings stash or directly into your Roth IRA.
Remember when you purchase a vehicle the vehicle price, is say, $80 000 dollars, but now add in the finance charges, the monthly interest over a period of a few years. You land up paying almost double for the vehicle. Imagine you just kept your old paid up car and invested what you would have paid monthly for a new vehicle into your savings account – how much money would you have right now?
We don’t want to learn about money
In many cultures and families its taboo to talk about money and in the not talking about it we grow up with a false sense of what money really is and how it works. As kids, our parents somehow made a plan to afford us the things we needed and wanted, but they never discussed it with us. They never told us that they had to take out loans and these loans had crippling interest rates piled on top of it.
We take a family vacation of “borrowed” money and long after our tan lines have faded we are still paying off that debt. We have to stop doing this. Just like we talk about the changes our bodies will go through when we hit puberty we need to talk about money. What is money, how do you get it, how do you grow it, what is credit, what is debt, what is interest.
These are just some of the issues we need to be covering. If you grew up like most of us did and never spoke about money how on earth you are going to know how to manage and grow it. Start the conversation today with your kids and work together as a family to see how you can save money and grow it for all your futures.
Thanks to the internet we are all able to go online and find out about money, how it works and how you can grow it. You can turn this learning into something fun for the whole family. It’s never too late to start to learn. Don’t be embarrassed to say you know nothing about money other than how to spend it. Chances are the person you are saying it to knows as little as you do.
A home to impress
By far one of the biggest financial commitments you will ever make in your life is the purchasing of a home. Too often we want to impress our friends with our stunning new home. We buy beyond our financial means and every month we struggle to meet that payment.
We buy homes that are too big for our small family in the beginning because we want to impress people with the large home we are able to buy. Larger homes cost more. Larger homes cost more to run and larger homes have higher monthly utility bills and tax bills.
It is always better to buy a smaller home is a good area than a big home is not such a great area. Property is a great appreciating asset if purchased correctly. You can always buy a larger home if you need it or when your family expands. But starting off smaller and then scaling is the best way to go. Again, most of us know very little about property. We often rush into an emotional home purchase as it appeals to our heart and it’s so cute and special. We get so caught up in this that we forget to do our homework.
What have other properties in the area being sold for? Is there growth potential in our investment and will it increase year on year? Again, most of us know very little about property. Take your time and do your homework. Remember you are going to be carrying that monthly mortgage payment for a very long period of time. It is also important to remember to save for property maintenance that is going to be needed in the future.
We don’t budget
Very few people work to a strict budget and plan. We get money in. We pay the bare minimum on our credit cards or loan payments and if there’s anything left after that we just spend it. Again learning to budget goes hand in hand with understanding how money works. We have been brought up and told that it’s rude to ask about money or talk about it in public. But this is the big mistake we all make.
If you have never been shown how to budget or save how on earth you are going to do it and take care of yourself financially when you are old. Again you can either work with a financial planner to help you set up a monthly budget or go online as there is a whack of budgeting tools available online to help you start this process.
In a nutshell, budgets should work something like this; 50% of your income should cover your essential expenses – housing, transport, utilities, groceries and your basic needs. 20% goes into your savings account or investment account. The final 30% is your lifestyle choices i.e. going out to restaurants, gifts or those things you would like to have.
If you want to go on holiday you need to save every month to be able to afford it. Give this some thought – every day on your way to or from the office you may buy yourself a cup of coffee. What does it cost? Now add that up and see what you are spending on coffee in a month. Imagine if you made the coffee at home and put it into a travel mug and drank it on the way to work – how much could you save?
A few other things we don’t do along the way
Take a look at what your interest rates you are paying on your mortgage, car finance or even credit cards. Can you review it with your lender and get a better rate? Dipping into your savings – often we save a bit and then feel it is okay to take some of that money out to pay for things like a trip or new furniture. But you should not do this. Have two lots of savings – one you don’t touch until you retire and a second for emergencies. Remember that a new jacket or that to die for a lamp is not an emergency.
Collecting your change – Too often we just throw all our change into a jar and it fills then we start another one and eventually we have jars of coins all over the place. It’s a great way to save. Throw your coins into a jar and then once a month take it to the bank and deposit it into your savings account. This is a great way to save without really feeling it in your pocket.
