11 Actionable Tips For Saving and Investing

Managing your personal finances can be challenging, and the hardest step is to create a personal budget, build a savings account, and understand retirement plans.

Improve your personal finances with these 11 actionable tips:

#1 Change Is Hard- Be Willing To Change

“To improve is to change; to be perfect is to change often” – Winston Churchill

In 2017, Trinidad and Tobago (a country of slightly less than 1.4 million people) just beat the US Men’s Soccer Team (325 million people) to eliminate the US from the next World Cup soccer tournament. Every few years, we Americans get all jacked up about a new coach, new team members- and we don’t seem to make much progress in Men’s soccer.

Sounds like someone needs to make some serious changes.

(The US Women’s Team, on the other hand, are the current world champions (as of 2017)- which is more proof that the US can figure out international soccer).

Change is hard

The reason that people don’t diet, don’t exercise, and don’t resolve bad personal relationships is that change is hard. As a result, we don’t really, truly change and grow unless we’re in real pain. When we’re at that point, the pain of change is less severe than that pain of not changing.

#2- Delay Gratification

With discipline and time, I think most people can accumulate far more wealth than they think is possible. But growing wealth requires change- which is precisely why most people don’t make the effort. The changes I’m suggesting involve an old friend:

Delayed gratification

Some decisions are relatively small:

• Dropping a subscription music service and just listening to the free version (Pandora, for example).
• Making coffee at home two days a week, which means that you stop by Starbucks less often.
• Buying afew more generic products when you go to the grocery store and Target. (I’m not going generic on salad dressing, however).

Since these are smaller decisions, the amount of gratification you’re delaying is small. You don’t mind listening the commercials on Pandora (I certainly don’t- I just turned down the sound), and the coffee at home isn’t bad.

Other decisions are much bigger. StudySoup wrote this great article on the average amount of money a college student saves by having a roommate. The average savings over four years is over $15,000.

Now, having a roommate is a big sacrifice, because you lose a fair amount of privacy. If privacy is really important to you, it’s a true delay of gratification (until you graduate, get a job and can afford to live alone).

OK- so what do I get out of all this delayed gratification?

You build wealth- which can give you peace of mind.

Here’s a practical example: By making changes to your spending and building a savings account, you create a $1,000 emergency fund. If your car brakes down, you can pay for the repair.

#3- Understand Salary Negotiations

Nearly everyone works as an employee at some point, and understanding salary negotiation has a huge impact on your personal finances. Here’s one of my salary negotiations:

I smiled.

“Yes- I think that number is reasonable, given my skill set and what you need.”

The next one who speaks loses- and I didn’t say a word.

Get free sample chapters from my book: Not Another Personal Finance Book.

Andy, the CEO, thought for a minute. He had asked me three times if I was willing to come  down on my salary demand, and I wasn’t willing to. There were a few reasons why:

 

• High-risk position: The CEO was “creating a position for me”, which meant that I wasn’t replacing an existing job position. As I find out later, the CEO had come up with this new position idea after meeting me- which made it that much more risky. There was a higher risk that this job might not work out, and I wanted to be paid for taking that risk.

 

• Others in similar roles: I was interviewing in 1997 for a role selling a corporate retirement product to corporations. The product was complex and had a long sales cycle. When I interviewed, I noticed that the people in similar roles were all older than me, and all well-qualified. If the firm had money to pay them, they ought to have the resources to pay me.

 

•  Willing to walk away: Most importantly, I had other options and was willing to walk away. This attitude is critical for both salary negotiations and if you’re pricing work as a self-employed person (as I am now). Everyone needs to belief that they can find another job or another client. You need the willingness to say: “I appreciate it, but I can’t meet your needs.”

 

I’ve used that phrase a lot over the years- feels good to say it every once in awhile.

Ironically, my son has NO hesitation telling people no when the money isn’t right. He’s a recent college graduate and a freelance film and video producer. That skill will serve him well as a self-employed person.

#4- Use Negotiation Theory

I think everyone can benefit from an overview of negotiation theory. For starters, you need to keep in mind that, in a negotiation, both sides are giving consideration. In your business law class, you have learned that consideration refers to giving something up. In a job offer, the employer gives up salary and benefits, in exchange for the worker’s time and effort.

Here are some negotiation terms you should know:

• Reserve price (reservation price): The minimum dollar amount that a party is willing to accept. Think about the owner of a painting at an auction who won’t take less than $10,000 for the artwork. In my salary negotiation, I had a minimum salary that I was willing to accept.

 

• Small pie bias: Many people in salary negotiations underestimate the size of the bargaining zone– the range of salary that both parties are willing to accept. The concept is referred to a small pie bias. Is it a $5,000 range , or $15,000? If you bring value to the firm, it’s probably $15,000.

 

• Zone of possible agreement (ZOPA): What need to find is the zone of possible agreement, or the range within which a deal can be reached. Think about a company sale, for example. The seller says: “I can’t accept less than $15 million”, but buyer doesn’t want to pay more than $13 million. Maybe the parties can tweak the negotiation and come up with a price range between $14 and $14.5 million.

Understand these concepts before you negotiate a salary, company bonus or relocation. You’ll be much better off financially, if you can use these tools.

#5- Create a Monthly Budget

The only reliable way to fund a savings account is to create a monthly budget and stick to your budgeting plan. That way, you’ll find ways to save money and budget for a savings amount each month.

You’ll save, because saving money is in your budget. It’s planned and expected. Here’s how;

• Take a blank piece of paper and write your after-tax income for the month at the top left side of the page. Write “Fixed Expenses” below that, then skip about half way down the page and write “Variable Expenses”. Assume, for this example that your gross monthly income is $6,000.

