Why save money? The answer is simple: If only you work, there is only one person working. If you work and your partner works, there are two people working. If you work, your partner works and you invest your money, there are three entities earning money for your family.
Goldhamer’s four basic rules for wealth accumulation:
1. Work hard and earn money.
2. Don’t spend all of it; ardently resist the desire for short-term satisfaction. Forgo the big screen TV if your savings and retirement have not been handled first.
3. Invest wisely: slow and steady wins the race. Impulsive investing will cost you money. Do not jump in and out of the market. Do not buy single stock fliers.
4. Watch the tax ramifications. Tax issues can eat your money. Ask before you invest. Make year-end determinations early in September, October and November so that you can manage your tax responsibilities and liabilities.
Here are some simple directions:
- Retirement savings: Whether you are 22 or 52, if you have not started saving for retirement, start now. Money doubles at 7.2 percent every 10 years. At 10 percent, it doubles every 7.2 years. That means at 7.2 percent, $2,000 saved now will be $4,000 in 10 years. That same $4,000 will be $8,000, 20 years from now, and in 30 years, it will be $16,000. In 40 years, it will be $32,000. Put $2,000 away every year for 40 years and you will have well over $420,000, 40 years from now. Yes, the bank percentage rate today is low. However, even with the huge crashes that happen every 10 years or so, professional money managers earn for you between five and 12 percent over the long-term…if you don’t panic and yank the money out. This is especially true of mutual funds.
- General savings: It is not enough to just save for retirement. My mother always told me when I was a little boy “pay yourself first”. Simply, this means that after you’ve paid your taxes, put some money away for retirement and pay at least $.10 of every dollar to yourself and put it aside for saving.
- Avoid short-term satisfactions: I know you want a big screen TV, a better car, but save for retirement; save for yourself before you splurge. One needs to show some restraint if you want to get ahead.
- Raising children: We all spend too much money on our children. Raising children is a hotbox crucible of spending. In the end, you will learn that if you spend less, stand back more and interfere less, the children will do fine without the parental overproduction. You have nothing more valuable to give your children than your time.
- Buy or rent a house? This is really six of one, half a dozen of the other. Traditionally, over the course of the last 100 years, houses have always gone up in value. Yes, in 1992, 1999 & 2009 the real estate market slumped big time. Nevertheless, eventually it rights itself. Try not to buy at the top of the boom. When you are afraid that everything is going so fast… wait. There are tax advantages to home ownership. This sometimes helps you save money. Do not overspend on your house. You are not in competition with anyone! You have to be patient and save money so that you can buy a house that you can manage. You do not want to be house poor.
- College educations: College educations are expensive, but you do not have to pay a ton for college. Your children do not have to go to a $60,000 year school, and they should pay for part of it. They are not babies and they will appreciate the education more. Here is an idea: There are consequences to working hard or fooling around. College-educated people make 69 percent more during their lifetime than non-college educated people. That tells the whole story.
- Talk about money: Do not let someone else do it and do not keep your head in the sand about money. Do discuss money with your partner before you get married and while you are married. Talk to your children about money. Teach fiscal responsibility. If you do not, you are asking for trouble. The person who abdicates their obligation to learn about their finances, how to invest and how to spend is flirting with disaster.
- Depend on yourself: Everybody has to be able to take care of him or herself. Teach this to your children. I raised two girls and my wife and I always told them, “Be prepared to take care of yourself; you can never tell when a partner, your money or a trust fund runs out.” Always be prepared to take care of yourself.
- Do not gamble: When I say do not gamble, I do not mean don’t go to the gaming tables (which of course, you should not). I mean do not bet that you will be able to make a payment on a loan (installment contracts and credit cards are loans) when you do not have the money to pay it. Buy only what you need, and what you do not need make sure you can pay for it by the end of the month. Credit cards are a trap for the unwary: easy to get, hard to pay. The banks love to get you in their clutches.
- The Sunk Loss Dilemma: The sunk lost dilemma is the inability of most people to give up on a bad investment or bad idea. This happens when you have made a mistake like buying at the top of the market and the housing market has plunged 30 percent or more, burning up your entire down payment. It can be worse: your house might be worth less than the mortgage. The same is true of a bad business decision in which you have poured thousands of dollars into and are not reaping benefits. It could be a 20-year marriage that is now just awful. The same is true when you have an employee that is not pulling their own, but you keep investing in their success, which never happens. The same is also true when you have bought a stock or other investment for $10,000 and it has dropped to $2,000. How long do you hold on to some investments that have sunk? The answer depends on how much it costs you to keep maintaining the lost investment. If you bought a house for $500,000 that is not worth $350,000 and you have a $450,000 mortgage on it, how long should you continue servicing the $450,000 debt to preserve no equity and maintain a $350,000 house? The answer really depends on whether or not you can find suitable housing for less money, coupled with what your exposure is to resolve the debt. Many times, I have had clients who were spending $10,000 per month trying to squeeze another $30,000 out of the house when they could be living elsewhere for $5,000 a month; they are throwing $5,000 per month out the window! In six months, if they finally gained the $30,000 extra (which they probably will not), they will have broken even. You have to be a grownup and take your medicine.
KGG is affiliated with a number of financial planners. We can help you straighten out your finances. Nevertheless, be warned it requires tough decisions and hard moves.
Let our firm arrange your initial consultation. Our estate, probate and trust administration law offices in New York or New Jersey can be reached by email, our online contact form or at (800) 711-5258.
Kantrowitz, Goldhamer & Graifman, P.C. – Bergen County Estate Law Attorneys