Saving Archives - The Free Financial Advisor

Should I Be Saving For My Ten Year Old’s Future?

April 19, 2021 by Tamila McDonald 1 Comment

If you have a ten-year-old child, you likely want to do all you can to secure their future. However, it isn’t uncommon to wonder precisely what steps you should be taking and whether now is the right time to make certain moves. If you can’t figure out if you should be saving for your ten-year-old’s future, here’s what you need to know.

Reasons to Save for Your Ten Year Old’s Future

In the end, there is a slew of reasons why saving for your child’s future is a smart move. Over time, your child is going to potentially have quite a few high-cost needs. Many of which can be hard to shoulder once those times arrive.

One of the biggest examples is paying for college. On average, college costs $35,720 per student per year. That’s more than many people can pay out of pocket without planning for the expense.

However, there are other costs you may also encounter. For example, if you want to help your child get their first car. That will likely cost several thousand dollars. If you want to have a little nest egg to lend a hand if they get married. You may need to save for that, too.

Plus, there is a range of expenses that you may not see coming. Anything from field trips to sports fees to medical costs not covered by insurance could all make saving important.

Ultimately, by saving for your child’s future now, you’re giving yourself time to gather up some cash before you need it. That can make a range of costs more manageable, both for you and for them.

Deciding If You Should Start Saving for Your Child’s Future Now

Even though most parents feel that there are plenty of good reasons to start saving for their child’s future, that doesn’t mean now is always the right time to do it. In the end, it isn’t the child’s age that should be a determining factor. Instead, it’s the household’s financial situation.

If you’re living paycheck-to-paycheck, your first priority should be to give yourself some breathing room. That way, you can handle other more crucial goals, like starting an emergency fund and paying off high-interest debt and then potentially move on to saving for your child’s future.

You may be able to get some space by reviewing your budget and trimming various expenses. Launching a job search to find a higher-paying position or a second job could also work, depending on your exact situation.

As you review costs, resist the urge to stop funding your own retirement. While you may think your child’s future is more important, you don’t want to neglect yours to make it happen. Instead, view your retirement contributions as high-priority expenses, and leave them as-is while you evaluate your budget.

If all of your financial needs are met, and you find room in your budget to save for your child’s future, then start right away. As with all kinds of saving, the earlier you start, the better, as it gives you time to benefit from compound interest and other kinds of gains you may experience.

How to Save for Your Child’s Future

When it comes to how to save for your child’s future, that may depend on the exact savings goal. Different techniques are often best in different situations, so you need to use a strategy that makes sense for what you want to accomplish.

Generally, if you are trying to set money aside for your child’s college education, a 529 College Savings Plan or 529 Prepaid Tuition Plan is your best bet. Which of those options is available depends on where you live, and they each have their own benefits and drawbacks. However, those are good places to start if setting money aside for school is the priority.

Uniform Gifts to Minors Act

You can also explore the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) options. These are the most widely used types of trusts, allowing parents to set money aside for child-related expenses or to transfer the assets to their child once they reach the legal age. These accounts make it possible to purchase stocks, bonds, or other kinds of securities for a minor, so it could be an option that’s worth exploring if your goal is to hand those assets over to your child.

Brokerage Account

Alternatively, you can open your own brokerage account. Then, you can invest outside of plans that are designated solely for education or retirement and where withdrawals aren’t age-restricted. That way, you can pull the money when the time comes. Just make sure you also account for the taxes that can come with a withdrawal, as you’ll need to handle them.

Traditional Savings Accounts

In some cases, a traditional savings account is a better option for handling your child’s future expenses. For example, it could be a great choice if you want to help them buy a car, as that purchase is almost on the horizon if your child is already ten years old. Just make sure that you opt for a high-yield savings account. Look at the interest rate, as well as any fees, to find the option that lets your money earn the most.

Ultimately, all of those options are potentially viable. Choose the one (or ones) that align with your goals, and you can make significant strides toward helping secure your child’s future.

