Dave Sather's Money Matters: Simple steps give big payoffs
By Dave Sather
Feb. 4, 2014 at 6:01 p.m.
Updated Feb. 3, 2014 at 8:04 p.m.
As I walked through the door at dinnertime, Carol and her friend, Gail, were trying new recipes. Carol was madly stirring something when she turned to me and said it was Feb. 1. She was declaring it "Financial Responsibility Month." Although the person standing in front of me looked like Carol, I wondered if aliens had abducted my bride. Extra-terrestrial theories aside, I didn't have the heart to tell her that April already had this designation.
She proceeded to tell me that in her world, the other 11 months of the year had been financial "irresponsibility" months.
I realized that while I was at work, Carol and Gail were trying to assess how their money evaporated each month. Carol confessed that when she tried to assess these things, it just overwhelmed her. Gail nodded in agreement.
Neither is unique in these matters. Some people are magicians when it comes to making money disappear while others of us are a bit more financially retentive.
Since I could tell the dynamic duo was serious, we sat down to discuss a few easy ways to end up with more money. So often, the key to success in handling large projects is to break them down into very small yet obtainable steps.
First, both enrolled in a Dave Ramsey Financial Peace course. If they could learn to pay cash for things, they wouldn't use credit cards.
In our office, we refer to credit cards as "plastic heroin" - they may be fun for a while, but eventually, the long-term consequences of credit card balances will crush you.
Secondly, Gail wanted to buy a brand new car. She had found a pretty blue one with a variety of sales gimmick discounts.
I commented that the average new car depreciates 11 percent the second you drive it off the lot. Gail was skeptical. I pulled up the research from Edmunds.com. In the first five years, the average new car depreciates about 60 percent over the first five years.
As such, if you are looking to buy a car that sells new for $30,000, you can buy a comparable car after five years for $12,200.
The average car on the road today is 11 years old. Even if you buy a 5-year-old one, it has lots of life in it, and it will save you a bundle. Gail was still unsure.
Instead, we discussed what the savings could grow to when she really needed it - at retirement. We assumed Gail took the $17,800 in savings and instead invested it over the next 30 years, earning 10 percent per year. That simple move would provide her an extra $300,000. Gail liked that answer.
Gail then said her new 30-year mortgage worried her. At age 46, Gail would not pay her house off until she was 76 years old. This was not the golden retirement she hoped for.
In assessing the numbers, Gail's $175,000 mortgage was at 5 percent interest with a monthly payment of $940 a month. If she increased her monthly payment by $200, she would have her home paid off 10 years early. This would save her $112,000 in payments and leave her with no house payment as she entered retirement.
Gail began to get excited at the thought of gaining more control over her finances. She then said she knew she should fund an IRA, but it was hard to come up with $5,500 each April. I asked why she would do it in one lump sum. Gail was confused.
I explained that it is much easier to fund if done in smaller amounts each month. Instead of funding $5,500 once a year, fund $458 each month. This also has the added benefit of getting the money invested and working for you earlier.
As we ran the math, we assumed 10 percent growth over 30 years. If an investor only invests the funds once a year, their savings will grow to $904,000 - a very nice sum. However, if you invest the funds each month, your savings will grow to more than $1 million.
By the time we finished discussing these simple strategies, Gail and Carol both realized that most wealth is accumulated slowly over decades by having the discipline to do simple but meaningful things.
Maybe the pair will consider the other 11 months as opportunities for financial responsibility - but I'm not holding my breath.
Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.