A Dime Saved

Why I put $5 a Month into a Retirement Account

I’ve been working on building an emergency fund. Unfortunately there have been a lot of setback which means that its taking me a really, really long time. I don’t make a lot of money so putting money way is very, very hard. Putting money into a retirement account is not really happening right now. Yet, I still put $5 a month in. Why do I do that, you ask?

Some Background:

Well, many years ago I was lucky enough to receive advice when I took my first job that I was smart enough to actually follow. At the time, I was fortunate enough to be living at my parent’s house rent-free so my expenses were really low and although my first job wasn’t paying tons I didn’t have to spend most of it. I met my personal finance teacher from high school who told me: Max out a Roth IRA as soon as you can. So I did. So I took her advice and saved up pretty quickly to open my Targeted Retirement account from Vanguard (a pretty basic and simple approach for anyone who is looking for a simple retirement account). Once the account is open with the initial minimum amount, you can deposit as little as you want (assuming you haven’t maxed it out- no worries there!). Most accounts have a pretty large initial balance so you would need to save up for that first.

After that first year, I moved out, got married, had kids and dealt with life. Saving got a lot harder especially since I hit a period of unemployment. I was and still am unable to put aside money for retirement. But… I decided to still put $5 a month into that account.

Why?

One reason is because of compound interest. I like to think that even the smallest amount will grow and make a small difference as I grow older. I may be able to put more later on, but at least this small amount will grow over the years. A little is better than none!

But ….The biggest and main reason is because:

Creating good financial habits is the key to successfully getting your financial life under control. Click To Tweet

The hardest part of creating a habit is beginning. And saving money must become a habit in order to be successful. (That’s why its best to start as young as possible. Parents: start teaching your kids to save now!!!).

Setting up an automatic deposit is the first step. And that is usually the hardest part. Fear can come into play. “What if I need the money now?” Laziness comes into play. “It’s too annoying, I’ll do it tomorrow.” Complacence comes into play. “I’ll have enough money to retire on when the time comes.”

Taking that first plunge is the hardest part. But once that first step is taken it is a lot easier to keep it going. Human beings work on inertia so stopping a habit is just as hard as starting for example, stopping an automatic deposit is just as difficult as starting an automatic deposit because all the same thoughts and excuses come into play (subscriptions anyone?).

Once I have more money to save (it will happen one day!) then adjusting the amount to be deposited is easier than setting up the deposit. I’m talking emotionally here- not physically! The habit has already been created- I will be just adjusting the amount. A much easier task! If I need to increase in really small increments I can do that as well! Slowly, month by month, that $5 is creating a habit that will be hard to stop. It’s making it so much easier to save even if the amount is negligible!

Sometimes it seems that small amounts don’t really make a difference. When we do the math it seems depressing. There are so many articles and blogs out there bashing the “latte factor”. But- when you do save, even the smallest amount, and you do resist the impulse to buy something (even if it’s cheap) you are creating habits that will hopefully last a lifetime.

Creating and maintaining good financial habits is the key to getting your financial life in order. It is what makes you spend and save responsibility even when your income increases. It is what helps you navigate every type of financial situation you may encounter.

And that is most definitely worth it!

Where should I put my savings? In your Savings Ladder!

The thing with living paycheck to paycheck or with living in poverty is that you don’t have money. Everyone who is reading this is probably scratching their heads because it seems really obvious. And it is very obvious. No money=no money to spend. But there seems to be a subset of the population that doesn’t really understand what that really means.

What do I mean?

Take myself for example, by the current financial calculators I am classified as “low-income”. Not middle class- the one below that;). I, (thank G-d!) do not live below the poverty line but I am, by definition, poor. I do not like being poor so I am working on changing that. I work hard and I am slowly working my way up in my company. As a “side hustle” I decided to start a blog. Now, this is not a woe-is-me post but merely an example. I have not made any money from this blog (yet!) but I hopefully will. But that takes time, and not only time but money. There are hosting fees, for example. Now, I orginally started this blog using one hosting site. But when renewal came around, their prices were too expensive for me. So I decided to switch hosts to save on costs. This procedure requires more technical skill than my own rudimentary skills, and I couldn’t afford to hire someone to do it for me, so I had to rebuild my site. Instead of taking the time (this is all in addition to my full-time job and mothering duties) to build up my site,. Increase my reach, monetize my site etc. I had to spend time recreating the work I had already done. This all took double the amount of time because my computer is very slow and glitchy. This is because I have a very bad laptop. It constantly freezes and opening an internet tab takes approximately ten minutes. You can imagine how long it takes to find photos for my posts! I can’t afford another computer right now, even as an investment.