Do you think that it’s wise to start saving for your ten year old’s future? Do you think ten years old is a good time to begin or is another age a better choice? Share your thoughts in the comments below.

What Should I Do With the Next Stimulus Check?

March 15, 2021 by Tamila McDonald Leave a Comment

With the new COVID relief bill passed by Congress and signed by President Joe Biden. Many Americans have stimulus checks on the way if they aren’t already in hand. However, figuring out what to do with the money can be surprisingly tricky. Particularly if you have some conflicting needs. Luckily, it is possible to choose the best path for you. If you aren’t sure where to begin. Here are some options for what to do with the next stimulus check.

Handle an Urgent Need

If you have an urgent financial need, such as issues buying enough food for your household or past-due utility bills, using your stimulus check to handle those costs is your best bet. It ensures you can continue to live without undue hardship, and that’s important during this pandemic recovery period.

Additionally, if you have secured debt – like an auto loan – and you’ve fallen behind on payments, putting the asset at risk of seizure, it may be a solid target. By catching up, you may be able to avoid the repossession or foreclosure. Depending on the asset involved, that might be crucial.

However, before you send stimulus money toward any bill, you may want to see if there are other programs available that may reduce that burden. For example, utility companies, mortgage lenders, certain state or county offices, and many other organizations have relief programs to help those who are struggling due to the pandemic. If you’re eligible for their assistance, don’t hesitate to use it. Then, you can direct your stimulus check toward other needs.

Pay Your Taxes

If you have filed (or are about to file) your federal taxes and owe money to the IRS, using your stimulus check to handle that burden isn’t a bad idea. Unlike for the 2019 tax year filings, the IRS isn’t postponing 2020 tax filings this year. If you want to avoid fees and interest, then you need to pay what you owe in full by April 15.

Even if the stimulus check only covers part of your obligation, using it to handle some of your taxes reduces this total burden. Then, if you need to enter into a payment plan with the IRS to address the rest, what you’ll need to pay could be easier to shoulder.

Create an Emergency Fund

If you don’t have any cash – or very little money – set aside in an emergency fund, using your stimulus check to get one started is a good idea. It’s wise to have a little cash available for unexpected events, something that the pandemic made abundantly clear for many.

Ideally, you want at least $1,000 set aside initially. Then, you can work your way up over time, aiming to save a minimum of three to six months’ living expenses.

Pay Down High-Interest Debt

Using your stimulus check to tackle high-interest debt is always a good idea. Not only will it reduce the amount of money you’ll pay over the life of the debt, but it could potentially boost your credit.

For many people, starting with high-interest credit cards is the best way to go, especially if the cards are close to being maxed out. However, for others, a high-interest personal loan could also be a good target.

Finally, if you have a payday loan, focusing on that might be your ideal option. Payday loans usually come with astronomical interest rates, making them a wise debt to tackle with stimulus money.

Boost Your Retirement Savings

By using your stimulus check to boost your retirement savings, you not only do something to help secure your financial future, but you may also get a tax benefit. You have until April 15, 2021, to finish up your 2020 retirement investing. If you contribute your stimulus to a tax-advantaged account, you might be able to lower your 2020 tax burden.

However, you can also use the money for your 2021 retirement savings. You may be able to get a jump start on it or even fully fund an IRA, depending on how much you receive in your stimulus check.

Handle a Large Purchase

If you have a solid emergency fund, fully funded retirement accounts, no high-interest debt, and have your financial house otherwise in order, then using your stimulus check for a large purchase is certainly an option. It may give you the ability to buy high-cost items in cash, allowing you to potentially avoid high-interest debt.

Even using stimulus money to fund a vacation can be a smart move if you’re in good financial shape otherwise. Again, it lets you avoid the need for debt and could give you something fun to look forward to once you feel comfortable traveling.

Invest, Invest , Invest

If you want to put your stimulus check to work but already have a fully-funded retirement account, then you could always invest separately. There are many options that can help people get started, including full-service brokers, robo-advisors, and anything in-between.

