Looking for some ways to build up your savings? This week’s episode provides all the tips and tricks. Josh and Austin discuss different account types that help you save, along with the limits that come with those accounts. They also share some statistics on average savings in America and some remedies for falling short in savings. Listen in now!
Main Talking Points
[2:34] – Types of Accounts to Save
[11:09] – Limits
[18:53] – Dad Joke of the Week
[19:31] -Savings for Average American
[25:11] – Remedy for Falling Short in Savings
Links & Resources
032: Understanding Different Account Types
Invest With Us – The Invested Dads
Free Guide: 8 Timeless Principles of Investing
Social Media
Full Transcript
Intro:
Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.
Austin Wilson:
All right. Hey, hey, hey, welcome back to The Invested Dads Podcast. A podcast where we take you on a journey to better your financial future. Today, Josh, we got a fun one. It’s going to be an episode where we talk about saving.
Josh Robb:
That’s right. We’ll be working on our CPR training and also practicing the defibrillator on each other.
Austin Wilson:
Well, actually I was talking about saving money, but if you’re suggesting we play with the defibrillator, that seems shocking.
Josh Robb:
That’s true.
Austin Wilson:
But we should… No, I’m not doing that. That sounds horrible.
Josh Robb:
Yeah, don’t do that. That’s not safe. Don’t ever anybody ever try that. I actually do have my training in the defibrillator.
Austin Wilson:
Yeah, I did about 10 years ago.
Josh Robb:
And CPR and all that. And I keep it up to date, but it’s even scary when you’re practicing on the dummy and they give you like, “This defibrillator is just a toy. It’s not the real one.” It lights up or whatever, you’re still like, “I don’t want to shock people.”
Austin Wilson:
You feel like you’re doing playing operation with real voltage. Yeah, it’s not cool.
Josh Robb:
True story though. At our church, we have a defibrillator and there’s one of the guys in our church, he’s on our safety committee and he checks them periodically to make sure their batteries are charged and all that. So he checked it one day and then after church, they had a men’s basketball, he, the guy who checked it, the defibrillators actually had a heart attack, collapsed, and they used those defibrillators to save his life. The ones he checked on.
Austin Wilson:
I’m glad that he found out it worked.
Josh Robb:
Yeah. So it’s just crazy, crazy. So, we make sure those are up to date, but it saved a guy’s life, the guy who checked it that morning to make sure they were ready to go.
Austin Wilson:
That is what it’s for. Give us a brief kind of a breakdown where we’re going today. It’s a new year, right? Let’s talk about saving in a new year.
Josh Robb:
Yeah. So, when you think budgeting and one of those pieces of your budget, like we talk about, we just had a podcast on budgeting, savings is a piece of that, right? You need to account for a portion of your budget to go towards savings, whether it’s short-term savings, long-term savings. So today we’re going to talk about that. So what types of accounts could you be saving in? We’re going to look at account types. How much are you allowed to save in each account? There are certain restrictions on some accounts. What is the average saving that people do here in the United States? I think that’s always a benchmark.
Austin Wilson:
It may shock you.
Josh Robb:
It may shock you, like the defibrillator.
Austin Wilson:
Like the defibrillator.
Josh Robb:
And what’s our recommendation, we’ll kind of wrap it up with that.
[2:34] – Types of Accounts to Save
Austin Wilson:
Yeah, exactly. So, let’s take that from the top there, what accounts are there to save? And we came up with a list of about six, there’s more. What are some types of accounts that there are to save? And actually, I think we did an episode on account types where we kind of talk about this and there’s a few episodes we’ll link to previously that might be some good-
Josh Robb:
It’s tying together.
Austin Wilson:
… background information, but let’s start at the top. A taxable account. What is a taxable account and what might that be used for?
Josh Robb:
So, the term taxable is pretty explanatory.
Austin Wilson:
Is it taxable?
Josh Robb:
Yes, it has tax along the way. It’s taxable, it’s taxing along the way. A good example of that would be emergency fund, which we did a episode on recently. So a taxable account is whenever I sell something, I owe tax on that transaction. At the end of the year-
Austin Wilson:
If you made money, yeah.
