There Is No Ideal Time to Contribute to Retirement

“Do you really think you should be voluntarily putting money into your retirement account?  It just seems like there are so many other things you could be using the money for right now.  Why don’t you wait to contribute to your retirement until you get more financially stable?”

Recently, I was lamenting our financial situation to a good friend.  I just had a dental procedure at a periodontist, I was just told my 6 year old has 8 cavities (that’s another story) that will cost $400 out of pocket to fill, and that my 10.5 year old will need braces to the tune of $5,000 or so.

Add on top of that the fact that our car has 150,000 miles on it, and we refuse to borrow for a new one, and well, I’m looking at a lot of financial stress.

Still, these expenses don’t have to be paid immediately.  I’m saving money every month for a new-to-us car when our old one finally gives out.  I may be able to wait a bit to get my son braces.

I just wanted to vent a bit to my friend and express my frustration.

I was really surprised by her answer.  She simply couldn’t understand why we would contribute to our retirement when we have so many impending expenses.

Yet, as Tracy Chapman sings, “If not now, then when?”

Good Time to Contribute to RetirementThere’s no good time to save for retirement.

You could always use the money for something else.

When my husband and I were newly married 14 years ago, I made a little over $30,000 a year.  We lived in the suburbs of Chicago, which wasn’t cheap.  My husband was a graduate student and didn’t work.  We were flat out broke.

And my employer had a mandatory rule that 8% of my gross income would go to my retirement savings.

I HATED that rule.  There were so many other things that I could have used that money for, but I had no choice.

Eleven years later, when I left the job and walked away with 11 years of retirement savings at 8% of my gross salary plus an equal match by my employer, I was ecstatic that I was forced to save for retirement.

Now, my husband is working for an employer who has the same rule, and we’re happy that 8% of his gross salary goes to his retirement account.

We’ve learned our lesson so well, in fact, we are also contributing to our Roth IRA even though money right now is T-I-G-H-T.

But really, for most Americans, money is almost always tight.

I would rather scrimp and save now, while we still have many working years left before retirement than scrimp and save during retirement, constantly worrying if I had enough money to last me until the end of my life.

So, no, my well-intentioned friend, I don’t think I should stop contributing to my retirement.  In fact, there’s no better time than now to save for retirement.

If not now, then when?

Do you continue to contribute to your retirement when facing large expenses, or do you wait to contribute until your finances improve?

Are You Teaching Your Kids to Follow Your Financial Habits?

My oldest is 10, and he does chores around the house to earn an allowance.  He works hard, and we’ve taught him to set aside a percentage for investing (10%), for saving (20%), and for giving (10%).  That leaves him to spend 60% of everything he earns.

And spend he does!

He finds it extremely difficult to let his spend money sit and grow so that he can buy something bigger.  Instead, as soon as the money hits his hands, he wants to spend it even if it’s a fairly insubstantial amount and can’t buy him much.

He just can’t seem to save up for the things he wants.

Instead, he’s enticed by advertisements.  He reads the newspaper and magazines to find free catalogs to send away for, and then he wants to spend his money on any little thing.

Teaching Financial HabitsIt’s driving me crazy.

His money, his life.  I should let him spend the money and be disappointed when he has no money to spend later.

Actually, that’s already happened.  When we first moved to Arizona, he saw a 2015 calendar at Costco for $15.  This calendar had scenic landscapes of Arizona and was quite pretty.  I told him to wait because as 2014 came to a close, he could get calendars cheaper.  But he couldn’t wait, and then in December and January, he was disgusted to find how cheap calendars got.

Still, his behavior hasn’t changed.

As a parent, I wonder how much I should interfere.

You see, when I was young, I was just like my son.  I spent every Saturday at the mall, my money burning a hole in my pocket.  I HAD to buy something, even if it was just a pair of socks I didn’t need.  Every week, I walked through the same stores, buying stuff I didn’t need, just like my son buys the stuff he doesn’t need now.

However, my mom never stepped in.  She gave me a wide amount of freedom.  Whatever money I earned was mine to spend how I liked.   She didn’t even ask that I set aside a portion of it for savings.

I was a responsible kid and bought my own car, paid my insurance, paid for gas, and also bought my own clothes.  I think she figured that I was handling my money well, so it was up to me to decide what to do with the rest.

When I was a teenager, my friend and I used our money from our job to go out to eat and see a movie every Friday.  Sometimes we’d go out to eat on the weekdays, too.

What a waste!