You will need to do some research if you don’t currently have an investment account, ensuring you choose the right brokerage for you. Additionally, if you aren’t sure where to invest the money, you might need professional guidance or to conduct more research.

In many cases, focusing on individual stocks isn’t wise for beginners. Instead, options like index funds may be a better bet, as they come with an innate level of diversification.

Save Money for College

Whether you have children or may go back to college yourself, setting your stimulus check aside in a 529 college savings plan could be a smart move. It lets your money grow tax-free, and any withdrawals you make for qualifying expenses aren’t taxed either. In the end, this option can help make college more affordable, allowing you or your child to potentially avoid or reduce the need for costly student loans.

Do you already have plans for your next stimulus check? Share your thoughts in the comments below.

How to Utilize Rewards

July 29, 2020 by Jacob Sensiba Leave a Comment

On this site, we talk about credit, investing, and how to pay off debt. One thing that’s often missed around the debt subject is rewards.

Rewards are incentives to keep going. It’s something we can use to motivate us on our journey, no matter what that journey is.

Whether we are trying to pay off debt, lose weight, or just, straight up, improve our life. You need to reward yourself, otherwise, it’s go go go, all the time.

In this article, we’ll talk about when it’s a good time to reward yourself, how, and things to look out for.

Habits

A reward should be centered around two things. Habit formation or commitment, and goals.

If you are trying to make an improvement on something, whether it’s your health or your finances, you have to develop good habits.

If you want to exercise more, do it six days in a row, then take a break. That break can be your reward. If you want to eat better, do it for six days and then take a little break with a cheat meal.

The first step is creating the habits to get yourself to that better place.

Goals

The next reward will come when you hit goals. You want to get to a certain place, say saving $20,00 for a down payment, eliminating your debt, or losing 20 pounds.

Those are great goals, but you should put in place incremental ones to help you get there. That could be a reward for every $5,000 saved, every $5,000 paid down, or every 5 pounds lost.

It’s a lot like Dave Ramsey’s “Snowball Method” with applications in different areas of life. The goal with that method is to give you small wins to keep you motivated.

How to reward

If you put those habits in place and hit those goals, it’s time for the reward. The great, but the challenging part about that is everyone defines reward differently.

So when you create a reward for yourself, you should keep two things in mind. Make sure it’s good enough to release some dopamine, but small enough that it doesn’t set you back on what you are trying to accomplish.

If you’re trying to lose weight, your reward should be a little cheat meal or a day off from working out. Not a day of binge eating or a week without breaking a sweat.

If you’re trying to save money or pay down debt, don’t let whatever the reward is negate you from saving that month or add to your debt.

Large enough to make you feel good, but small enough so you stay on course.

What to watch for

The biggest thing to watch for is the size/duration of the reward. It mustn’t be too big or too small.

It’s a fine line and may require a little trial and error before you get it right. Start small and work your way up.

As I mentioned, it shouldn’t detract you from the pursuit of your goals, but it should also make you feel good about the progress that you’ve made or the habits you’ve created.

How I handle rewards

I won’t lie to you, rewards are a challenge for me. I’m very much a black and white type of person.

I keep junk food out of the house because I can’t be tempted with it. I make regular transfers from checking to savings in order to keep “discretionary money” out of my bank account for fear of spending it away (mostly on take-out, honestly).

It’s hard for me to put the pedal to the floor and take it off for a day. I’m either all on or all off, but I’m starting to figure it out. It really just takes some practice, a little will power, and some self-awareness.

The Importance of Being Handy

July 1, 2020 by Jacob Sensiba Leave a Comment

Perhaps it is just within my circle, but it seems that the character trait or the skill of being handy has lost its value.

People seem unable to fix simple things. Around their house, their car, what have you.

I’m curious if the majority of people know the difference between a Phillips head screwdriver and a flathead screwdriver.

At no time was the importance of being handy more clear than during the last few months, when the entire country went into lockdown. You never know when that service you rely on will be unable to help you.