Josh Robb:
Yeah. But it’s a taxable. I could maybe deduct it if it’s a loss, but it’s a taxable event on a sale. If I get interest in that account, I’ll each year owe tax on that interest.
Austin Wilson:
Or dividends.
Josh Robb:
Yeah, any kind of income that comes in, in a few minutes, well then it’s tax-free but it’s still a taxable event. You just are allowed to offset it. So taxable accounts are great. What is an example of that? Emergency fund. When we talk emergency funds, you need access to that money. You don’t want restrictions. Taxable accounts are nice because the restrictions are pretty much non-existent.
Austin Wilson:
Yeah. And then depending on what kind of account you actually put that in, just even like a high interest savings account that interest you’re getting is taxable. So it’s kind of where we’re at as far as taxable goes. Let’s talk about savings for health expenses because, you know what? Health expenses are not cheap and they get more expensive the older you get and they don’t get cheaper over time, in general. So what is an account you would use for health expense savings?
Josh Robb:
So there’s a couple of different types, but the main one most people will see would be an HSA, health savings account. HSA. So what that is is if you have a high deductible plan, you are allowed to have an HSA along with it. And an HSA account is nice because you get to put money in, get a tax deduction on that. So it’s a tax-free contribution, it grows tax-free, and if you use it for healthcare expenses there’s no tax owed. So it’s a very nice account.
Austin Wilson:
Beautiful.
Josh Robb:
Very nice from a tax advantage. And we’re going to talk about this on our next section, but there’s limits to that because it’s so nice. So again, we’re talking savings. So if you’re looking at carving up some pieces, saving for healthcare costs is a good idea. HSA is a nice place to save. Now, depending on where you work and what plans you have, you may have other types of health savings plans where maybe your corporation, your business, puts money in and then you have a set amount you could spend. Those type of savings accounts usually go away, so if you don’t use it at the end of the year, you lose it. HSA is it’s your money, it stays there year after year, even if you don’t spend it. So there’s all different types, but HSA is the most popular.
Austin Wilson:
Yeah, I think one of those other options is a flexible savings account. If net’s not with a high deductible plan necessarily, that’s with other lower deductible plans typically and that’s where you’ll have some money put in there, you can use that for your health care expenses, but typically that does not roll over or whatever, those kinds of things. So health savings, that is one next bucket. Another bucket is company retirement plan.
Josh Robb:
Yeah. So, that would be 401k. Or if you’re in the nonprofit world 403b. There’s a couple of other ones out there, kind of strange numbers and letters, but in general those are the main ones.
Austin Wilson:
These are the ones, yeah.
Josh Robb:
99% of people have one of those two if they have a retirement plan. So they’re nice, they’re pre-tax most of the time, there’s some options for after tax, Roth, 401ks. But in general, it’s pre tax, meaning you get to deduct that from your income in the year you make your contributions into it. A lot of times the company will also match. And so if you put in a certain percent, they’ll also put in some, so it’s free money. Also, like to point out within there there’s other types of retirement plans, like simple IRAs, SEP IRAs, there are other things that maybe your company has. They’re all the same in that they’re pre-tax. And so they all grow tax deferred, meaning you’re deferring or putting off taxes. Taxes will be owed later, but you get to at least grow tax deferred for a while.
Austin Wilson:
And these have become super popular since the eighties or so, I think I’ve read, as the retirement savings or the way that people are funding their retirement has drastically changed over those couple of generations or whatever. So think back in the fifties, sixties, seventies into the eighties and some even today, but you’re really lucky if you have this today, but a pension was a big way that you had a lot of your retirement and the longer you’re there, the more you get, and it’s great. You can pretty much ride it out. But it’s become more tax advantageous I think for corporations or for companies to offer 401k plans and matches through that over the years, really since the eighties, and that is really where the majority of people’s retirement savings is going to be held nowadays.