Think before you spend – Impulse and emotional spending is a fast way to deplete your money in your wallet. Take a moment to think about it. Do you really need that extra coffee and muffin or even that new shirt that is on sale? In most cases, if you take a moment to breathe you will soon realize that you don’t really need it you just want it.
One of the biggest financial mistakes we make is that of spending without thinking about it. We also learn to manipulate ourselves by justifying why we need something and that we will start saving next month. Too often next month never happens.
Keeping up with the Joneses
Growing up, our parents would tell us, “We don’t keep up with the Joneses, we are the Joneses.” But that was to get us to stop bugging them to get them something our friends had. But keeping up with the Joneses is a genuine middle-class conundrum. There is an element of pressure not to be left behind. There is a fear of exclusion if you can’t meet the criteria of your peers.
So, you’ll be driving home from work one evening, and you’ll see that your neighbors have had their roof painted. You’re worrying about how to pay the utilities this month, but you immediately shift your concern. Now, you are worried about what you’re doing wrong that your neighbor’s doing right. How can they afford to have their roof painted when you can’t?
Now it’s going to make your roof which is in need of a coat of paint look even worse. How can you work the finances so that we can have the ceiling painted soon? What will the neighbors say if your roof continues to look so shabby?
These are real thoughts that the common experiences.
In fact, they can keep you awake at night. Where you’re going wrong is comparing yourself to others without the full facts. What if your neighbor came into an inheritance and used some of the money to have the roof painted? That’s at the expense of having lost a loved one. The members of the middle-class need to learn to ‘stay in their lane.’ Worrying about others and what they have is a pointless way to spend your life. The amount of stress and anxiety you’ll feel is self-inflicted. It does long-term harm to your body. You could decrease your lifespan by worrying about what others have that you don’t.
The members of the middle-class need to learn to ‘stay in their lane.’ Worrying about others and what they have is a pointless way to spend your life. The amount of stress and anxiety you’ll feel is self-inflicted. It does long-term harm to your body. You could decrease your lifespan by worrying about what others have that you don’t.
Not being prepared to take a risk when it comes to work
Everyone has that one friend who took a chance, left their job, and started their own business. Now, you’re either pitying them as they stand in the unemployment line. Or you’re kicking yourself for not thinking of doing what they did. You enviously watch them make their first million and move out of your middle-class neighborhood. While they move onward and upward, you’re stuck in a dead-end middle-class job you hate. You can see your whole life ahead of you. It will be middle-class until the day you die.
So, what’s the difference between you and your friend? Vision and bravery, that’s what it is. Your friend identified a need in the market, or they decided to pursue their passion. Then they dared to close their eyes and take a leap of faith. No one is saying it’s easy. But then again, the higher the risk, the higher the reward. While you were coming up with all the excuses you possibly could, they went for it. They didn’t ask, “What if it fails?” They asked, “What if it succeeds?”
This is a difficult mentality to achieve when you have children, college funds, bills, and a mortgage to take into consideration. There’s no need to take a blind jump off a cliff and start your own business. You can do it part-time while you’re still getting an income from your regular job.
Then when you’ve established yourself and seen that it’s viable, you can enter into it full-time. That’s probably what your friend did. After all, no one’s that crazy that they quit their job and then start a business, are they? Well, the lucky few are. But most of today’s successful business people started part-time. And you can, too.
A failure to understand delayed gratification
Working toward something is not a concept many members of the middle-class are familiar with. And who can blame them? The way marketing and advertising are done today, it’s all about more, more, more. And it must be achieved now, now, now. Falling for that mentality is easy. Subliminal messages tell us not to wait. Waiting is not cool. If you don’t get it or do it now, you’re a loser. You’ll be a laughing stock. You might want to dismiss this as foolishness, but odds are you’ve done it too.
You’ve looked at something in the store that you know you don’t need to have. But it is something you’d like to have. Now, things that you need to have must be purchased. But things that you want to have do not need to be acquired right there and then. But suddenly, you decide on impulse. And soon you’re standing in the check-out queue with your credit card out, ready to be swiped. A month later, the bill arrives. You got instant gratification from buying what you wanted. And now you have long-term buyer’s regret because you have to make those monthly payments.