My Experience

My dad taught me from an early age the importance of being able to fix things yourself and the value of a strong work ethic. Those may seem unrelated, but I believe they are directly correlated.

I watched him and helped him with all of his projects. Plumbing, changing the oil on his car, renovations, replacing his brakes, you name it.

Not only did it save him and us, as a family, money, but it was quality time I got to spend with him. There were valuable lessons taught in those experiences.

Now, I can fix almost anything. It gives me a sense of pride, it saves me money, and now, it’s making me money.

At my last apartment, I was the go-to handyman for our complex. They took a small chunk off my rent and paid me by the hour when I was on a job. Saving and earning at the same time.

Now that I’ve moved, I no longer am the go-to for that complex. Instead, I’m the go-to for all rental units owned by that investor in my city. That’s an incredible opportunity for me to make money outside of my normal 9-5.

Growing up, did I think this kind of circumstance would come upon me? Of course not. But that’s the thing. No matter how you think your life will turn out, it hardly goes that way.

You have to vary your knowledge and competencies across a range of industries. You truly never know what will fall into your lap.

From there, we’re going to take a hard right turn into a different topic

Consumer Math

This is something that should have been on my radar, but it wasn’t. Until this morning. My cousin is taking a consumer math course, and after learning about what it was, I have to promote it.

You can find a consumer math course anywhere, and they all teach the same thing.

Math for real-world situations.

It’s basically a personal finance course. It teaches things like budgeting, taxes, loans, buying a car, wages, deductions, spending, and transportation.

These are topics that everyone should be knowledgeable about, as they lay the foundation for your financial life. Ace these, and you’re steadfastly in the driver’s seat of your finances.

Quick Wrap-Up

Above, we covered two things. Being handy and having a wide range of knowledge can help you later in life, and how having a foundational understanding of consumer math puts you in control of your finances.

Both of these are vitally important but dramatically undervalued by the masses.

Trying to Save Money? Concentrate on Time

June 18, 2013 by Average Joe 17 Comments

Editor’s note: Hey, kids! We’re handing the spotlight to my good friend Miranda for today’s post. Check out her site for more about people struggling with the broken concept of work-life balance. – Joe

The best money savings tips are the ones that save you money. Clearly.

But since time is money, a tip that saves you both, is like a double expresso. Sort of like an “uber savings” tip.

How did I discover “uber savings”? I write a blog called beyondworklifebalance.com

As a full time working professional, a mom to one, stepmother to three, framing my life in terms of achieving balance is absolutely NOT useful. I’m not a trapeze artist balancing work and life, on a wire, ready to be free falling, with a mere puff of wind.

I started to think about work and life in a more integrated way, and finding the complementarity in the things I do.

Here’s how this works:

Suppose I want to spend an hour exercising, and an hour catching up with a friend, and I have a toddler to take care of. Instead of scheduling an hour at the gym, and then another hour at Starbucks with said friend, and then having to find a sitter to take care of the toddler, while at the gym and maybe at Starbucks too, I find another solution.

I take the jogging stroller, put my son in it, and meet my friend for a jog around the block. I save time driving to and from the gym. I save money by not having a gym membership. I save money by not hiring a sitter. And as much as I like those double lattes at Starbucks, I save money there too. And since we’re running, theoretically, I don’t need the caffeine jolt to get going.

Here are a few others:

1. Walk two miles to work. Save money and time by not having to go to the gym. Save money on gas and on parking. Oh, and lower the carbon footprint, too.

2. Double up dinner recipes and freeze. Save time since I don’t have to do get all the ingredients out and cook again. Pack my lunch for the next day and save money by not hitting the cafeteria. And maybe get a second dinner from the freezer on a night when the Little League baseball game goes into extra innings after a rain delay.

