Smart Couples Finish Rich: Step 5 Review

October 19th, 2007

Each Friday for ten weeks I am reviewing a chapter of David Bach’s Smart Couples Finish Rich. The introduction can be found here, the review of step 1 here, step 2 here, step 3 here and step 4 here.

Are we ready for retirement? Or at least, are we adequately preparing for it? Let’s delve into Step 5 of Smart Couples Finish Rich and find out! Step 5 is Build Your Retirement Basket. Bach refers to different savings goals as “baskets” throughout the book - the retirement basket, the security basket (step 6) and the dream basket (step 7). As I contemplated this chapter, I prepared myself for it telling me we weren’t doing enough. I understand that. I am well aware of the days, weeks, and months slipping away that I am not taking full advantage of the power of compound interest. We are doing a little bit (4% of my spouse’s salary goes to his 401K with 20% of that matched) but not enough. And, I was right. Read on….

The basis of Step 4 is practicing the concept of Pay Yourself First. Put aside 10% of your pre-tax earnings to your retirement. Bach is a little (justifiably) harsh in giving his wakeup call: If you are not paying yourself the first 10% of your income, you are living beyond your means. Ouch. If you want to be really rich - save 15%. Etc, etc. Now to make that bite a little less - if you do this in a pre-tax manner (401K, IRA) you see less money gone from your paycheck than if you do it in an after tax manner. The chapter then goes through the ins and outs of different retirement accounts and options, including those for the self-employed. The chapter finishes with the Finishrich Rules of Retirement Investing, which I like enough to repeat here:

Know what your money is doing
Make sure your retirement money is invested for growth
Allocate your assets so that you maximize return while minimizing risk
Invest in your company’s stock, but do your homework!
Make sure you read all of step 8 (we’ll get there in a few weeks)

Well, after reading the chapter, I found I had learned a few things. I, like most of the rest of the planet, had heard the “Pay Yourself First” mantra time and time again. But I never thought about it being about retirement savings. That is probably obvious, but it wasn’t to me. So I feel a tiny bit better now. We are saving 4%, and I have a goal to get that to 6% even before we are out of debt, and then step it up annually by 2% when my spouse gets his annual raises. Once it is at 10% I’ll have to decide if we want to raise it further (that won’t be at the maximum contribution) or if we want to look at the IRAs instead. But that’s a while off. Overall, I feel better that we are doing something, but know we need to step it up and do even more. Soon. The next period we can raise the 401K % is coming up soon and I have already talked to my spouse about raising our contribution to 5% then (6% is the limit of the 20% in matching funds from his employer).

Retirement. Better late than never to think about it. Even better to do something about it! But what about right now? Come back next week where we discuss Step 6 - Build Your Security Basket.

4 Responses to “Smart Couples Finish Rich: Step 5 Review”

Mrs. Micah Says:
October 19th, 2007 at 9:50 pm

Sometimes 10% can seem daunting, but it sounds like you and your husband have a good plan for getting there. That’s excellent, much better than giving up in despair, for instance.
FourPillars Says:
October 19th, 2007 at 11:09 pm

I have to take exception to your interpretation of “pay yourself first”. I might have blogged about this topic (or perhaps I will) but the bottom line is that debt repayment is savings so if you are trying to save 10% or 20% then any principal repayment should be part of that total.

It doesn’t sound like a lot of fun to “pay yourself” and only reduce debt but the fact is that when you have excessive debt, you’ve already “paid yourself” and then some.

Mike
m Says:
October 19th, 2007 at 11:22 pm

I like the better late but never idea in regard to all this.

It’s easy for me to look back to how much better of a situation I could be in now had I known 10-15 years ago what I know now. But, there’s nothing I can do about the past.

If for no other reason than simply to have peace of mind, I have to stay positive about and confident in my ability to effect change in the present and future and ignore the occasional feeling of “it’s too late for me.”

It’s good to remind ourselves that even if we may have been better off now had we done things differently in the past, we do still have the ability to make changes now, and even th

If we don’t let ourselves believe in “better late or never” we will be in danger of losing our motivation to keep on trying our best. At least that is how it is with me. Reminders that every thing I do now will make some difference helps keep me going despite the obstacles and setbacks.

Thanks for the reminder. And good luck!!
paidtwice Says:
October 22nd, 2007 at 4:36 pm

@Mike - it wasn’t my interpretation, it was Bach’s, which I guess I extrapolated to mean that is what Pay Yourself First meant all along (a surprise to me). Bach says : “Paying yourself first means putting aside a set percentage of every dollar you earn and investing it for your future in a pretax retirement account.”

@m and Mrs Micah - we can all do it. Better late than never *is* true. Better early than late of course but we can’t turn that back. We can only start now.

Trackbacks:

Mrs. Micah Says:
October 19th, 2007 at 9:50 pm

Sometimes 10% can seem daunting, but it sounds like you and your husband have a good plan for getting there. That’s excellent, much better than giving up in despair, for instance.

FourPillars Says:
October 19th, 2007 at 11:09 pm

I have to take exception to your interpretation of “pay yourself first”. I might have blogged about this topic (or perhaps I will) but the bottom line is that debt repayment is savings so if you are trying to save 10% or 20% then any principal repayment should be part of that total.

It doesn’t sound like a lot of fun to “pay yourself” and only reduce debt but the fact is that when you have excessive debt, you’ve already “paid yourself” and then some.

Mike

m Says:
October 19th, 2007 at 11:22 pm

I like the better late but never idea in regard to all this.

It’s easy for me to look back to how much better of a situation I could be in now had I known 10-15 years ago what I know now. But, there’s nothing I can do about the past.

If for no other reason than simply to have peace of mind, I have to stay positive about and confident in my ability to effect change in the present and future and ignore the occasional feeling of “it’s too late for me.”

It’s good to remind ourselves that even if we may have been better off now had we done things differently in the past, we do still have the ability to make changes now, and even th

If we don’t let ourselves believe in “better late or never” we will be in danger of losing our motivation to keep on trying our best. At least that is how it is with me. Reminders that every thing I do now will make some difference helps keep me going despite the obstacles and setbacks.

Thanks for the reminder. And good luck!!

paidtwice Says:
October 22nd, 2007 at 4:36 pm

@Mike - it wasn’t my interpretation, it was Bach’s, which I guess I extrapolated to mean that is what Pay Yourself First meant all along (a surprise to me). Bach says : “Paying yourself first means putting aside a set percentage of every dollar you earn and investing it for your future in a pretax retirement account.”

@m and Mrs Micah - we can all do it. Better late than never *is* true. Better early than late of course but we can’t turn that back. We can only start now.