If you want something enough, you should be prepared to wait for it. Using a credit card to purchase something that you should be saving for instead is unwise. The accumulated debt can push you to the precipice of financial self-destruction.
There’s nothing more satisfying than saving for something and paying cash for it. You can take a certain amount of pride in that. Delaying the gratification makes the purchase even more significant. You keep yourself out of unnecessary debt. And you have a new prized possession that is all yours.
Not facing reality
One of the fatal financial mistakes members of the middle-class make is not dealing with the reality of their money matters. Instead of confronting your escalating debt, you prefer to stick your head in the sand like an ostrich. If you don’t acknowledge it, it will go away. At least, that’s what you think (or hope) might happen. Unfortunately, that’s not how it works. Pretending you’re not in financial trouble only makes the problem worse.
If you’ve overextended yourself in terms of debt, but you do nothing about it, the vicious cycle will perpetuate itself. You’ll make more deficit to service existing debt. Your whole life will become about working to pay off debt that paid off other debt. That’s not a quality existence.
It might not be the most beautiful experience, but you might need to consult a financial adviser and lay your cards out on the table. It can be hard to admit you’ve messed things up by living beyond your means. But think about the alternative. Better to tell a consultant who can help you before you lose it all.
Money problems can become marital problems. They place enormous pressure on a relationship. The strain can become so high that the relationship breaks down.
If one of you is pretending your finances are fine when they’re not, you can drive your partner to a tipping point. This is something you want to avoid. If the relationship breaks down to the extent that you get divorced, it’s a sad situation emotionally. But, not to sound cold, it’s an even sadder situation financially. It will only increase your debt and your monthly expenses. To avoid this eventuality, seek financial help before things go too far and nothing can be salvaged.
Where we come from
People in the middle-class tend to come from a middle-class background. There are certainly exceptions. Some people had an upper-class upbringing who now live a middle-class life. It’s a massive mindset change. Very often, this group will have champagne tastes on beer money. It’s hard to accept that you don’t have the money for the finer things in life. And if you’re going into debt to get them, you’re placing your financial future at risk.
Yet another group of middle-class people comes from a low-income background. For them, the temptation is to make sure their lives and the lives of their children are nothing like the life they led growing up. In doing this, they can go a little overboard, and wrack up debt they can’t service.
In a lot of cases, they lack the financial planning skills needed to manage an income, pay a mortgage and bills, and still have savings left over. They were raised in a hand-to-mouth existence, and so the culture of savings has not been inculcated in them.For those that grew up in the middle-class and remain there, they don’t know anything else.
Many of the habits they acquire when it comes to money come from their upbringing. However, being middle-class 30 years ago is not the same as being middle-class today. Life was a whole lot simpler back then. The demands on your money were not so many. It was not as easy to incur debt as it is today. It’s normal to want to give your children more than you had growing up, but you can’t do it at the risk of bankruptcy. You need to be objective about what you can afford and not succumb to the temptation of debt.
Not shopping ‘smart’
Leading a middle-class existence is a hectic life. You have a full-time job, children who do various activities, social clubs, and responsibilities to your extended family. It feels like every minute of your day is jam-packed with something that needs to be done. So, when it’s 6 p.m., and you’re tired after a long day at work, you don’t feel like cooking. You order pizza, thinking it’s not that expensive. But add up your pizza bill at the end of the month, and you’d be surprised.
It’s Saturday morning. This is the only time you have to go grocery shopping. You don’t look to see which shops have discounts and where you can get things more cheaply. There’s no time. So, you go to the nearest grocery store and do your shopping.
You don’t have a list, because you’re in a hurry. You haven’t planned meals for the coming week. You’ll wing it. Afterward, you arrive home having bought a whole lot of things you didn’t need. And when you realize that you didn’t buy spaghetti, it means another trip to the shop where ‘offers’ tempt you to spend more.’ As an experiment, go an entire month without ordering take-out. You’ll save more than you think. Next, plan your meals for the week. Make a shopping list and stick to it. Go shopping once a week.
Get everything you need so that you don’t have to go back. Look out for stores that offer lower prices. Set yourself a budget each week. Try to spend less than your budget and use the extra money for a family treat. If you struggle to cook during the week, do it in one large session over the weekend and freeze your meals. Don’t be surprised if you halve your grocery bill this way: it can be done!