Which brings me to my point: poor people can’t really invest. Investment is inherently risky. I can spend money on a new laptop in the hope that it will bring me more money but I really can’t be sure of that. I don’t know if I will make the money back-especially not in the time frame that I would need it. So I struggle with my old, creaky laptop and hopefully will slowly make the money to be able to buy a new one. Even though buying a new after laptop will help me make more money, of that doesn’t happen-the risk is to large for me to swallow. What’s a few hundred dollars, you ask? A lot. It’s a lot. It will literally take me MONTHS to set aside that amount of money.

Buying in Bulk- This is common advice that I see given to help people save money on food. The cost savings can be huge. BUT…. that is assuming that you have the money to lay out for it. Many don’t. Many people can’t lay out a large amount of cash-or blow their entire food budget on one ingredient that will save them money in the future. It’s too risky. They may not have the money to pay it back. The cost-savings may not turn out as great as initially perceived. Things go bad, things drop on the floor. Even if the investment is worth it, the emotional energy it takes to remember to “pay-back” the $5 you saved on rice can be too much for many people.

Why am I writing all this? This is not a pity post or a sympathy post. This is an explaining post. This is explaining why we (the poor people of the world) are not taking your very good financial advice. Your financial advice is great but we can’t afford to take it. We can;t buy equipment for our side hustle. We can’t buy 3 months of rice in one go even though its cheaper. We can’t buy membership at Costco. We don;t have the money to buy this season for the next. We can’t buy solar panels or invest in large-minimum balance accounts. We want to. Maybe one day we will. It just is going to take us a longer time to get there.

Meanwhile, we are doing the best we can to stay out of debt, build some savings. And maybe, just maybe, buy a new computer one day.

This is a guest post by Good Nelly loves to analyze the day-to-day financial happenings along with critically analyzing the changing rules of credit, debt, insurance, mortgage, etc. related matters. She loves to share her analysis with others thus helping people to understand the exact scenario. The opinions in this article are attributed to her and her alone.

 

Being in debt is bad. But do you know what is worse? Having misconceptions about debt, yeah.

Approximately 99.9% of us have debts in some way or another. It is a necessity in today’s economy where people pay almost everything with credit cards. They also depend on student loans to get an education, mortgages for getting a new home, and so on.

If you have an affordable amount of debt, it can help you to attain your goals and live a comfortable life. But if your debt becomes uncontrollable, it may create huge problems in your financial life.

Having plenty of debt myths and misconceptions may lead you towards making wrong decisions. Those decisions may ruin your financial life and push you towards more debts. Keeping that in your mind, check out some common misconceptions about debts that you might need some explanation.

Debt myth #1- Late payments on credit cards will harm your credit score

If you make late payments on your credit cards, the credit card company may charge you late fees. They may also create interest charges. But credit card companies normally won’t report late payments to the credit bureaus until your bills are 30 days past due. If you have to make late payments, no harm will be done to you as long as you can afford the interest charges and late fees. But don’t make it a habit, unless you want to lose a good amount per month.

Debt myth #2– Making minimum payments on credit cards are good

If you only make the minimum payments on your credit card balances every month, you can’t imagine how much time it may take to pay off those credit balances. Month after month, you’ll have to pay the original balance, as well as you’ll pay interest charges. If you sum up the total amount, it may become way higher than the original balance.

You shouldn’t continue making only the minimum payments if you want to get rid of your credit card debts. Making minimum payments will generate interest charges and increase your total debts. So, make full payments every month as far as possible. If you face any issues, call your credit card company and negotiate for an alternative payment plan.