3. When I buy groceries, I use my debit card to get weekly cash and buy a book of stamps at the same time, I save money on those naughty little ATM fees, and save time by not having to go to the post office.You get the idea.Some people will say, “isn’t this just multitasking?” I say no. I say it is finding out how these small, and sometimes, not so small, ways of saving money and time and can be complements of each other. It opens up a new dimension beyond just saving and beyond just work life balance.

4. Fill prescriptions online. Those who have monthly or weekly prescriptions to fill know how expensive and time consuming it can be. What I have found is that ordering these prescriptions online through a Canadian internet pharmacy saves me time and money. For starters, I never have to wait for my prescription to be filled. Secondly, ordering this medication online is much less expensive, as the Canadian government has put a cap on what pharmaceutical companies are allowed to charge. If you’re like me and need prescriptions regularly, this option is definitely worth considering.

What techniques do you use to save time? Let’s share some more money-saving ideas in the comments.

&bsnp;

Miranda Daniloff is a wife, mother to one and stepmother to three, university senior manager, a daughter, sister and sister-in law, friend, creative writer, former radio and television producer, who loves to read, run and cook. She started beyondworklifebalance.com to find a better way to integrate work and life. The idea of balance just stressed her out.

Photos: Strollers, Sergie Melki; Miranda, Martha Stewart

How to Start Saving Money Now

May 28, 2013 by Stan Poores 13 Comments

Struggling to save money? It will never get easier if you wait. Luckily, we’ve got your back.

If there’s one thing that’s difficult to do in our society today, it’s saving money. Everywhere you turn, there’s an advertisement for the next hot toy. On the side of that semi, on the billboard near the highway, over the radio waves, through your television, and as I’ve experienced lately, even in a parade – these are all ways that companies are trying to market their product to you.

In order to save money, you first need to filter out the media. No matter what the product is, it’s not going to give you long-term joy (which is really what we’re all looking for, isn’t it?). Mainly, these products or services will provide short-term happiness that will last for maybe a week or two. That’s all. You’ll be much better off saving your money for an important event in the future than on a cheap thrill in the present.

Start Saving Money Tip #1: Sell Some Stuff

Once you can ignore the media a little better, the stuff that surrounds you each and every day should be a little less important. In fact, there may be some items in your basement that you haven’t used in the past year and may never use again. So why in the world are you hanging onto this stuff? The next step (after ignoring the media) to saving money now is to sell some of the things that you no longer use and do not need.

You could start selling items via a community garage sale, Craigslist, or even through eBay. It really doesn’t matter what avenue you choose, just as long as you get rid of some clutter and make some money in the process.

Use this money to pay down debt, establish your emergency fund, or open that IRA you’ve been waiting on. It’s time to put your money to work!

Start Saving Money Tip #2: Reduce Your Monthly Expenses

The next best way to start saving money is by reducing your expenses. Most of us think we live so much more frugal than our friends, but are we really? Where are we shopping for our groceries (the more glamorous store or the discount club)? What type of cell phones do we own? Where do we go on our vacations (camping at the local state park or heading to Aruba)? And, what type of cars do we have parked in our driveway? No matter how cheaply you think you’re living, there are always things that we can cut back on.

– Track your expenses.

– Eliminate wasted home entertainment subscriptions.

– Search for energy efficient practices in your home.

Start Saving Money Tip #3: Make Money with Your Money

If you get to the point where you have saved a decent amount of money, then it’s time to start investing and earning more money with your dollars. This is the absolute best part of your savings because you’ll finally have the mentality of the rich, which means that you’ll soon be living like the rich as well!

Just to be clear here, I’m not suggesting that you use all of your savings for an investment. Rather, I’d say that you should only use a small portion of your savings for multiple investments. I know of quite a few people that have started an online business for less than $100 and are earning thousands of dollars each month today. It doesn’t cost much to get started and it could increase your savings exponentially!

