After a week of violent stock market swings and glum economic news from all corners, I sought the sage advice of friends to see how they were best managing these uncertain financial times. With more insight than many Wall Street talking heads, these Mavens of Main Street shared their strategies for surviving (and in some cases, thriving) during this economic roller coaster. These unsung gurus had a far wider ranging set of practical ideas — and ones likely to be far more profitable.
RETIREMENT INVESTING – ENDING UP WITH MORE BY TAKING HOME LESS?
With my recent career change, I had the opportunity to reexamine my retirement investments. Like most, I spent a great deal of time and energy negotiating the most lucrative contract I could. Unfortunately, most people seem to stop there once the terms are accepted and the ink has dried. For long term financial security and stability, however, it is the next steps that are often most vital and impactful. As I went in for orientation, I spent just as much time and energy working with the benefits director in Human Resources to ensure I received as LITTLE as possible in actual take home pay. Obviously this seems counter intuitive, but by maximizing my pre-tax personal retirement contributions and dependent care savings plan, I reduced my take home pay (and therefore taxable income) dramatically. Whether your employer offers a matching plan or you’re simply funding your own, consider maximizing all options open to you, including dependent care accounts and medical flexible spending accounts.
As I turned my focus to Facebook friends to solicit their successful savings secrets, my friend Kate told me, “In addition to putting 10% of our salaries into savings that we try not to touch, we also max out on our tax withholding from our paychecks, so we can be sure to get money back every year. This makes us budget our normal week-to-week lives on slightly less money and then we get a chunk of cash to do something real with (a new sofa, some house-related renovation). We figure we wouldn’t notice a few extra bucks in our account each week (or bother to invest it) but in a lump sum we can really do something with.”
My initial reaction was to point out that by ensuring the largest possible refund come April, she was also essentially providing the federal government with a tax-free loan. And while that is true, Kate has clearly identified a successful strategy that works for her family and provides a substantial and reliable annual bucket of funds for larger purchases. As with all strategies, anything that increases savings while lowering discretionary spending is an effective means that helps her family achieve their savings goals.
LIVING BY CASH – OR NOT?
Carol told me that she “lives out of envelopes”. In asking her to explain this seemingly odd advice further, she assured me it’s an old idea making a comeback. According to Carol, “The idea is to pay cash for EVERYTHING. I haven’t mastered it yet but doing better.” For Americans who have the tendency to develop credit card debt, paying cash is a very effective strategy. I can also personally attest that paying cash reduces impulse buys and leads to lower overall expenditures as it is psychologically and emotionally harder to part with cash than to simply swipe plastic.
Just as Kate’s advice for maximizing an annual tax refund gave me pause from a purely financial perspective, Carol’s advice has a flip-side. For those without credit card debt, paying cash may not always make the most fiscal sense. I currently hold credit cards with no balances and no annual fees. The interest rates may be high, but since I pay them off every month, they are irrelevant in practice. To me, credit cards are tools that make purchases easier and provide my family with valuable free perks. In fact, I cannot recall the last time I actually purchased an airplane ticket thanks to the rewards points associated with my cards. If used properly (not used to purchase something you couldn’t afford with cash), credit cards can be a great help and provide additional consumer protection. Also, if I purchase a large item at the beginning of a billing cycle, for example, I have the full month to enjoy it, and then almost another month after the close of the billing cycle to pay the bill (which I have set up to happen automatically on the due date). As a result, I paid the same for the item as I would have with cash, I received it for close to two months without paying anything (technically an interest free loan), and the added bonuses of either cash back or travel perks and added protection in case anything goes wrong. Proper and effective use of these cards also enhances my credit rating resulting in better mortgage rates on our home. Again, this is an effective strategy only for those able to pay off their bill monthly. If that is not the case, then living out of envelopes is excellent advice.
CREATIVE SAVINGS FOR COMMUTERS
For those in tighter financial situations in which retirement savings seem a luxury currently beyond reach, other friends have shared their strategies for cutting costs. In Amanda’s family, the day begins as the adults decide who has the longer commute and assigning her the more fuel efficient car. In a similar manner, Stephen utilizes promotions attached to his free grocery store loyalty card that saves him 40 cents per gallon every time he fills up at the station he would be going to anyway. Most major grocery store chains offer a similar type program attached to their free loyalty cards. With an average tank being about 16 gallons, Stephen saves at least $6.40 per fill up. And to top it off, he bypasses Starbucks and has his first cup of coffee at the office!