Debt myth #3 – Closing few credit cards or reducing credit limits will make the credit score sky high!

Absolutely wrong! Closing an old credit card means you are also wiping out an entire credit history with a decent credit limit. A bad credit history and a low credit limit can greatly affect your credit score. How? Let me explain.

While approving a new credit card, a credit card company will surely consider your FICO credit score. Older credit accounts may help you to build your score, because it has a long credit history to support your credit. When you close an older account, you lose the benefit of the credit history of that account.

If you close an old credit account, you are also reducing a decent amount of credit limit from your total available credit limit (all credit cards combined). Lowering credit limit will increase your credit utilization, and it’ll harm your credit score.

Debt myth #4 – Credit report can be repaired instantly by paying off debts

Another great misconception and the answer is will be a big ‘No’! Your credit report is an overview of your current financial situation and your credit history. So naturally, it’ll include all of your debts too. Paying off debts will improve your credit report and credit score, but it won’t remove the past black spots from there. Typically, most of the negative entries or information remain on your credit report for as long 7 years. Chapter 7 bankruptcy stays for 10 years and a Chapter 13 stays for 7 years. If you want them to be removed, you need to wait for that long.

Debt myth #5 – Getting married means more debt from your spouse

Most of the married couples believe that after marriage, they should always need to merge their debts. Practically, it’s not true. It’s quite common for a husband and a wife to work together and eliminate their debts together. But it is not a legal obligation for both of them.

Every individual has a separate entity when he/she are single. So why it should be different after the marriage? Couples should manage their own finances separately, as well as their debts. Of course, like an ideal couple, they can seek each other’s help at any point in time.

Of course, there are chances when a person can be obliged to pay his/her spouse’s debt after marriage. You could be responsible for a loan you have consigned with your spouse, or you have to pay the credit card bills where you have authorized your spouse as a joint account holder. It’s up to you, whether or not you want to sign up for the thing.

Debt myth #6 – All debts are evil and will damage your finances

Indeed, it is one of the most common misconceptions about debt. You might not treat it as a truth, but “good debts” exist. These debts will create some value in your financial or normal life, or in both. What are the examples? Check these out.

When you borrow money to start a business or to increase your net worth, it may be called as a good debt. Taking out a student loan can increase your knowledge and help you to get success in life. Thus, student loans are also considered as good debts. When you take out a mortgage, you are actually investing in an asset. After paying off the mortgage after 15 or 30 years, you’ll get a home with a higher value. So, it is also a “good debt’’.

But don’t forget that you must repay your good debts and keep your accounts in good shape if you want to prosper in your financial life.

Debt myth #7 – Bankruptcy is the coolest option if you want to get out of huge debts

Not at all. Bankruptcy should be your last option if you run out off other alternatives. To handle your huge debts, you might opt for popular debt repayment methods like debt consolidation program, debt settlement, taking out personal loan or loan from relatives, taking out a home equity loan or HELOC, withdrawing money from 401(k), etc.

A debt consolidation program combines your multiple debts into one single monthly payment and lowers your interest rate. On the other hand, if you opt for settlement by negotiating with the creditors, you can practically settle your total debts into a lesser debt amount. A successful debt settlement might ease up your debt load, but it may also harm your credit score, whereas debt consolidation doesn’t have much effect.

If you choose other debt repayment options, don’t forget to make payments on time and in full.

Debt myth #8– Credit counseling agencies are god damn blood-suckers!

Rubbish! A credit counseling agency is usually a non-profit organization who can provide you with debt help when you need it desperately. You might be able to handle your 2-3 credit cards quite easily. But what about a situation when you have multiple debts? In that situation, you might handle your credit card debts well, but what about other unsecured loans, bills? Who will help you? Who to talk to about debt!

Here a credit counseling agency will come to rescue you from the jaws of debt. Under a debt management plan (DMP), they’ll suggest you a repayment plan working with you and your creditor. By enrolling in a DMP and paying back debts through one monthly payment, you can repay your debts in full within a certain period. Enrolling in a DMP, through a credit counseling agency, will be added to your credit history, but it won’t hurt your score.