Maybe we all recall the fable1 about the Tortoise (turtle) and the Hare (rabbit) and how in the end the Tortoise got there first. If not, here is the short version. The hare and tortoise got in a race. The hare was so busy running, he got ahead, and thought he had the race in the bag. Since he was ahead and now tired, he took a rest and when he awoke — he started running again but….the tortoise was ahead and beat him to the finish line.
Maybe today’s society rewards the hares, or perhaps, it encourages or even forces us to be hares or be left in the dust. When I was younger I could run and get everything done and then collapse at night. When I bought my first car, I had a car payment and then the rent went up and wow, car insurance! I had to get a part-time job — I went to work at…
…Pizza Hut as a waitress so I could afford to eat. Literally, I would get a free personal pan pizza whenever I worked. Usually, I at least made enough in tip money to put gas in my car. Normally, I made a lot more if I got to work on Saturday night.
All my life I have tried to become a turtle (slow and steady), but, somehow my spirit is the hare. I will say that as a single mom I often felt like the hare. It seemed like never enough time or money. Always in a hurry to get my kid to school and me to work and then back again. Weekends were housework and errands. So by the time I was worrying about saving money for retirement, I was already behind. And then there was saving for college!
I am sure many folks are familiar with the scenario. How do we catch up? What do we prioritize? Some experts have these strict “cash in the envelope” strategies for budgeting and say cut out your morning coffee or breakfast stop. Others are like go cold turkey and sell things, go bare bones, etc. to cut expenses. If you have credit card debt, things are even more dire.
The reality is that the best solution is something that you can and will do. Maybe you need to be the hare for a little while and look at how to do something quick to stop the money leaks — can you stop eating out and cook at home. Maybe buy a Keurig and make coffee at home before you run out the door. Eating out and buying expensive drinks are the common money thieves. However much this saves you, does it really help you catch up. It’s more like the hare starting to get a head but not actually winning the race. How long can you cut back — eventually, you will get tired and stop.
If you have credit card debt, due to the compound interest2, you may still be losing ground. Well, of course the first step after stopping the money thieves, is to figure out how to get compound interest working in your favor.
If you haven’t heard of the “snowball” method. How it works, is a bit counter intuitive. You pay more on the card with the smallest balance while paying the minimums on the other cards. The goal is that you pay off the smallest card and then you can put that payment amount on the next card that has the next lowest balance and so on. I used that after my divorce to pay off my credit cards. If you do this while cutting back your spending -this works!
That said, if you need to — you may need a side-hustle (aka second job). Do you have a hobby that you can make some money? It could be as simple as baking cakes (folks at work may pay for a nice cake for a special occasion) or even just making hair bows (yes, someone I knew did this at night while she watched TV). The side hustle may only bring in a small amount of money but it almost counts as double – yes!! It’s money that doesn’t come out of your budget AND if it’s under a $400, you don’t have to claim as income. While $400 may not seem like much, it might cover a new coat or feed your holiday shopping fund.
You get the picture, the hare gets busy fast to make a dent. Next is the where the turtle wins the race. Many folks work at a job where there is a retirement savings plan (e.g. 401(k) or similar). Most companies will put money in if you do– they will match your contributions up to say 5% for example. If you do not contribute enough to get the match, then you are missing the best gift! I have coworkers who have told me they can’t afford to — actually you can’t afford not too! It may be hard at first but it’s literally free money. And you get a tax break on your contributions. Maybe you have to start after you get your credit cards paid or the easiest time to start is when you get a raise. If you get a 3% raise, put in 3% – it’s not the full match but it will be easier – and it’s as if you put in 6%!!. Next year do the same. Here is why even a little makes a difference — compound interest! Really the longer you have money in there to grow, the better. So it’s really best even if it’s only 3% to get started and then just let it grow.
Next you have to decide how to invest. Easiest is to pick a good “Target Date” fund. These are funds that are usually named with a date: Investment A 2050 or Investment B 2065. So which one to choose. Hopefully, your company has several in the fund offerings. Think about how long you plan to work and calculate the date you plan to retire — the earliest date. So if you are 30 and plan to retire at 67 then select one that is 35 years from now. You can change your strategy later if you need. The goal is to get started. The more time you have funds saved — the more time it has to grow. The target date funds will start more aggressive and then slowly move more conservative as it comes time to use the funds. So, as you get older you may want to start contributing to a fund with a later date (10 years or so) to cover your lengthy retirement.
Now, you are like “Hey, wait! What about the kid’s college?! Let’s get into that. Well by now you have your debt eliminated — at least the credit cards are paid. You are saving for retirement. What about a car or house payment? Have you saved money for a house? With the cost of buying house, let’s discuss college funds. Seriously, the earlier you start a college fund the better. A 529 plan can be your best bet. Each state offers one and you don’t even have to pick the one in your state. That said, if you can put some money into one to start the ‘snowball’ growing that is a huge help.
Maybe feeding the college fund is hard. Even $50 here and there will make a difference. Grandparents may even wish to contribute a yearly gift. Your goal of saving the possible $100-200k for each kid may not be practical. That said, if you can save enough for the first year for each kid — that can help them get started. Then help them pay while in school. And, if you can have them only borrow the last year or two of school and then you can pay the interest. This sentence looks simple but it’s not. The biggest issue with student loans is the interest and even though the payments don’t start until they graduate, the interest starts compounding.
If you can get your child the student loan that is the equivalent to a home equity line of credit then it will often allow for interest payments. This is critical to keep the snowball at bay. Let’s say your child borrows $20k a semester for the last 2 years at 7%. The interest is going to really start adding up. However, if while the kid is in school — you may not be able to pay the tuition but you can pay the interest. Therefore, your child’s loan may still be a serious chunk but not nearly as much since you paid the interest.
Rather than feel like you need to save/pay all of your kid’s college costs upfront, please remember your son or daughter can live with you after college. If you can let them live rent free or help with groceries, etc., they can work to pay off loans and save money. That is a huge help. Additionally, many companies offer tuition assistance to repay student loans. Please don’t sacrifice your retirement savings when your child has more options to get ahead. With the real estate market the way it is, saving and buying a home will be a different post!
In the end, your child will be most happy if you can fund a your own happy retirement without having to live with them! And this is a very comfortable place to be.
1Aesop’s fables are a collection of ancient Greek stories, credited to the storyteller Aesop (c. 620–560 BCE) that teaches moral lessons. They often feature animals with human characteristics and are designed to convey a moral, such as “don’t judge a book by its cover” from The Lion and the Mouse or “slow and steady wins the race” from The Hare and the Tortoise.
2Compound interest is the interest calculated on the initial principal amount plus any accumulated interest from previous periods. It is interest on interest, causing money to grow at an accelerating rate over time. This can be beneficial for savings and investments but costly for debts, as interest can grow quickly on both the original amount and the accrued interest. This is why it is compared to a snowball that grows as it rolls downhill.
I am not being paid or sponsored for the mention of any companies or products. These comments are from personal experiences and I am providing links to either my blog or others for reference.