Josh Robb:
Yeah. And part of it has to do with there’s costs associated with the two. The other part is, as people are living longer, if I am a company and I offer a pension for the lifetime of this employee and they’re living into their nineties, whereas 20 years ago it was living into their maybe late seventies, early eighties, that’s more I have to fund, that’s a lot more cost associated. And so it gets harder. So pensions, like you said, are getting few and far between, so most of the time you’re going to see some sort of 401k plan and it’s set up that the employee has a responsibility, whereas the pension is really the company’s job to put that money away.
Austin Wilson:
Yeah. It was very common that you could retire without putting a dollar into the stock market back in the day. And now that it’s just not the case. So that is company retirement plan now think about retirement savings on your own.
Josh Robb:
Yeah, so personal ones you would have IRA accounts, either a traditional IRA or a Roth IRA.
Austin Wilson:
Now, IRA stands for?
Josh Robb:
Individual retirement account.
Austin Wilson:
Gotcha.
Josh Robb:
So it’s yours. You open it.
Austin Wilson:
It’s tied to your social security number.
Josh Robb:
It’s tied to you. Yep. So I can’t share it with my spouse. It’s my account. My spouse can have their own, but we don’t share one. You can’t have a joint account. So those are great in that a traditional IRA is pretax, you can get a deduction, and then a Roth IRA is after tax and it grows tax-free from then on. So two great ones. That’s another saving for anybody. So as long as you have earned income, you could use those up to an income limit. We’ve talked about that in the past in account types and stuff, where those sit, but in general, most people will qualify for that.
Austin Wilson:
So another way to just have a catchall is a taxable account. Like, we had talked about savings accounts with interest payments, that’s taxable, taxable accounts can really be used for a ton of things, but if you have a whole bunch of money, you don’t know what to do with, you can put it in a taxable account and do whatever you want with it. And that’s what that’s for. So, this is after your emergency fund.
Josh Robb:
Yeah, don’t think emergency fund, this is brokerage account, investment.
Austin Wilson:
Think just a savings account, whether you can invest whatever you want, like an investment account.
Josh Robb:
Yep. And that idea is, again, it’s taxable, so you pay tax along the way, but the restrictions are less. And as we get into these limits coming up we’ll talk through that a little bit, but the idea there is I can put as much money as I want into this type of account and it grows taxable along the way. So I control the taxes when I choose what I’m doing.
Austin Wilson:
Now, the last one.
Josh Robb:
Last one.
Austin Wilson:
Not used as much. In fact, I don’t use it at all, but I did at one point in my life, the good old piggy bank
Josh Robb:
Good old piggy bank
Austin Wilson:
Or the coffee can in the cabinet or the bag of cash in your backyard.
Josh Robb:
Yep. So the other way of saving is just accumulating the money physically, just having it with you. And so we’ll talk about that. So let’s get into limits, all right. So we just had an episode on emergency fund, so if you recall, we set the target, roughly, the rule of thumb is three to six months of living expenses. So again, we’re not going to go into all the details, you can listen to the episode, but when we’re talking limits to saving, there is no mandate limit, but we say three to six is a good amount to have in emergency fund.
Austin Wilson:
Yeah. And I guess that while there is no limit, it does not help you above a certain point because your money’s not working for you. It’s sitting there for if you need it. But you shouldn’t have more than you would need, because it’s just sitting there.
Josh Robb:
Correct.
[11:09] – Limits
Austin Wilson:
Generally speaking. Earning very, very little. There’s a point where that becomes a good thing to have and there’s a point where it becomes there you can put your money somewhere else and it’ll do better for you. So back to HSA, health savings accounts, very important in today’s world, going to be very important for our generation’s retirement I have a feeling. So what are the limits on that?
Josh Robb:
Yeah. So if you’re a single person, so yourself on the plan, so it’s just you on the plan, you could be married, but if you each have your own retirement plans at work or whatever, $3,600 per year is what you’re allowed to put in. If you’re on, what’s considered a family HSA, meaning there’s more than one person on your high deductible insurance plan, you could do 7,200, which if you do the math, is double the single, which to me actually hurts people with families because if I have me and my wife, that makes sense, it’s double.
