by Joan Warner and Adrianna Gregory
Although Adrianna and Joanie are several decades apart in age, we both need to save money. Adrianna’s financial goals include paying off student debt and resisting lifestyle inflation; Joanie hopes not to have to work until she’s 90. We may be at different stages in our lifecycles, but we’ve both had to learn healthy saving habits (which don’t come naturally to most people). We’ve also tested time-honored pieces of personal-finance advice and discovered some are more useful than others. We decided to share one of our recent conversations.
JW: I’ve found the retirement industry’s wisdom to be 100% true: Saving should be invisible, automatic, and boring. When 401(k) plans first came on the scene, employees had to opt in. Now, 36% of U.S. companies enroll their workers automatically. This is a really good change. Plus, many plans get people started at 3% of salary, not 1%. I’ve found, over the years, that if I instruct the plan to deduct an additional 1% from my pay every January, I barely notice it. I also don’t mess with my investment allocations. I pick the most plain-vanilla, low-cost stock and bond funds, and I just sit back.
AG: I like that approach, and completely agree that most investing should be boring. That said, I try to have some fun with saving; I create separate accounts and name them for specific purposes. Doing this motivates me to save more than I would otherwise by helping me visualize an end goal. It helps me control my spending, too—when I’m in the store I can tell myself, If I buy this bulldog sweater, that’s $50 less that I can put in my “adopt a bulldog” account. (I don’t actually have a savings account for that, but now that I think about it, I probably should.)
JW: You’re “bucketing”! That’s exactly what the experts say you should do, because saving outside a 401(k) takes discipline. I was never a good budgeter, so instead I’m a tightwad. I don’t take taxis except in medical emergencies. I buy clothes in January and August, when everything’s on closeout. The extra bucks go into a “high-yield” liquid account. For me, having a sizable emergency fund has been very important to my financial security—and I don’t agree with the popular guideline that people should set aside three months’ of expenses. Six to 12 months is more realistic. If you lose your job, you shouldn’t have to take the first position that comes along just to make the rent. And if you have a health issue that keeps you from earning for a while, the last thing you need is financial pressure.
AG: Yes, never underestimate the stress-relieving power of the emergency fund. I know it is tough for many people to save anything after paying the bills, but having something set aside for life’s uncertainties should be everyone’s first financial goal, even above paying down debt. And this money should be in its own account, not lumped in with any other savings goals—I’ve seen some really questionable advice out there about relying on your 401(k) as an emergency fund.
JW: You’re so right, and I’m shocked when I hear of young people dipping into retirement savings for other purposes. Let’s share Albert Einstein’s real quote about the miracle of compound interest: “He who understands it, earns it. He who doesn’t, pays it.”
Joanie Warneris the Thought Leadership team’s Managing Editor for financial services.
Adrianna Gregoryis the Associate Editor for Technology at Oxford Economics.