Photo: Images_of_Money

3 Easy Steps to Increasing Investment Returns

April 23, 2013 by Average Joe 39 Comments

Hello Free Financial Advisor readers! I’m Marvin from Brick By Brick Investing, a blog that focuses on teaching the average joe how to invest in the stock market and grow their wealth in order to achieve financial independence. It’s my pleasure to have you as my audience today. If I could explain one thing to investors it would be this…

Investment returns are not the number one factor in regards to building wealth through the stock market. Now before you strike me down and start to curse my name hear me out. I pride myself in being completely honest with you and if our roles were reversed I would want you to do the same. Here are the three things that you have complete control over that matter most.

Earn More Money

While some make the noble attempt to educate themselves financially it has been my experience that they prematurely start investing and in return lose a substantial amount of money. I would advise instead of focusing all that energy chasing hot stock tips, attempt to be the best in your field. Strive hard for that promotion at work or for that bonus and when you achieve success allocate your increase in income to your overall portfolio. I would much rather see a safe low risk return of 6-8% on a portfolio of $100k+ than a high risk return of 15-20% on a portfolio of $10k.

Throughout college I worked hard and was able to levy that hard work into a favorable job market where I obtained a very coveted job skill. In return I was able to start making a large sum of money compared to my peers that I graduated with the year before. It wasn’t easy, there was a lot of sacrifice not only from myself but from my family as well. I basically sacrificed three years of my young adult life in order to acquire a nice salary. Now I am able to make low risk trades and investments and compound my wealth.

Increase Your Savings Rate

Stop trying to keep up with Joneses and stop living above your means. Eliminate your debt and spend less than you earn while investing the rest. I believe a good bit of us have been deployed and lived under basic conditions. Therefore I believe it is safe to say you can do without some of the luxuries that deplete cash from your wallet. I personally recommend that individuals should strive to save 50% of their income AFTER tax.

Time and time again I hear that this cannot be done but I did it for two years of my life. In fact I use to save 80% of my after tax income before I got married. I will never forget the day my wife discovered that I used shirts on hangers as curtains for my room, her facial expression was priceless. For six months I had nothing more than a mattress, laptop, and gorilla case in my room. These are the things that allowed me to save so much money at a young age. Since then my wife and I have come to happy medium and we save 50% of our after tax income and indulge in some luxuries but if it were up to me we could save a lot more.

Choose A Great Financial Advisor

While no fault of their own a lot of individuals believe all financial advisors are created equal, but the harsh reality is they are not. It is imperative that you verify potential advisors credentials, fee structure, and capabilities. Some advisors may try to use a broad stroke with all their clients and you need to verify that your potential advisor has a plan for your specific situation. Do not feel that you cannot ask questions. In fact you are interviewing them for a job to manage your investments. Ensure that you leave no questions unasked and make sure you understand the answers that are given to you. Albert Einstein said, “If you can’t explain it simply, then you don’t know it well enough.”

Increasing Investment Returns Can Be Simple

If you do these three things I guarantee you will outperform 90% of your peers in terms of investing and ensure a successful retirement. These are the things I live, preach, and teach.

Photo: Tony Crider

Saving Money Isn’t Work: It’s a Mindset Shift

April 20, 2013 by Average Joe 13 Comments

When I’ve given speeches at community groups, I’m often surprised to hear, “This sounds like a lot of work.”

It’s hard to know what to say to this. Do I say:

– “But it’s worth it.”

– “Not really”

or even,

– “Maybe a little work, but it focuses your mind on saving instead of spending”

None of these approach the truth. Saving money isn’t easy or hard….it’s a complete mindset change.

Finding Opportunity Where You Don’t Expect

As I wrote in Can’t Save? Write it Out, Bitches!, often, we don’t look hard enough for opportunities. I took a quick trip to the store yesterday for bread and ketchup to work on my famous sloppy joes (well, not yet famous, but I’ve not given up). Without thinking, I jumped in the car and paid full-on retail for both of these items.

In today’s world, with my iPad sitting on the counter, it wouldn’t have been hard to find a coupon. In fact, a look this morning (that took less than three minutes) found me $.50 off the bread I purchased and $.25 off the ketchup. Lots of savings? No, but by changing my mindset and doing this all the time, I can find tons of opportunities, no matter where I am.