Austin Wilson:
But kids.
Josh Robb:
But if I had kids in there, there’s costs associated, but I don’t get to save any more for each of those additional kids. So just a side note on that.
Austin Wilson:
And kids, in general are going to-
Josh Robb:
They’re the ones that go to the doctor all the time.
Austin Wilson:
They’re going to go eat up your deductible.
Josh Robb:
They’re the one’s licking the ground and stuff and getting sick them all the time.
Austin Wilson:
So back to retirement, kind of revisiting the 401k, 403b, limits. Now, this is where if you’re under 50 or over 50, there is a difference. And we also had an episode about that, so we’ll link that in the show notes as well. But Josh briefly, what are the limits if you’re under 50 first?
Josh Robb:
So in 2021, if you’re under 50 years old, you could put $19,500 of your money into the retirement account 401k, 403b. When I say your money, that means if the company’s matching, that does not count towards that limit. So I could put 19,000 and if my company does like a 4% match, their match can go on top of that.
Austin Wilson:
It does not take you out of your limit. And then if you’re over 50-
Josh Robb:
Once they cross that 50, that big magic fund birthday, I could then do an additional 6,500, which brings the total up to 26,000. The reason we do that, we’ve talked about it, it’s called a catch-up contribution. Meaning at 50, you’re a lot closer to retirement than you were prior to that, I guess every day the same is true, every day I’m one day closer to retirement. But that 50 is kind of like you’re hitting that final stretch. And if you’re behind on your retirement planning, they give you that opportunity to put more pretax money in. And the assumption is in your fifties you’re probably earning about your max salary at that point. And so if I can get some savings on my tax, that’s also nice as well. So you get extra 6,500.
Now, they do periodically adjust those numbers. So keep an eye each year. If you’re maxing out your 401k this year, always check to see, did they increase it? They usually do it in like 500 increments every couple of years. This actually I think has been the same since 2019, which inflation has been so low, that’s part of why they haven’t moved it, but keep an eye on that.
Austin Wilson:
So let’s revisit the contributions to your retirement that you do on your own or the things that you’ve done with your old retirement plans or whatever, if you’re rolling over. So the Roth IRA, traditional IRA limits, Josh, what are those?
Josh Robb:
Yeah. So Roth IRA and traditional IRA, the contribution limits are the same. So again, we use that 50 thresh mark. If you’re under 50, you could do $6,000. If you’re over 50 it’s 7,000, they give you an extra thousand dollar catch-up contribution. And so again, those are your money going in, for the traditional and the Roth, one’s pre-tax, one’s post, you think, “Well, shouldn’t I be able to put more in the post-tax because I’m paying tax?” Well, no, if you get the same rate of return and you have the same tax bracket, you actually end up with the exact same amount of money either way.
Austin Wilson:
Yeah, it’s just when your tax-
Josh Robb:
But it’s when your tax brackets changes when there’s an advantage to one or the other, which is when you’re planning comes in. But in general, you could put the same amount in both of those.
Austin Wilson:
So I think the government was sitting there around the round table, the knights of the round table, and they’re like, “So it’s really a bummer to turn 50, right? So we should give people some bumps in their retirement contribution limits when they turn 50.”
Josh Robb:
It makes me wonder if they’re ever going to move that age up as people live longer, does 50 ever become 60?
Austin Wilson:
Right, because 50 is like 40 what it was 30 years ago.
Josh Robb:
Yeah, so I wonder, it’d be interesting. That’s one of the numbers they really haven’t touched, they’ve moved RMD ages, they moved a bunch of ages, but fifties kind of stayed there. We’ll see what happens.
Austin Wilson:
It’s really a good thing for people.
Josh Robb:
Oh, yeah if you gives you longer time.
Austin Wilson:
Yeah, exactly.
Josh Robb:
As people work longer, it gives them extra years for catch up.
Austin Wilson:
So I already kind of think I know the answer you’re going to have for this, but Josh, what’s the limit to a taxable account?
Josh Robb:
There is no limit.
