Why should anyone save? 

You’ve heard that money doesn’t buy happiness. That’s true. What savings buys you is freedom and security. Those are priceless, but only if you value them. If freedom and security are important to you, consider how you can achieve them.

I have great difficulty saving anything. Am I unusual? 

No, you’re not. Consider whether you identify with any of these examples:

You’ve been hit by an ugly sequence of badly timed financial catastrophes, none of which is your making and many of which were not foreseeable. Everyone gets handed a disproportionate amount of grief at times in their lives.

You’re a serial procrastinator, repeatedly telling yourself there’s always tomorrow to begin anything, including losing weight and dealing with financial stuff.

You have little or no idea how you spend your income. The idea of a financial plan or budget is unthinkable.

You buy stuff because you “just want it”, it’s convenient, it makes you feel good, it’s “discounted” or a “limited time offer”. And you have little or no idea as to whether you can really afford it.

You have no emergency fund for unanticipated expenses, but you do have considerable credit card debt and a new car that was financed with a 7-year payment contract. And perhaps significant student loan debt that may take a good chunk of your adult life to pay off.

You’ve embraced the belief that personal debt is not only acceptable, it’s the only way to afford the life you want, or at least think you want.

You rationalize your lack of saving and your acceptance of debt by believing you will work until age 75 or longer to make up for it. But the reality is you have no idea the medical problems people begin having when they arrive in the 65-70-year-old age category. Talk to family members of that age and they will enlighten you.

OK – fine, I want to do better, but I’m tired of reading about silly “solutions” for saving money – I want something that will work for me. 

Fair enough. Let’s start with your view of yourself, list some situations to avoid, and then give you some practical applications to get you started.

How high a value do you put on your own life and future? The higher the value, and the more hope you have for your future, the more you should be willing to trade some indulgences now for others later.

Can you afford to save? The easiest way to answer this is to take a month or two and track everything you spend money on. For most of us, the results are sobering. If there is anything left over that’s good. If not, then go over the list and determine if there is anything you can cut back on. If not, then your only alternative is to increase your income by getting a second part-time job or get a better paying full-time job.

If you want to take a more comprehensive approach, consider creating a budget.

Avoid counter-productive behaviors and people who are intent on separating you from your money.

When you have financial decisions to make, don’t make them when you’re distracted or emotionally vulnerable. Possible distractions are shopping malls, car dealerships, expensive restaurants and bars, emotional disagreements with significant others in your life, and online offers.

Spend some quiet time thinking about what you really value, and then look over your last twelve months’ credit card charges and ask yourself how well they match up. Prepare to be shocked.

Don’t be swayed by people whose job is to separate you from your money. They’re better at their jobs than you are as a consumer; these people are not your friends:

Car dealers. By starting with how much you can afford to pay a month they’ve already framed the discussion on their terms. Do you really think buying a new car is a reasonable financial decision when in 2-3 years’ time it’s already depreciated 35%? Would you buy a $300,000 house with the expectation it will be worth $195,000 in three years?

Realtors. “Buy the most expensive house you can afford, or one even more expensive since you’ll grow into it, and it will appreciate as they always have in the past”.  If you believe residential housing is an investment rather than a place to live, think again, and do some reading about the financial crash in 2008 and what happened to housing prices.

Be creative and find practical ways to make saving as easy and painless as possible.

Channel money from paychecks before you’re tempted to spend it. A 401(k) is a perfect example as you don’t “touch” the money that is skimmed off the top. If you don’t have a 401(k), but you do have electronic salary deposits, divert a percentage off the top to a savings account.

If you get a percentage raise, take a portion of that and divert it to savings. Small amounts are meaningful as they add up over time with the magic of compounding. Once you establish the habit of saving it will serve you well throughout your life. By saving you’re really paying yourself – aren’t you a better investment than a credit card company?

Don’t try to do too much too soon by setting goals for yourself that are unlikely to be met.

When setting goals, think specific, general, short term, and long term. “I want to start saving for retirement” is a non-specific, long term goal. “I want to save $500 by June 1” is a specific, short term goal.

Goals should be attainable, and should be aligned with your values, not taken from some outside source.

Don’t beat yourself up for setbacks that may occur.

Rather, consider setting up rewards for yourself along the way, like splitting savings into two categories: long term, not to be touched until a clearly defined date (like a desired retirement date), and short term, for occasional indulgences when you feel you deserve a reward for being conscientious.

Share both your goals and your successes with people who support the idea of saving – friends, family members, or financial advisers. You are the best person to devise a way to make this work for you, so make smart decisions and be willing to change your approach along the way if needed.

And finally, here’s a personal view based on years of life experiences. If you’ve ever tried to lose weight by going on a diet, statistically you are highly likely to fail in the long run. Why? Because you’ve only modified short term behaviors and inevitably reverted to older long term established behaviors. Saving is no different. Both require that you find ways to make changes in attitude that you can maintain throughout your life.