 

• Fixed expenses: OK, now think about the fixed expenses you have every month and list a description on the left below fixed expenses. That will likely include your home mortgage, car payments, and insurance premium payments. Assume that your fixed expenses add up to $4,500.

 

• Variable expenses: You now have to fit your variable expenses and your savings into the remaining $1,500 each month. And variable expenses are the ones you have some control over. Maybe rather than eat out three times a month, you only go twice. Or another one- you brew coffee a home three days a week, rather than come here.

 

• Savings account: Your budget should include a monthly amount for savings. The first thing you do each month is pull out your budgeted savings amount and more it into a separate bank account. That way you don’t spend it. As an example, 5% of monthly gross income of $6,000 would be a savings amount of $300.

 

• Mobile apps: There are lots of mobile apps to monitor this stuff, but the key is to plan your spending and review where you are a few times a month.

#6- The Benefit of Saving Sooner, Rather Than Later

“Actually, I’ve always lived frugally and saved a lot of my income, so I don’t need to work for awhile”

Wow.

It was 1999, and I was talking to a co-worker, Ron, who was about 50 years old. A large insurance company we both worked for was merging with another firm, and we were both leaving the company. (I left to start my current business).

I had suspected that Ron well below his means, because I had a good idea of how much money he made. Both Ron and his wife worked, yet they lived in a blue collar-type neighborhood with small homes.

Ron wasn’t retiring early, but he had enough money to take some time off. He told me that he and his wife had planned financially, so neither of them would need to start working immediately after leaving a job.

They planned, they saved aggressively, and invested wisely.

This strategy can build wealth- even in times of market volatility. Give it a try.

#7- How an Annuity Explains the Benefits of Consistent Investing

In finance, an ordinary annuity is a series of equal payments made in consecutive periods, and the annual amount you’re able to invest may be an ordinary annuity. You can plug numbers into a future value annuity calculator to find out how much you need to invest each year to reach a $1,000,000 portfolio, for example.

Assume that you invest $10,500 in year one, and that you’re able to increase your invest 3% each year (as your salary or other income increases). They aren’t equal payments, but you still have an annuity.

Assuming an 8% annual rate of return for 25 years, you would be darn close to $1 million ($998,486.43).

What if, instead of investing in the stock market, you simply bought certificates of deposit (CDs) at the bank for 25 years? Assuming that the average interest earned on a CD is 3%, you’d have to invest $19,700 per year to reach $1,001,151.

The goal ($1,000,000 in 25 years) is much harder to reach if you buy CDs, vs. investing in the stock market.

The savings route

If you simply cut expenses and put the money in the bank, the amount of money you have to save must be large. As a result, the only people who accumulate wealth purely by saving (like my grandmother) must do so over many decades. A bank rate of return is so much smaller, and the amount invested is larger.

A little of both

Most people accumulate wealth by:

• Creating a personal monthly budget
• Saving money each month
• Investing money saved in a diversified portfolio

 

It’s a little of both, because you must have the discipline to manage your spending, while you also take some risk as an investor.

 

#8- Understand Retirement Plans

 Using the benefits of a retirement plan allows you to accumulate investment earnings much faster. If your goal is to maximize the amount you can invest, you need to consider using your company’s 401(k) retirement plan

Most 401(k) plans allow you to invest pretax dollars into a retirement plan that’s provided through work. Let’s say you want to invest $100. If you use your company’s 401(k) plan, the entire $100 is invested. The $100 investment – and all of the earnings – aren’t taxed until you take money out of the plan at retirement.

If you didn’t use the company plan, you’d pay taxes on the $100 first, so not as much money would be invested. Instead of investing $100, maybe you invest only $80. Over 20 to 30 years, that extra $20 investment can make a huge difference in your total return.

 

#9- Why Retirement Plan Distributions Are Important

 

How you take money out of a retirement plan is just as important as investing in plan. Your decisions have a big impact on how much you can withdraw, and the taxes you’ll pay on distributions.

Assume, for example, that a $100 is invested and becomes $300 in 20 years. None of those dollars have been taxed yet. So, when you start taking money out for retirement, the entire $300 balance is taxed as you make withdrawals.

Work with a CPA and a financial advisor to understand the retirement plan dollars you must withdraw each year, and the tax impact of each withdrawal.

 

#10- How a Retirement Plan Match Benefits You

A retirement plan match refers to the additional pre-tax dollars an employer will invest in your retirement plan, based on the amount you personally invest.

Let’s say that you can earn a 5% on your 401(k) contributions. A 5% company match means that the firm will invest an additional $5, so your total investment is $105. If you don’t invest in your 401(k) and get the company matching dollars, you’re leaving money on the table. That extra 5% can make a huge difference between now and retirement.

#11- Rollover Your Retirement Plan To Keep Earnings Tax Deferred

The key is to keep your retirement plan funds in a tax-deferred account, and you can do that with a retirement plan rollover. In many cases, You can move your account balance into another retirement plan as long as you complete the rollover within 60 days of withdrawing the funds.

Here’s how you can do it:

• Request a distribution from your current retirement plan.
• Open an Individual Retirement Account (IRA) for your rollover balance.
• Start investing in a retirement plan at your new job (if they offer it)

Keep in mind that you can move the IRA balance into the retirement plan at the new job- it’s an option, if the new plan has a good track record of performance.

This post is for educational purposes only.

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

Co-Founder: accountinged.com

(email) ken@stltest.net

(website and blog) https://www.accountingaccidentally.com/

(you tube channel) kenboydstl

Image: Bullseye, Jeff Turner CC by 2.0