Austin Wilson:
What?
Josh Robb:
Yeah. So since it’s money that’s been taxed and will be taxed along the way the government says we don’t care what you do with that, we’re going to get our tax.
Austin Wilson:
You could have billions of dollars.
Josh Robb:
Yeah, there’s no limit to what you put in to a taxable account in any one year, which is great and it also is a nice bucket. Now, we talk about all the tax savings for 401k and a Roth IRA, even an HSA. Great. But tax savings come with restrictions. HSA have to be used for medical expenses or else you get a penalty, 401ks, Roth IRAs, traditional IRAs, all those, if you’re before 59 and a half, 10% penalty. Taxable account, no penalty.
Austin Wilson:
Do what you want.
Josh Robb:
So, it’s a nice bucket. Even though you’re taxed along the way, capital gains taxes are usually at or below what your effective tax rate is. And so, it’s not that bad of a deal to have a piece of your assets in taxable money.
Austin Wilson:
True. The last, but not least. What is the limit to the good old fashioned coffee can or piggy bank?
Josh Robb:
Until it is full. Once the money doesn’t go in anymore, you can’t add to it.
Austin Wilson:
That’s right, then you take it to the bank.
Josh Robb:
But in general, we put that in there kind of as a joke. When you think of kids saving, they have their little piggy bank, tracking it, but having accessible cash at home or somewhere close by is nice. Just for, and we’ve talked about this, you and I, you shake your head all the time, but the person comes to the door, I need to buy those Girl Scouts-
Austin Wilson:
It’s my easy out, “I got no cash.”
Josh Robb:
But in general, having some access to cash somehow is good for emergencies. The limit is, again, at what point is it deterring my long term growth and success.
Austin Wilson:
In case all those conspiracy theories come true and you need to have cash on hand.
Josh Robb:
You need cash on hand. I’m more just worried about tolls.
Austin Wilson:
Oh, man, we were on vacation in Florida a few years ago and we were driving back from my cousin, my cousin lives in Florida, hey Jacob, what’s up? If you hear this.
Josh Robb:
You waved to him.
Austin Wilson:
Waved to him on a podcast. But we were driving back to the resort or whatever we were staying, and he lived close to Daytona, about an hour and a half.
Josh Robb:
They have a race there don’t they?
Austin Wilson:
Yeah, a little bit. About an hour and a half from, we were staying near Orlando, and so we had to take toll road back, beautiful drive, nice, driving through Florida. It’s pretty boring. It’s Florida. Well, we were on toll road and I have cash, like dollar bills cash, but quarters, not so many. I had plenty of cash to cover my toll. And we got off on the exit that we needed to to get back to our resort. And they only took exact change because there’s no one working it and there was a bucket you had to drop it in. And I was in a rental car too, of all things. So I had to take an envelope like they let you do and I had to-
Josh Robb:
Mail it in?
Austin Wilson:
And I had to go home and write a check for a $1.75 and mail it to Florida.
Josh Robb:
It was 1.75, plus postage.
Austin Wilson:
I know. So that was another 50 cents or whatever. So anyway, tolls, man, they get me.
Josh Robb:
They do. That’s why you need access to cash.
Austin Wilson:
Fast pass. Fast pass.
Josh Robb:
Oh, that or cash. I have now in both of my vehicles a little stash of just quarters and stuff, just because I don’t want to get caught without low tire pressure. Anything where I just need a quarter. Like there’s been too many times where I just need change.
Austin Wilson:
The cart at Aldi, you need a quarter for.
Josh Robb:
You need a quarter for.
Austin Wilson:
You’ll never see an Aldi cart floating around Findlay
Josh Robb:
No, you got to put it back. I want my quarter back.
Austin Wilson:
If you want your quarter back, you got to put your cart back. That’s genius.
[18:53] – Dad Joke of the Week
Josh Robb:
That’s right. So we took a break.
Austin Wilson:
We’re going to take another break.
Josh Robb:
Take a break from a break.
Austin Wilson:
Josh, I have got a dad joke of the week for you. I hope I haven’t used this one yet. Because this is hilarious.