Imagine if I had instead invested just a small portion of that in a Roth IRA.  Or if I had saved it to pay for part of my college education.  Maybe I wouldn’t have graduated with $25,000 in student loan debt.

Even now, I have a hard time saving, though I am getting much better.  I’m finally able to stick to a budget and make saving a priority.  It’s taken me 40 years to break bad spending habits that I learned in childhood.  Let’s be honest, getting a hot deal isn’t really a deal if you don’t need the item and it robs you of the ability to save.

I want to teach my son this lesson now, so he can be more financially responsible than I was for many years.  But that lesson is oh so hard to teach.

How much do you guide and interfere in the way your child chooses to spend money?

 

How Much Leveraged Risk is Too Much?

On January 15th, 2015, the Swiss National Bank eliminated it’s cap on the Swiss Franc in regards to the Euro.  What does that mean?  Well, up until that day, the SNB had said that the value of a Franc would be tied to the value of a Euro.  Under that policy, they had maintained the Franc at a value of 1.20 Francs to 1 Euro.

Disclaimer: This post is being sponsored by ETX Capital.  The content is mine, however, and isn’t influenced by their sponsorship.

Artificial Currency Valuation

In other words, they were artificially changing the value of their currency.  And when they stopped artificially changing the value of their currency?  The market corrected, and the Franc rose to a more reasonable exchange rate. At the same time, the Euro dropped.  The big problem with all of that?  There was no warning that it was going to happen.  And as we all know from the housing crash in 2008, when there’s no warning, bad things can happen.  Banks across Europe immediately felt the pressure.  Within a day, it wasn’t just banks.  It reached all the way down to many small investors around the globe.  Most of those investors were FOREX investors. You see, FOREX investors invest in foreign currency with the expectation that the currency will increase in value.  For years, the Franc was artificially stuck in one place.  And then it wasn’t.

Leveraged RiskSNB Change Cost Many FOREX Traders

Many FOREX traders trade on margin, or leveraged investments.  They’re required to keep a certain percentage of their overall investment in a cash account.  Say $200 on a $10,000 investment.  And when that $10,000 investment tanks and is suddenly worth only say, $1000?  It’s not like they just get to walk away from that.  They still owe the $9,000 they lost to the brokerage.  But, just like in the housing crash, where many of the investing houses were over-leveraged on sub-prime mortgages, many of the investors simply didn’t have the cash to make up the difference.  And many of the FOREX brokerages were left holding the bag, which left many of them in the same situation as the banks in the housing crash.  Suddenly without much in the way of liquid funds and headed for bankruptcy.

Much like the housing crash, there were a few brokerages that had been cautious with their leveraging, and actually managed to escape relatively well from the SNB issue.  One such brokerage was ETX Capital in London. Not only did they come through the fray,  but, according to LeapRate, they’re buying up some of the brokerages that didn’t make it through so cleanly.

Limited Leverage and Risk Aversion Saves the Day

So, how did ETX Capital make it through the SNB fiasco?  According to a LeapRate interview with the CEO of ETX, it’s because they’re a more risk-averse brokerage.  In other words, they put additional limits on the leveraged investing of their users.  That risk-averse, limited leveraging, allowed them to take far smaller hits in the markets and recover much more quickly.

What can we learn from ETX?  Some risk might be good for us, but we have to be really careful about how much risk and leverage we have.

Limiting Leveraged Risk is Good for Personal Finance Too

Let me put it this way.  How many of you reading this have less than $1000 in the bank right now, and over $100,000 in mortgage, student loan, and credit card debt?  That’s leveraging.  Your credit score is a numerical indicator of the likely hood that you will repay a debt.  The higher the credit score, the higher the likely hood that you’ll repay the debt.  When you take on a mortgage, or use a credit card, you are leveraging your credit score (and future income) for that “investment” debt.  (*note: Debt is never really an investment.  Don’t treat it as such, please.)

Why do we leverage our credit and income for debt?  Because very few of us will ever have the patience or will power to save up for years so that we can pay for a house with cash.  Most of us can’t make it a year to save up for a good used car.  So, we leverage ourselves out to buy the things we can’t buy with cash.  The more debt we accumulate, the more leverage, and thus risk, we have.

What happened to people who bought houses with those sub-prime mortgages before the crash?  We all know the answer.  We saw it streaming across our televisions and the headlines of our newspapers for over a year.  They were foreclosed on.  The economy dipped so hard that there was serious discussion about it becoming another “Great Depression”.  And those people lost their homes.

What if we were more like ETX Capital and other brokerages and banks that self-limit their leveraged risk?