Personal Finance: The Long Game
I wish that personal finance was a simple sprint, but the truth of it is that it’s a marathon. I would love to write about how much I have paid down my debts today, but I already made all of my debt payments for the month, and that value hasn’t changed. My income hasn’t changed, either. I’ve received no windfalls or unexpected inheritances. My money report would be exactly the same as I reported earlier in the month. This saddens me a bit. I want to make progress. I want to experience something magical in my personal finances, but this thinking is a mistake.
Personal finance is played for the long game. It’s a marathon, not a sprint, so the only way for me to get ahead of my personal finances is to participate in the long game, to set long-term goals that are years away. This isn’t something that comes naturally to me. I can’t really see past lunch, and then, when I’ve eaten, I completely forget that I will be hungry again around dinner time. I’m not much of a planner, but mastering personal finances takes a plan.
Step One: Paying Down Debt
The first step in my plan is to pay down debt. I am 38 years old and owe over $37,000 in debt divided between student loans, a personal loan, and a car loan. If I make minimum payments on all of these loans, which I am currently doing, I will be debt free in six years, when I’m 44. I can speed things up a little if I start paying down additional principal, but I have to save an emergency fund and a tax fund for next year before I am able to do that.
Step Two: Creating An Emergency Fund And Saving For Taxes
I owe taxes every year, and while I have been increasing what I contribute from my paychecks, this burden has been the same for the past five to seven years. Taxes come, and I have to pay for them. I recently increased my withholdings by an extra $500 per month, but I did it late in the year, so I will still end up owing come April 15th. That’s fine. I can save and plan for it. I will need to save about $5,000 for taxes next year. This is priority number one as far as savings go. After that goal is reached, I want to save an additional $5,000 for an emergency fund. I will keep this money in an online savings account and use it only to fund emergencies. It is not a travel fund or a rainy day fund; it is my cushion between myself and the inevitable giant rocks that get thrown in my way. I’m a ways off from these goals, but I do have $3,000 socked away and will continue to put money in every month until I reach the goal. In all likelihood, I won’t reach the goal until tax time next year, but that’s fine with me. Being able to pay the tax bill while having $5,000 left in the bank for emergencies seems doable based on my current monthly surplus.
Funding A Retirement Account:
After I have saved for taxes and an emergency fund, I want to start funding a retirement account. I do have money in a pension through work with the current balance sitting at $14,418.19. I am grateful to have this set-aside. I didn’t have a choice in the matter, which is why it is there at all. It has taken five years to save this much in the account, though I have been contributing more in the last two years because I moved to full-time status. I am now contributing $330.20 monthly to the pension plan, and this will continue as long as I retain my current employment. At age 55, I will be eligible to retire with a monthly pension of $1,000. At age 60 this jumps to $2,000. At age 65, my pension would be $3,300 per month. This is comforting to me–to know that I am already saving for retirement in spite of my complete failure to do so on my own. If I have my druthers, I would cash out at 55, but this is likely out of the picture because, well, $1,000 a month ain’t squat.
In addition to my pension savings, I want to start contributing money to my own IRA or Roth IRA. My goal is to save about 10% of my income, which would put me at the yearly contributions limit of $5,500. To meet the contribution limit, I will need to sock away $458.33 a month. Once I have my emergency fund, this is completely doable for me. After 16 years–the time it will take me to reach age 55 after I have saved an emergency fund– of investing with a 7% annual return, I can save up $164,121.20. That’s a lot of money, but it’s nowhere near the amount I would have had if I had started, at say, 29 instead of 39: $404,161.03. I missed out on years of compound interest because of my financial ignorance and overspending. Still–the point is to look ahead and not behind.
At 7% interest annually, $164,121.20, the amount I will have accumulated by age 55, earns $11,488.48. I am probably doing this wrong, but if I were to withdraw that much from my account per year, the balance should stay roughly the same. Combined with the pension at age 55, this means I could count on $23,488.48 per year, or just under $2,000 dollars a month. It’s not the prettiest picture in the world, but I could survive on $2,000 per month–especially considering my pension includes free healthcare that is high-quality. This number would increase at age 62 when I could draw on my Social Security. God knows how much it will actually increase (my current payout at 62 would be $1,400 per month, but I am sure this will end up going down because of the state of Social Security), but it will increase.
Fifty-five. That’s as early as retirement gets for me. I can live with that.