Josh Robb:
Okay, I’m ready.
Austin Wilson:
Josh, how many tickles does it take before you can make an octopus laugh?
Josh Robb:
Now, I know this one because my kids love this show, but I’m going to let you tell me, because I would just want to hear you say the words.
Austin Wilson:
Okay. So I’m going to rationale this with you because it is not anything to do with octo, meaning eight.
Josh Robb:
No.
Austin Wilson:
Nope. The answer is 10 tickles.
Josh Robb:
10 tickles.
Austin Wilson:
10 tickles.
Josh Robb:
Because they have tentacles.
Austin Wilson:
Because they have tentacles. I thought that was funny.
Josh Robb:
I like that one.
[19:31] -Savings for Average American
Austin Wilson:
All right. We were just happy, we were riding a high. Now we’re going to get depressed. Let’s talk about some depressing numbers. So what do savings look like for average Americans here in America?
Josh Robb:
So, I was looking through some articles and was reading through, and it varies depending on what reports you see, but in 2019, the Bureau of Labor and Statistics, which-
Austin Wilson:
It’s a pretty reputable source.
Josh Robb:
They do a pretty good job. They said, and this is 2019, the average person had 78,635 in gross earnings. So they just looked at the earnings on everybody here in the United States, which amounts to 67,241 after tax. So just average person making 70,000 gross, 67 net. Okay. So then they said, “Okay, how much does this person spend?” So they did whatever they do for their statistics, found the average person spends $61,224, which leaves, math in my head, $6,017 left, or in other words, unspent money. Or in other words, savings.
Austin Wilson:
Saved money.
Josh Robb:
So that’s money that didn’t get spent, so it’s saved. So if you do a percentage, then that’s 7.66% of their total gross earnings, or just about 9.8%, of their net earnings.
Austin Wilson:
So I have a feeling, I know that that is going to seem quite low.
Josh Robb:
I read a couple other articles. Everywhere I read somewhere between six and 8%, so I’m thinking everybody’s using gross numbers, but somewhere between six and 8% is what they said the average American saves.
Austin Wilson:
And the bulk of that is going to be contributed to retirement.
Josh Robb:
401k.
Austin Wilson:
Then there’s going to be any other savings. It’s just any savings that you’re not spending.
Josh Robb:
Savings in general. And I would stretch it even to say between six and 10% is what the average saving is in the United States.
Austin Wilson:
Gotcha.
Josh Robb:
So when we look at retirement planning, we do a lot of that here, we talk through, and even in the industry, it used to be 15%. Get to 15% savings and you’ll be fine. Well, people are living longer, cost of living, healthcare costs are going up, the new number is about 20%. So somewhere between 15 and 20% is the target people should be saving. And that’s not like emergency fund savings.
Austin Wilson:
That’s retirement savings.
Josh Robb:
That’s saving for your future retirement. So if I have a short term goal of, “Hey, I need a new car.” That’s not part of my 15 to 20%, that’s on top of that. So again, you can see it’s probably closer to 20 to 25% of your savings in any given year, depending on what your short term goals are. And so again, let’s just use the high net number and just say, “That’s great. Nine, almost 10% savings.” We’re still halfway to where we should be.
Austin Wilson:
That’s not good.
Josh Robb:
That is not good. And then TD Amer actually had a survey in 2019 as well, they surveyed 2000 people, so not a huge survey group, but the requirement though of those 2000 people, they had to have at least $25,000 invested. So they’ve actually done some savings, so these 2000 people have at least 25,000. They found 66% of those people who are in their forties had less than a hundred thousand. So you think about retirement and savings and what’s needed, and we’ve talked about some of those numbers, kind of what your target is along the way, and then 28% of those 2000 people who were in their sixties had less than $50,000 saved.
Austin Wilson:
In their sixties.
Josh Robb:
In their sixties. So they’re at the edge of retirement. They’re within walking distance of the door there to get out and they only have $50,000 saved.
