That is the EXACT takeaway I was intending. If you do not pull it out BEFORE you get your regular paycheck, then most - maybe not all - but most people will justify a need for spending it… even in a very legitimate way, leaving savings the last place it goes.
Take it out before you even have it and you cant/wont spend it elsewhere and you will be surprised to find out that most people can still manage to get by… even thrive.
In essence it is the diametrical opposite of the old adage, “the more you make, the more you spend”.
Definitely good advice. However, do you have an ample reserve in case of emergencies outside your 401K? Also, are your 401K options adequately diversified. Most people are at the mercy of what their employer provides. It is better now - when I started, when 401Ks came in, we had only two options, there may be better options out there after you get to your maximum employer match.
It should be possible to set up a sweep from your account to a more diversified investment account in order to not see the money, which I agree is crucial. We do this manually now, and our financial planner has set up a sweep of our cash account into better investments. It has worked quite well for us. I could retire now if I wanted to (health insurance is a bigger issue than money) but am having too much fun at work to do so.
If you have direct deposit, open up a second bank account (savings), and set up your direct deposit to just drop some amount of money out of each check in that other account.
Back in the day, I put something like $150 each pay period in my savings account, and by the time I quit that job to go to grad school, I had over $10,000 in that account from doing that.
The best part was that I never missed that $150, because I’d created my budgets and lifestyle to not have it in the first place.
In a later job, there was some adjustment, but it was short lived, and now I put more like $350 per pay period in the account and don’t miss it.
Really, this advice amounts to ‘live deliberately below your means’. It only applies to those who have that option.
What it is, is a corrective to the opposite trend - that as people’s incomes increase, they have a tendency to start thinking and living as if what they “need” for current living increases, too. Of course above a certain minimum one doesn’t actually “need” more, but it is very easy to fall into the trap of thinking that one does.
Taking savings off the top is just a little mental judo one does on oneself to avoid that trap, that is all.
It’s a good plan if you have the discretionary income. We did somewhat the same thing when we were in the Foreign Service. When we joined, we had about $30K in debt because my new wife had been caring for her mother who had had a major stroke. We both were employed, so both started contributing to the Thrift Savings Plan. I maxed mine out, but my wife put in less because of her debt payoff. We were both fully invested in the TSP stock fund. This was in the 90s, so the market was still booming. At the end of six years, between those contributions and what we banked from our checks, we were over $350K to the good. While the matching funds quit when we did, we left the money in the TSP, where it continued to work for us.
Those without much discretionary income should try to put at least something into a savings instrument whenever possible; the prospect of being 65 with nothing to live on is grim.
For me, since in those 15 years I have had 3 jobs (and about to start a 4th). I generally roll the 401’s from the previous employer over into an IRA which keeps the tax deferred status (I plan to cash out at retirement when I am in a much lower bracket) but also gives me much more flexibility.
I also keep 10-15% in cash “just in case” of some major unforeseen event. Of course our family also has regular savings and we use sharebuilder as a monthly investment tool outside of the 401/IRA vehicles.
Sharebuilder is pretty cool because you can basically build your own funds and contribute each month for a very small fee… you want to buy 1/4 of a share of Apple of Google ever month? No problem
I know it seems like that… but if you took even 2% out starting next month and then slowly increased it over a year or two, you would be AMAZED and how well you adjusted.
I know I cannot speak for everyone and perhaps you are the exception, but for most people, taking 2% pre-tax would be possible.
Yeah…I’m currently bringing home just a bit more than the cutoff for food stamps. That’s a great plan, but it’s not possible for all educated professionals working in their field.
Yep, I too, would have sworn this was going to be SPAM.
This year, I really wanted to do something to keep from paying so much in taxes. I’m donating way too much to Uncle Sam these last few years. I was told to go see somebody at Edward Jones. All he did is reccommend various forms of IRA accounts, never mentioned 401k’s. Maybe I need to look into this further.
I’m self-employed, but heard I can do my own 401k’s. Can you avoid a broker altogether? How much do they eat up in fees?
A SEP IRA is often preferable to a 401k for a variety of factors, including simplicity of administration, lower/no fees, and longer times to actually fund the contributions (October instead of January).
Since a SEP IRA limits you to 25% of your income, it would allow you to achieve what the OP wanted to do. A 401k lets you do 25% + the elective deferrals up to 17.5k (22.5k catchup). I advise on things from the tax side, and I mostly recommend a 401k when someone is looking to sock away serious money fast or when they have other employees and need to focus on elective deferrals rather than profit-sharing.
There certainly are 401ks that are an option for you - they’re often called solo-401k or uni-401k plans. Edward Jones offers them, as do most other retirement advisers and online brokers.
I had exactly the same experience as the OP. Now, at 23 years instead of 15 (and the last 4 have been jobless), my 401k has doubled.
Key to this was picking a good mix of low cost mutual funds and leaving them unmolested. At the bottom of the market (when too many friends bailed and went all cash), I just held on. The 401k was down 42% but now it is up 150% from the low balance in March 2009.
To echo other comments:
[ul]
[li]early saving is important. Saving a $100/week from 25-35 gives you more at 65 than saving $100/week from 35-65. Compound interest is a powerful friend.[/li][li]never let savings or retirement dollars hit your checking account. At one point, I was splitting my paycheck across checking and 3 other accounts.[/li][li]if you have access to a 401k, take advantage of it - even if only 2% to start. [/li][li]set a goal of maxing out the 401k contribution in dollars. At 50, you can add more money to it.[/li][li]if you get a raise or bonus, it goes to savings/retirement first - or at least 50% of it. This is a relatively painless way to start living below your means.[/li][li]investing is not difficult or scary when time is on your side - even when starting in your forties. Three low coast funds can make you rich. See this.[/li][li]a Roth IRA can be a good way to invest your emergency fund. It grows tax free but you can withdraw contributions (not growth) if needed.[/li][li]if your income is too high for a Roth contribution, investigate the possiblity of a ‘Backdoor’ conversion.[/li][/ul]
Obviously, that’s a very difficult position to be in. However, many more people think they’re in that position than actually are. It is very easy to see certain things as necessities rather than the luxuries that they are. But if you look around you, you’ll probably see people who make less than you and somehow avoid starving in the streets.
If you are currently in debt, the value of making a cut, any cut, in your standard of living in order to pay back the debt is huge. Because every bit of debt you pay off means that your necessary expenses are reduced that much more, giving you more money to pay off more debt until you’re out of the hole.
Making those cuts can be really painful. You will be living like a poor(er) person for a while. But not making the cuts will be painful for a lot longer.
I agree that this advice is pretty much to live under your means. When we bought our current home, our income qualified us for a much bigger loan. We might have been able to eke out mortgage payments on the highest amount, but we wouldn’t have had money to vacation, or sock away money yinto retirement.
So my advice is that if you’re looking at buying a house, don’t take out as much as the bank will lend you. Do live under your means, because having a nest egg or emergencies and/or retirement will give you more peace of mind that the bigger home.
You put roughly 16k a year in (inflation adjusted) for 15 years, which is 240k, and now you have 500k after 15 years. That is fine and all, but that isn’t a huge deal IMO. You caught the stock boom of the 90s as well as the bush years and your money doubled over a decade plus.
Its not bad advice though. I’m trying to put 25% of my income into investments, but that leaves nothing for other forms of savings.
