As I See It: Save Now or Suffer Later

by Victor Rozek

"Retail therapy" is more than a clever self-deprecating quip. It is a social commentary, and for many it's a way of life. Which may explain why less then 10 percent of retirees have enough money to maintain their lifestyles. Even for the best intended, life has a way of intruding on saving. A down payment for a house, an unexpected repair, medical bills, a period of unemployment; there are a hundred reasons born of necessity to dip into our savings. There are a thousand more born of manufactured want.

It's no secret that Americans spend better than we save. We have, after all, been expertly conditioned to do so. The nation grinds to a screeching halt unless most of us continue to buy mountains of needless junk, so advertisers are relentless in urging us to part with our hard-earned cash. Every week we see and hear hundreds of ads urging us to buy something. Even banks expend little effort convincing us to save; they much prefer to convince us to borrow.

And borrow we do. The average American has $8,000 of credit card debt and although that amount sounds relatively modest, the attendant interest rate insures that it isn't. David Bach, writing in AARP, The Magazine, provides the following wallet-popping analysis. Assume you have $10,000 worth of credit card debt with an average interest rate of 20 percent. After your other living expenses, you dutifully make the minimum monthly payment of about $250 a month. At that rate, how long will it take you to pay off your debt? Five years, ten? Almost 30 years! If, that is, you don't charge anything else.

Think of it as voluntary indentured servitude. No wonder people are unable to save much.

The urgency to save grows as workers age. But without a history of saving--lacking the habituation of regularly setting money aside for the future--people often feel helpless and overwhelmed when faced with starting a retirement fund in middle age. Although many of us are late financial bloomers, what's important is not so much the timing, but that we do, in fact, get around to blooming. IT workers have an advantage in this regard, because we are generally well compensated and therefore have more potential resources at our disposal.

Saving has a behavioral component to it and, like other unfamiliar behaviors, it requires practice. Bach, the author of Start Late, Finish Rich, offers some sensible suggestions for late starters, contending that even modest behavioral changes can pay impressive dividends.

He advises his readers to first shed regrets about what they haven't done, could have done, and should have done. Regret keeps people stuck in the past, and beating yourself up about the past does nothing to advance the present. Bach recommends writing down all of your financial regrets--I should have bought Microsoft when it was trading at $20; if only I'd enrolled in my company's 401(k); why did I buy a new car I couldn't afford--and then burn the list or toss it in the garbage to bring some closure to the past. Everyone misses opportunities and makes poor financial decisions. Acknowledge them, learn from them, and let them go.

Then, begin the process of freeing up investment funds.

Bach calls his secret for saving "The Latte Factor," a phrase he likes so much he had it registered as a trademark of Finish Rich, Inc. Like many useful insights, once you've heard it, it seems self-evident and you wonder why you didn't think of it yourself. "We all have more money than we think," Bach says, but we spend it on small, and often inconsequential things. "If you spend $5 a day on coffee and a bagel, that's nearly $2,000 a year," which would make a dandy IRA contribution. And it's not only the double frappuccino grandes; it's bottled water, going out to lunch, cell phone overcharges, expensive cable packages with hundreds of channels you never watch, health club memberships you seldom use, cigarettes/alcohol, lottery tickets, and that Great American Pastime--impulse shopping.

Track your daily and monthly spending, Bach urges, identify areas where you can save a little money, invest it, and watch the miracle of compound interest at work. If, at age 52, you and your partner each start putting aside $10 a day and invest it at 8 percent interest (not unreasonable, Bach says, if you diversify and invest for the long term), "by age 70 [you'd] have $294,449 in savings." If the money went into a 401(k) and half was matched by your employer, "that pot of gold could grow to $441,673--not bad for a late starter."

If you just take your latte money ($5 a day or $25 a week) and invest it at the same rate of interest "after 5 years you'd have $8,236 and after 10 years you'd have $20,339." Think of it this way: Would you rather have twenty grand or ten years worth of lattes?

Next, Bach advises, pay down your debt. Use your latte money and whatever you save by making small adjustments in your lifestyle. Those never-ending monthly payments are largely what prevent people from setting money aside. Credit card interest rates, Bach says, can be renegotiated. If a competitor offers a lower rate, call your credit provider and ask for a comparable rate.

But if you apply for one of those balance-transfer, low interest credit cards, read the fine print. Credit card companies now offer seductive interest rates which instantly disappear if you are late with just one payment. Miss a payment and your rate jumps to 20 percent. Miss two, and it soars to 30 percent! But even if you make your payments, you may not be safe. There's a new gimmick that credit card companies use to bleed even those who make all of their payments on time. It's galactically called "Universal Default." Basically, it allows them to check your entire payment history on all of your open accounts and if you miss just one payment to anyone, they jack up your rates. Nice, eh?

If you have multiple credit cards, Bach says, cut them up and save one for emergencies, but bury it somewhere so that it's not readily available for therapeutic purposes.

And always pay yourself first, advises Bach. It's an old axiom but often overlooked. Before paying the creditors, pull something out for yourself--not spending money, but investment money. A painless way to do it is to have the money automatically deducted from your check (or checking account) and invested in an IRA. If you don't see it, you won't spend it, and it's affirming to get the quarterly statements and watch your money grow without the need for your direct involvement.

Finally, Bach encourages people to turn their hobbies into cash. Programmers can apply their skills in Web site design and software consulting. Many take advantage of the Internet and sell old sporting goods, collectibles, and just about everything else on eBay. I personally know a woman whose hobby is painting and she sells about a $1,000 a month worth of small (3-inch by 4-inch) watercolors on the Internet.

Saving is a matter of prioritizing. When we're young, the need for security seems abstract and distant. Freedom is more important; the freedom to spend and experience, to live as much as we can with as little restraint as possible. But as we age, we discover that freedom includes freedom from worry about how we will survive after our working years.

Stress and anxiety kill more people than disease, so if you're stressing about a lack of savings and anxious about the inevitable end to your earning years, start now. Resolving to do it later seldom works because time always asks for more time.

Don't let your time run out.