Austin Wilson:
This makes me feel that, obviously the numbers aren’t lying, the vast majority of Americans are planning on being nearly entirely dependent on social security for their retirement. And let me tell you what, you’re not going to have the retirement you want. That’s going to be a stressful, not fun retirement
Josh Robb:
Retirement was not designed to really be reliant on social security. Social security is there as the safety net. It was created as a safety net for those that you would at least have your essentials taken care of. It’s not designed to support your full retirement lifestyle.
Austin Wilson:
And you know how we probably got here because a lot of people as they’ve changed jobs and changed companies, they’ve made some, what we would say, probably unwise decisions with their rollover 401ks, they would just cash out when they moved jobs, they would cash out anything they could that they’ve accumulated for benefits just as soon as they could, regardless of the penalty over time. And it’s probably put a lot of people behind the eight ball.
Josh Robb:
Yep. And then not only that, but if you look at parents in generations past, like you mentioned, pensions covered a lot of their income in retirement. And so they kind of maybe were taught that don’t trust the market, those type of things. And well, the pension is not available for you, the thing that they could rely on to help supplement their retirement. And now you’re stuck having to learn from that, that difference. And I think going forward, we’ll probably be seeing some changes. They’ve been talking about having some kind of required savings programs or having auto enrollment. So you have to be enrolled. You have to opt out instead of opting in to retirement plans, which I think are good ideas because it forces people to save.
And sometimes that is needed, especially young. When you’re in your twenties, you get your first job. If they force you to put 4% in to get that match or something, you’re going to be thankful 30 years down the road when that money is compounded and something you may not have done because you wanted to spend that on a new car or something you’re forced to save it, it’ll pay off down the road.
[25:11] – Remedy for Falling Short in Savings
Austin Wilson:
So, we see that people are generally falling short of what was recommended for savings in general. What would we suggest people do to kind of remedy that?
Josh Robb:
It depends.
Austin Wilson:
So everything in moderation or whatever the normal Josh answer is.
Josh Robb:
Yeah, first and foremost, like we’ve always said, emergency fund is highly, highly, highly important that you focus on that first. Like I said, 20% savings for long-term retirement savings. Not if you don’t have an emergency fund because you’re going to put money in 401k, have an emergency, and then be forced to pull that right back out.
Austin Wilson:
Couldn’t get it out.
Josh Robb:
With a penalty and get less money than you would have had to begin with. So first and foremost, you need that emergency fund, top priority. But we say, make it a goal to get to that 20% threshold. And I would say, once you hit the 20, see if you can get beyond that because that’ll only help you give you more freedom and flexibility down the road.
Austin Wilson:
Especially the earlier in life you are.
Josh Robb:
Yes. Oh yeah.
Austin Wilson:
The more you can do when you’re young, if that percent, if you’re doing 20 plus percent when you’re young. Oh my goodness. You’re going to be doing awesome.
Josh Robb:
Yep. Just keep in mind though, this doesn’t happen overnight. So if you listen to this podcast, say, “You know what? I want to get serious about saving this year. I’m not doing anything.” I don’t expect, and I would be surprised if you found a way to save 20% in the first year.
Austin Wilson:
Overnight, oh yeah, yeah.
Josh Robb:
Where’s that coming from?
Austin Wilson:
Right.
Josh Robb:
So it doesn’t happen overnight, but find ways to create that habit. Savings is a habit and if you create the habit over the long run, you’ll be able to build on that foundation. And so we’ve talked about this, but there’s a 50/50 rule. So what it means is every time you get a raise, take 50% of that raise, increase your savings, take the other 50%, add it to your budget for inflation. And so if I get a 4%, raise 2% goes to increase my savings. So if I was at zero, I’m now saving 2% of my income. And then the other 2% goes to my budget. Next year, if I get another 4% raise, I’m now saving 4% because I added another 2% there, 2% goes to my budget. Next year, if I get a 4% raise, I’m now saving 6% and that works up. I’m getting to 20. Now, that’s a great way of doing it.
Austin Wilson:
And the other benefit of doing something like that is when you go to retire, you’re living on less.
Josh Robb:
You’re living on less.
