This article is part of our 52 week journey through Bill’s latest book, The Graduate’s Guide to Life and Money. Each week, a full excerpt from his book will be presented from beginning to end. To get your copy of his book, visit www.TheGraduatesGuide.com.
With so many expenses coming at you, sometimes it can be difficult to put any money away. Besides, even if you do have a few extra bucks, it’s not enough to matter right? You probably don’t even know what you should do with it either. Fortunately, we’re going to make you a millionaire before you retire, and we’re going to do it the easiest way possible. We’ll call it the “Get Rich Steady” approach. Don’t worry; if you are more interested in aggressive investing, we’ll go over that too.
It’s kind of ironic. If you just ignore your retirement and wait until your sixties, you’ll be in bad shape. Most likely you won’t be able to retire. On the other hand, if you set up the right kind of plan for yourself now, you should be able to ignore your retirement until your sixties, and you’ll be in great shape. The only difference between a happy retirement and one that might not happen at all is careful planning. Of course, you don’t really want to completely ignore it, but you can take a mostly hands-off approach if that’s what you want.
So is that what this chapter is about? Retirement?
Not completely. Retirement is just part of your whole saving and investing “portfolio.” What you have to first understand is why you should save, how you should save, and how the numbers work for you.
Why is saving so important? Just like paying off debt, savings gives us more choices. If you have money saved, you can go on vacation when you want. If you have enough money saved, you could buy a car whenever you find a great deal. Of course, if you have a lot of money, you could even retire when you want. The more you have saved, the more choices you have. You will also encounter situations where you had not planned to spend money. For instance, your car may have blown a head gasket, or your television may have accidentally fallen off the back of your entertainment stand. Having money in savings will help you to minimize your stress, and it will keep you from going into debt to pay for needed repairs (or replacement).
Before we get into too much detail about 401(k)s or IRAs, lets discuss some basic features of money. The first thing we should cover is the 80-10-10 rule. The 80-10-10 rule is nothing more than a guide to help you allocate your income. Basically, you should plan to spend no more than 80% of your money. You should also set aside 10% for savings and another 10% for charitable contributions. Why do we do this? It helps you have a more balanced life.
You see, too many people graduate college and they use the 110% rule. This is a dangerous rule where the recent college graduate begins spending about 110% of what they earn. How is that possible you ask? We call that debt. First there is the credit card debt, then the car loans and then the mortgage. Before you know it, you have more debt than income and your payments are so high there is no room to breathe.
By learning to set aside 10% of your income for savings (or to use it towards paying off debt), you will immediately be on your way to living a comfortable life full of many choices and much less stress. In a few years you will be paying cash for your next car or buying a nice home with a large down payment or both. You will also have room in your budget to maneuver when an unexpected crisis occurs. Without the 10% savings, you could go 10 years at your job only to realize you have nothing more to show for it than a lot of extra bills coming in every month that keep you going back to your job. You could have done that without a degree!
The other 10% you should set aside is to allow you to contribute to a charity or charities. Perhaps you want to give to your church or your favorite cause (such as a children’s hospital or an animal shelter). Maybe you would just like to be able to help a friend or colleague in need or give a large contribution towards the fight against cancer. Wherever you choose to give your 10%, I can guarantee it will help you feel better about going to work everyday, knowing you have contributed to something you believe in and have made a difference.
Sometimes people think their contribution is too small to make a difference, but if you make $50,000 per year and contribute 10%, that’s $5,000 for the year. There is not an organization I know that thinks $5,000 is insignificant.
Many of you are probably thinking, “I already save 10% of my income through a 401(k) at work.” That’s very nice, but the 80-10-10 rule only applies after you have saved through your retirement plan at work. In other words, the 80-10-10 rule applies to what is left over after you have money deducted for your retirement.
Next week we will discuss retirement plans and explain 401(k)s.
Bill Pratt is a former credit card executive turned student-advocate. He is the author of Extra Credit: The 7 Things Every College Student Needs to Know About Credit Debt & Ca$h and The Graduate’s Guide to Life and Money. Bill speaks at colleges to educate and entertain students about real-life issues in money, leadership, and success. His goal is to help students succeed personally and financially so they can improve the lives of those around them. You can learn more at www.ExtraCreditBook.com or www.TheGraduatesGuide.com.