– Saving on insurance with comparison sites

– Saving on airfare and hotels with online discounters

– Saving on food with Tesco vouchers

– Saving on restaurants with newspaper coupons

It’s easy to find ways to save, but instead of just grabbing the keys and leaving home, you need to take a few minutes.

It isn’t frugal as much as it’s smart

I’ll be the first to tell you that I have no interest in saving $.75 on bread and ketchup. However, if it’s the same ketchup and bread, the same hotel room, the same airline, and I don’t have to take significant time to find the deal…that’s not about saving $.75. It’s about learning to treat money with respect.

So, the next time you grab the keys to head to the store, think for a moment. Could I look for deals online? Could I find aggregator sites that would help me get this done better/cheaper/quicker (or all three at the same time?). Could I be saving daily with discount codes, coupons and deals for the same stuff I was going to buy anyway? Better yet, could this be the Roth IRA contribution you weren’t able to make this year because you “didn’t have any money?”

Photo: Saad Faruque

Goal Setting and Pretty Retirement Charts – Our Cuppa Joe Discussion

March 22, 2012 by Average Joe 10 Comments

Every Thursday we grab a cup o’ Joe and talk opinions on financial matters…..today we’ll chat about goal setting and workplace retirement plans.

My opinion: Do you know those 401k asset allocation charts in the front/back/middle of your workplace retirement plan booklet? They’re color coded circles of slick graphics, and are often found at the conclusion of a survey about the amount of risk you should take in your investments.

Those pie charts are nearly irrelevant when it comes to financial success.

Each day in a workplace somewhere in America you’ll find a fast-talking 401k-hocking yahoo teaching a group of people how to use these silly charts to determine how much risk they “want” to take.

How much risk you “want” to take?

“Want” and “financial success” rarely coexist when talking about money management. Most people want zero risk and huge returns. They also want Santa Claus to be a little more kind next year than last.

Is “how much risk do you want” really the question you should be asking with your 401k plan?

I have a better question.

Try this one on: How much risk do you need to take to reach your goal?

Isn’t that the question these surveys should be asking?

I know this doesn’t sound like rocket science, yet you’d think so if you’ve ever read workplace retirement plan guides. In many cases, risk tolerance charts and savings guidelines are presented as two entirely different discussions.

Huh?

Let’s be clear about what I’m discussing here. If you’re going to achieve financial success:

Find out how much you need to save.

Then learn what return you need on that savings.

If I had control of these workplace pie charts, here’s what I’d do

I’d gather everyone in the conference room and show the group how to determine the amount they need to save to reach financial success. I know that’ll differ for everyone, so it’ll be important to focus on goal calculators. With the boss’s permission, we’d follow this up with generous portions of alcohol. We’ll call it “Some of You Will Be Happy” Hour.

Second, I’d help everyone determine what return they need on that savings to achieve the retirement goal.

Sounds like I’m repeating myself, doesn’t it? I’m not.

Here’s where we finally insert the silly quiz

Third, the employees would be presented with the risk tolerance quiz. Everyone could see if the asset mix they (historically) would have needed to reach financial success matches their risk tolerance.

If so, more Happy Hour.

If it doesn’t: Houston, we have a problem.

The real problem

If you aren’t going to reach your goal, you have a choice to make: either save more money or raise your risk tolerance. One requires sweat, the other education.

Which path would you follow?

I believe that once we begin presenting 401k plans this way, instead of with some inane chart about your “risk tolerance” (lots of people very comfortably missing their goals out there), we’ll finally begin to realize that every goal can be met through a simple equation:

Savings x Return = Goal

How you approach one side will affect the other.

Okay, discussers, let’s go: Do you have a workplace retirement plan? Did it come with a silly risk tolerance chart…or did they present retirement in the brilliant manner I have above?

(photo credits: Nutty pie chart: Sebastien Paquet, Flickr; Teeter-totter: Rambergmedialigmages, Flickr