Monday, November 12, 2007

Why You Need To Start Saving NOW

I was talking with a friend this weekend about financial stuff. It started with a simple question, how do you save and pay off debt at the same time? A simple question begat a long ass answer and, many emails later, I think she is on her way to a monthly spending diary. Because the first answer to any question is, do you know how much you spend?

It's a good question, though. And I kind of think the answer is you can't afford not to save. In 2008 the max on your Roth IRA is five grand a year (again a warning to bartenders, waitresses, and other cash cow hustlers- you cannot contribute more than you earn, as in what's reported to the IRS). So I did a quick calculation and came up with the following.

If you were to start saving in January for your retirement, you're starting with zero balance, and you were to max out your Roth IRA contribution at $5,000 a year for 30 years, could you retire? Drumroll please... The answer is with $713,182 (assuming 8% annual returns). Great, you say. Not so fast. The same calculation, but with 3.1% inflation, and you get $264,353. What?!

Well, remember that time way back when and you took the subway with a token and it was a buck and a quarter? Or that time when you gave the movie theater a ten dollar bill and got change back? That is called inflation, the nasty fact of life that a dollar today is worth less tommorrow. The adjusted figure is what $700,182 is worth in today's dollars. $264,353. I know I've harped on this before. Blogger redundancy. But with oil near $100 a barrel, major banks and lenders on market welfare (aka the sub prime loan mess), and recession arguably on the radar, all of which means the smarty pants with MBAs are defecating bricks right about now. Since they're the ones running the economy, it might be prudent of us to to take care that our own finances are in order.

The first step to any financial plan is to track your spending and then make a budget. So my friend will submit her monthly budget, and I'll start posting on the practical side of how to pay off debt and start saving for your future.

6 comments:

SavingDiva said...

It's great that you're helping out your friends with their budgets...and I'm a little jealous that you have friends that you can talk to about personal finance.

PiggyBankBlues said...

don't be jealous, i talk about finance so much they hardly pay attention :)

but my friends all work in the service industry or own their own business, so they're not really hooked up with retirement funds and the like. and because they make cash it's a different way to budget.

frugal zeitgeist said...

Right on. I couldn't agree with you more. The age at which people can collect full social security benefits is gradually rising as well, and people will feel that right in the pocketbook at retirement.

Having said that, anyone who thinks that social security alone will fund an adequate retirement is drinking crazy juice. . .

PiggyBankBlues said...

good point, zeitgeist, i forgot to mention that by the time we retire we won't be collecting until age 90...

and i've seen my grandparents try and live off of social security alone. it wasn't cool in the 1990s and it sure as heck won't be cool in the 2040s.

Ms. M&P said...

I've really got to get an EF and get my 401(k) up. All the recession/inflation talk is making me nervous. Did you see the Herbert op-ed in the NYT? I thought he was dead-on re: recesssion.

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