Austin Wilson:
So you need less to maintain your standard of living. So the money you’ve already saved lasts longer. There’s a lot of benefits to that.
Josh Robb:
And we talked about our emergency fund. Any unexpected money comes in, throw that towards savings. So birthday, graduation, anything where it’s like, “Hey, here’s some extra money, I wasn’t expecting,” savings. Company match. So we talked about 401k 403b, Those are the simple IRAs have a match too sometimes, those are the spots where if the company is offering you free money to save, take it.
Austin Wilson:
Can you beat free money?
Josh Robb:
Oh, man.
Austin Wilson:
You can’t beat free money.
Josh Robb:
The rate of return on that is great.
Austin Wilson:
So that’s just something I heard at my old job, people would say no, and they’d say, “I can go get that in the market or whatever,” and the truth of the matter is if it’s a match of any kind, there is no way you’re going to get even close.
Josh Robb:
A hundred percent match every dollar is pretty hard to get, unless you had to buy Bitcoin last year I guess, but in general, you’re not going to get there. And so get that match. And I would even argue, get that match even while you’re still trying to do some of your other goals because that’s money you’re never going to get back. They don’t come back, “Oh, here, let me pay that match you didn’t get last year. Emergency fund top priority, then after that it’s the match.
Austin Wilson:
Yeah. Another one is just don’t forget to take advantage of your HSA, don’t forget to take advantage of your Roth IRA. These are some tax advantaged savings vehicles that you can have for health savings or retirement. Just don’t forget about them.
Josh Robb:
If you’re in a high tax bracket, chances are you can’t do a Roth IRA, so focus on the ones that can, but in general, for most people a Roth IRA is probably an option that you should at least consider, look at what your tax bracket is, talk to your tax preparer and just say, “Hey, if I do a Roth, instead of a little more in my 401k, what’s that look like? Is it worth it?” I like multiple buckets. I like a pre-tax, a post-tax, and a taxable, those three buckets are nice because it gives you more flexibility.
Austin Wilson:
And don’t forget that if you’ve checked off all the boxes above and you got money leftover, shove it in a taxable account.
Josh Robb:
Or if you have a short-term goal.
Austin Wilson:
Or if you have a short-term goal. Yeah, you want to have you be able to have access to it.
Josh Robb:
That should be a taxable account.
Austin Wilson:
Put it in a taxable account. You can grow some money and do whatever you want whenever you want with it, not a problem. It has great flexibility. So those are the vehicles that we would suggest. Make 2021, this is a new year, make it a year of saving. Just make little changes. Like Josh says, you know, these aren’t things you’re going to be able to overnight, but let’s just take a step and get a little better.
Josh Robb:
Even if it’s $50 a month. If you get that habit started, automate it, make it happen automatically, and get that habit started.
Austin Wilson:
And as always, check out our free gift to you. It’s a brief list of eight principles of timeless investing. These are overarching investment themes meant to keep you on track, to meet your long-term goals, investing is some of those things where you talk about. So check that out. It’s free on our website. Josh, how can people help us to continue to grow this podcast?
Josh Robb:
First of all, subscribe so that you get the most recent updates sent directly to you.
Austin Wilson:
Every Thursday.
Josh Robb:
Every Thursday.
Austin Wilson:
Every Thursday.
Josh Robb:
And leave a review on Apple Podcasts if that’s where you listen. Any great ideas or topics, shoot us an email at hello@theinvesteddads, or if you just want to say hi, we’d love to interact with you and see how you’re doing. If you think someone is interested in this savings topic, make sure you share this episode with them. The idea there too is maybe you could start a conversation and work through accountability where you say, “Hey, let’s do this together. Let’s start saving and set these goals.” So that’s the things that we’d love to see happen and hear about it too.
Austin Wilson:
All right. Well, until next Thursday, have a good week.
Josh Robb:
Yeah, talk to you later. Bye.
Outro:
Thank you for listening to the invested dads podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe, and don’t miss the next episode.
Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management, all opinions expressed by Josh, Austin, or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.