Try working on your attitude – everything else will follow from that.

If you have the option of saving for college in a 529 plan or a Roth IRA, which should you choose?

Factors to be considered

These factors are important: parental retirement plans and funding, parental income now and projected for the future, contribution limits, ownership and control of contributions, investment options and costs, tax consequences for both parents and dependent children, financial aid impacts, and flexibility or lack thereof of what can be done with unused balances.

And then you can add the uncertainties that come with children in terms of interest in college and alternatives to college, choices of schools and majors made and possibly changed later, and assumptions or pressure from parents as to what their child “ought” to do.

A simple way to think about the choice

Let’s start with three generalities and then consider them in more detail:

• If you are uncertain as to whether your retirement savings are going to be sufficient, or if you are unsure that money set aside will be necessarily used for college, choose the Roth IRA. Money in Roths can be used for either purpose and many others.
• If you are convinced that you want to set aside money specifically and only for education, that you are certain that your retirement savings are on track, that you have a satisfactory plan for paying down debt, and that you can reliably predict now what your child will wish to do when reaching college age, seriously consider a 529 plan.
  
• If you have sufficient financial resources to fund both after meeting retirement objectives and planning for future healthcare expenses, consider yourself very fortunate and fund both.

Major differences between 529 and Roth IRA plans

The variety and number of investment options are likely to be far greater in Roth IRAs than they are in 529s. The longer the investment time period the more important this becomes.

Qualified withdrawals from Roths can be used for any purpose, 529 withdrawals must be used for qualified educational expenses. The IRS determines in both cases the meaning of “qualified”.

Money can be withdrawn from Roths at any time without incurring a withdrawal penalty when the funds are used for qualified educational expenses. Up to $10,000 per year can be withdrawn from 529 plans for qualified educational expenses, including expenses for K-12.

Allowable individual contributions for Roths are $6,000 per year or $7,000 if the holder is aged 50 or over, but there may be income limits that limit contributions or disallow them entirely. Even if a spouse has no earned income, a spousal Roth IRA can be opened doubling the allowable total contribution to $12,000 or $14,000 for those aged 50 and over.

Allowable contributions for 529s are $15,000 per year for individuals or $30,000 per year for couples. And by using an accelerated gifting provision, five years’ worth of annual contributions can be made in one year provided no further contributions are made in the next four years.

Financial aid impact –  the impact of 529 plans depends on who owns the plan. If the plan is owned by a dependent student or a dependent student’s parent, the impact on eligibility for financial aid is minimal.

If the plan is owned by anyone else such as a grandparent or non-custodial parent, distributions are counted as untaxed income to the beneficiary, and that could have a significant negative effect on eligibility. There are some ways to deal with this, and they should be discussed with a knowledgeable expert on student financial aid.

Only one Roth can be opened per individual; there is no limit on the number of 529 plans per individual. However, there is a maximum aggregated amount that can be contributed, and that amount varies by state ($200K to $400K).

If there is money remaining in a 529 plan the owner of the plan can change the plan’s beneficiary to another family member. The family can also withdraw funds left over but they will be counted and taxed as income and a 10% penalty will be assessed on the earnings portion of the withdrawal. You cannot change ownership for a Roth plan.

Money in 529 plans can not be used to pay off student loans as they are not considered a “qualified higher education expense”. Money in Roths can be used for any purpose.

Some states offer a state tax deduction (not a tax credit) for 529 plan contributions. Note this applies to the state in which you are a resident, not the state from which you get the plan. There are no state tax deductions for Roths. Before you opt for a 529 plan make sure you know how your home state treats both state tax deductions and withdrawals for K-12 expenses for state tax purposes.

Thinking and planning for the future

In choosing between a 529 plan and a Roth IRA you are being asked to predict the future: your future retirement needs and your future need for helping meet a child’s future education costs. Ask yourself which need is more likely to be predictable with accuracy, and which is more easily modifiable as the respective times approach.

Consider that college may be very different in the future than what we experienced as parents in terms of cost, time required, and locations. And keep in mind that educational expenditures are likely bounded by 4-6 year time frames, whereas retirement is, hopefully, going to have a 20-40 year time frame.

Will creating a budget really help me get my financial life under control?

Forget for the moment the word “budget”. Let’s start with what problem you are trying to solve, what challenges you want to meet, and how best you can accomplish this.

First ask yourself whether you have experienced one or more of these scenarios:

I have difficulty distinguishing between needs – things I can’t live without – and wants, so I sometimes cannot meet either one and frequently suffer from the result. A budget will not fix this, but taking a good look at what you’re spending money on can help clarify things.

I would like to save some money every month but can’t figure out how to do that. You can do this with or without a budget.

I have trouble paying monthly bills in terms of finding the money and then scheduling the payments. You have a cash flow problem and probably need a budget.

