Getting Financially Fit in 2010: Save For Retirement and Large Purchases

Have you ever lost a decent amount of weight and then found yourself back at the same weight a year or two later? The reason for that is you work so hard at working out consistently and changing your diet to meet your goal of losing weight, but after you reach your goal, you slowly slip back into your old ways and soon find yourself back at the same weight you started with. When getting financially fit, many people are able to reach their goal of getting out of debt, but then they find themselves slowly slipping back into debt and not increasing their net worth.

The only way to prevent this from happening in your financial life is to build an emergency fund like I talked about in the last article, and saving for retirement and large purchases. If you don’t want to be broke anymore, you must become a saver. You must mold yourself to think save FIRST, and spend SECOND. This must become your mentality if you want to break the poverty or paycheck-to-paycheck cycle. Many middle-class families aren’t considered to be poor in our society if they drive nice cars and own a single family home. But the only true way to measure wealth is by someone’s net worth and if you are in debt on your assets and you have no cash in the bank, you are considered to be poor from a financial point-of-view. The only way to increase your net worth is to save money and pay off debt.

Saving For Retirement

You can find a wealth of article about investing and saving for retirement under our investing category that I have written in the past. The main thing to remember is to hold off on throwing a lot of money into retirement until you are out of debt. The only time I suggest people put money into retirement when they have a lot of debt is when their compay offers a great 401k matching program. If your company will match your contributions 100% up to X percentage contribution, contribute that maximum amount to get the full match but nothing more until you’re out of debt. If you ARE out of debt, then about 15% of your take-home pay can go towards retirement accounts. If you stick to that percentage amount for 25 to 30 years, you’ll definitely be a millionaire in your golden years.

401k or Roth IRA?

Many people ask if they should be saving for retirement in their 401k or a Roth IRA. It’s a huge discussion, but here’s the short answer: If your company offers a match, invest first in the 401k. If they don’t offer a match or you’re self-employed, open a Roth IRA. You’ll be putting in after-tax dollars, but then you won’t have to pay the tax when you pull it out during retirement. The 401k puts in pre-tax dollars, and taxes it when you pull it out at retirement. You could end up paying more in taxes if all of your retirement money is in a 401k, because your goal is to be making more money and in a higher tax bracket when you are in your 60’s and 70’s.

Saving For Large Purchases

The easiest way for middle-class families without a lot of cash to slip back into a debt situation is not by using credit cards on consumer goods. Most people who truly change their financial habits will get rid of all of their credit cards and never use them again. However, they can easily be tempted back into financing a car purchase, kitchen remodel, or ski boat. This kind of debt can be worse than credit card debt because even though it usually comes at cheaper interest rates, it will lock up a bigger chunk of your monthly income and keep you from saving for retirement or paying off your house. Even if you don’t need a newer car right now, start saving for one. Then, once you want to upgrade you can sell the old one and use the rest of the money to purchase a newer, more reliable car. And as far as luxury items go, use grandma’s philosophy: If you don’t have the money for it, don’t buy it!

Do you have any stories to share about retirement planning and saving? Do you have a story about how you paid cash for a large purchase? We want to hear it! Help encourage those that think this goal isn’t attainable for them.

  • Gina

    We decided that we wanted a new deck and and a screened in porch added to our house. Instead of taking out a HELOC (like most of our neighbors), we put money away each month for 3 YEARS!! It sure feels good to sit in our PAID for porch while our neighbors complain about their debt!

  • Winston

    Americans need to adopt Chinese ways of thinking when it comes to money. They are nothing revolutionary. Don’t spend what you haven’t earned. Just because you are earning this xxx right now doesn’t mean you are going to earn that several months from now. And don’t fall for those commercials that say buy this and that with no interest for 1 year. They are traps to get you broke.

  • Mac

    Actually, I try to avoid paying cash for anything if at all possible. I try to put EVERYTHING on credit cards just to reap the benefits of the rewards or cash-back programs they offer. Then, I do pay back the full balance each month to save on interest.

    For large purchases, many retail stores offer a 0% financing program for a set number of months/years if you use the store card. I recently took advantage of a 12-month 0% interest deal through Home Depot for our $8500 driveway. I set aside money in a savings account each month for 12 months and just before the year was up, I transferred all the money to the home depot card and paid it off.

  • Susan

    The Roth IRA – thank you, Dad, for making me switch to this type of account many years ago!

  • Mike

    This year we didn’t contribute to an IRA, cause I was in grad school. But since our income falls in the savers credit range, we will contribute some before April 15 to maximize our savers credit.

  • Kendra

    I wish I would have saved up for the bedroom set, washer and dryer, and living room furniture I recently financed. I know now that was a mistake. I am going to continue to follow this blog to make sure I don’t make any more mistakes this year.

  • Sean

    I have been using SmartyPig for large purchases for the last couple years now and I have to say it is great! Every month they take money out of my checking account and give me a 2% return (it used to be much higher, but I’ll take 2% these days). I use this for my homeowners insurance, property taxes, and various other large purchases. Right now I’m slowly saving up for some new furniture and I think I’m going to start a new goal for 5 years out for a new car. The way I figure it most people pay more than 2% for a car loan over 5 years so why not save over 5 years and *make* 2%.

    I’m sure there are other ways to auto-save, I just like SmartyPig’s website and I’ve never had any issues getting my money at any point into a goal. I would definitely recommend them as a great way to pay yourself first!

  • thriftygal

    We scrimped and saved for several years for a badly needed new car. It wasn’t easy because we had paid for our wedding a while back and hubby was in grad school for almost all the time we were saving. But we lived in a 3rd floor attic apartment, driving beat up old cars even after we started making decent money. So it was finally exhilarating to pay cash for our new car :)

    Just make sure you also invest in an anti-theft and/or recovery system when you’ve taken pains to save for a large purchase. We sure learned that the hard way!

  • Elizabeth I

    People just do not know how to make a realistic budget and stick to it. My husband and I made a very conservative budget at the beginning of 2009. Then we reviewed it three months later…were our projections for groceries, gas, etc. reasonable. We made minor changes and we met our budget every month and had the money we projected left over. This is with three kids and a stay at home mom.

  • Jennifer Phillips

    We were pretty well off, and then both jobs were lost to downsizing and closings, I ended up with major major surgeries and medical bills, and now at almost retirement age we are starting over again. We ate up our regular savings and emergency savings and then our retirement savings plans lost a bunch in the market along with we had no choice but to use it for bills lest we would be homeless now. We are slowly trying to make it back, but I doubt we reach the amount we had ever again. I would love to know what to do in times like that so I could teach our adult sons what to do. I don’t want them ending up this late in life in the same predicament.

  • Anissa

    I have a 401K at work, and both my husband and I started Roth IRA’s. We can do this because we make smart financial decisions. The only debt we have is our morgage. We don’t buy cars we can’t pay for outright (aka over $5000) and we don’t have credit card bills that can’t be paid. Do these things and you’ll be surprised how much you can put aside for the future.

  • Audra

    Most people pay for their land/home taxes as part of their mortgage payment. If you’re like us, and pay those taxes yourself, then putting money aside for that cost per-month really does help. Land/home taxes are usually a very large yearly bill. I calculated how much $ I would need to set aside each month to save up for that bill. So each month I literally put that money aside for that purpose. It’s nice when the bill comes, to know I have the money to pay for it. It’s the same principle as setting up an emergency fund, just more specific to what it will go towards.