Like many Americans, I can’t pay an expense like an unexpected car repair without either charging it to a credit card or borrowing the money from friends or family. This is less a budget problem than it is the lack of having an emergency fund.

Now consider which of these best fits your personality and past behaviors:

I’m not likely to write down and track a lot of my spending. This is way too much trouble. The idea of giving myself monthly spending quotas is worse than having a root canal.

My income is erratic; I have occasional expenses I cannot anticipate very well.

I tend to view spending as a means to achieve emotional gratification.

While I don’t consider myself a control freak, I like the idea of documenting my financial life and monitoring how I’m doing relative to my objectives.

Take a moment and think about your answers and they mean to you.

Now apply them in practical ways.

Track your expenses for one month.

You’re probably very aware of the amount of your income that comes in every month; you may not be very familiar with how the money goes out every month. So, start thinking about what expenses are fixed (like rent or mortgage payment), what expenses are variable (like restaurants), and how that distinction relates to needs and wants in your life.

Then develop some categories that make sense to you for each of the two types of expenses. And for one month write them down in their respective categories. A good time to do that might be after you get home from work and are enjoying a glass of wine or whatever else is your choice of drink. Don’t put it off by skipping days as you will very likely forget what you did yesterday or the day before.

At the end of the month look at what you’ve written down. I guarantee it will surprise you. If you survived that experience, add another month so you have two months of data.

Decide if there are areas of your spending that could be reduced.

If there are, try doing so for the next few months. Set that money aside through direct deposit or any other electronic means so you don’t have it available to spend. This is sometimes referred to as “pay yourself first”.  Now spend what’s left over any way you want.

Note this approach is not what most people think of as a budget with all the associated restrictions, it’s a simple way to track your spending and to determine whether your spending aligns with your needs, wants, and financial goals.

If you don’t have one or more financial goals, think about what they might be and write them down in whatever detail suits you at the time.

Now consider whether you need a budget.

If you like the idea of documenting your financial life and monitoring your progess against your objectives, I recommend a budget program.

Here’s what you will want in a downloadable software or web-based budget program:

1. Easy to use, otherwise you won’t use it.
2. It does what you want it to do, meaning you’ll need to figure out what that is.
3. Gives you more than just numbers tracking – it also supplies helpful suggestions.
4. Offers very high levels of security since you’ll be syncing with credit card and bank accounts.
5. Runs on multiple operating systems on both desktop and mobile devices.
6. Handles all your financial accounts.
7. Gives you the assistance that works for you such as online manuals or telephone support.
8. Is available at low or no cost.

Mint and You Need a Budget are two good options to consider. There are many other programs you can find by doing a simple search on “personal finance software”. Don’t jump into picking one – review one or two and pick the one that you think has the best chance of your sticking with it.

I’m a big fan of budgets but only if chosen for the right reasons by the people who can benefit from them. The amount of upfront work that is required depends on what you want the program to do; once that’s done they do not require a lot of time to maintain.

And they have another upside – or downside, depending on your point of view – they get partners involved in the process. There is considerable research concluding that people in otherwise serious relationships are less than forthright about their financial circumstances with their partners. Fighting over financial matters has always been very high on the list as a cause of divorce.

Decide the level of involvement you want and think you can stick with, and go for it!

You can either contribute to retirement savings or to anticipated future college expenses for your child (or children). How do you choose?

Sacrificing retirement savings now can affect both your future and future burdens on your children.

More limited options once retired

Once retired, you have more limited options should you need to borrow money.

In retirement you will need to replace a percentage of your pre-retirement earnings. You’ll need a place to live, a means to meet your basic expenses, a way to meet what will certainly be continually increasing healthcare costs while hopefully having some money left over to spend as you wish. These variables can be estimated because you have years of experience with real costs.

Don’t make the mistake thinking that you can simply forego contributing to retirement savings for a period of time leading up to a child entering college. Those foregone contributions will have a very large negative impact on your ability to retire later because you will have lost the compounding effects.

More options pre-retirement with funding college expenses and education choices

With anticipated college expenses, you have more options with greater flexibility. You and your child can and should consider cost when making choices. Student loans can be used. Scholarships and grants are available. Many financial aid packages are available.

At the same time the level of uncertainty for the college experience is rising. College is likely to be a very different and unforeseeable experience in the future. Rising costs, out of control student loans, and COVID will have negative impacts that are not well understood. The widely accepted current view that college is a necessity for everyone will be questioned, as it should be.

Recommendation

If you are like most people and cannot fund retirement and put aside money for future college expenses, comparing limited options for retirement with the increased options and flexibility for college as well as the increasing uncertainty makes focusing on retirement savings a better choice.

What if you end up saving more for your retirement than you need later? That has three important benefits: your children will not be financially burdened by having to support one or both of their parents, you can always give money to your children later if you wish, and you have the option of helping them pay off student loans along the way.