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Eating My Own Cooking - How We Save Our Money

Way To Wealth

 

Way To Wealth

 

Eating My Own Cooking - How We Save Our Money

Luke DeBoer, CFP®

It seems like I've been asked a lot lately - by clients, friends, colleagues, etc. - "What do you do? How do you save your money?" It's a good question, not because what I do is gospel and should be copied by all but because a.) it's a good thing, generally, to be transparent; especially when I ask others to be transparent with me and b.) it's a good thing to be kept in check, so I'm glad to have been asked.

So, I got to thinking, "I should really tell people what I do." This is important as those who know me know I can be a bit strong in my opinions regarding the importance of saving and the importance of saving intelligently and wisely, so I better be doing it myself!  Additionally, there's the old saying about how the cobbler's kids go shoeless - in that the cobbler, who makes shoes for other people, largely ignores the practice for his own family. This is probably the case in too many professional's lives but I hope it never will be in mine. So here's what I'm doing now to make sure that's not the case.

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So first things first, there are a couple rules that apply for everyone. The following aren't gray areas, they are absolute truths. 

Rule #1 - Capture the Match

If the company you work for has a match, you save enough in the workplace plan to actually get the match. 

So in addition to the work I independently do in financial planning, I also am a consultant at UnitedHealth Group, specifically working on the Financial Fitness team. UnitedHealth Group matches (effectively) 75% on the first 6% of contributions. This means that if I put in 6% they put in 4.5% (.75 of 6). Additionally, my wife's company matches 1%. We both hit the match. 

Rule #2 - Save in an HSA (Max it out if possible)

I won't rehash how or why they are so great, as I wrote a whole blog post on it. They are the ultimate savings vehicle. The best, bar none. So read here if you need convincing.

We max out our HSA and (mostly) don't use it for current medical expenses, saving it instead for an emergency savings fund/future medical expense fund/retirement account all in one. 

Those two things are about the only no-brainer, not up for debate savings items (additional no-brainer items exist in personal finance but this post is about saving).

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Next, there are some things that are highly prudent to do. These are things that are generally wise to do but there may be exceptions to both whether you should do them and to what level.

Prudent Savings Maneuver #1 - Establish An Emergency Fund

I've always liked to keep some liquid cash. This goes back to my days as a server/bartender in high school and college. I wouldn't deposit my $1 bills from tips, instead just keeping them in cups in my room (not a wise place for storing money, by the way). Now-days, we keep a healthy chunk (though not too much) just sitting in savings accounts. Additionally, we've accumulated a nice amount of ex-post facto potential HSA distributions - this is a way of saying that we've paid for medical expenses out of pocket while having an HSA, allowing us to, at any point in the future, draw those amounts out of our HSA with no tax or penalty. This is a fantastic way of keeping assets invested yet still liquid (from a tax perspective). 

Additionally, although our emergency savings is essentially fully funded, we have auto-contributions going into it of $45 per month, mostly because it just feels good but also because as our family gets bigger so does our need for extra emergency savings. 

Prudent Savings Maneuver #2 - Save in a Roth IRA

I really like Roth IRAs. The investment fees may be a bit higher in a Roth IRA vs. a Roth 401(k) but the benefit of being able to pull out contributions tax and penalty free at any time is worth it to me. The level of savings in my Roth varies as our cash-flow changes (for example, I try to put in more in 3 paycheck months on the high side but we have 4, soon to be 5, kids so some months are a bit tougher) but all told I attempt to consistently fund it, even if at a low amount.

Although I don't aim to use the Roth IRA as an emergency savings vehicle (that's what an actual emergency fund is for...), I do greatly value flexibility, so this benefit means a lot to me.

Additionally, tax diversity is a really good thing; for the lay-person this just means having multiple types (from a tax perspective) of accounts available to draw off. It allows for some sweet strategies to be implemented later on. So saving consistently in a Roth IRA is a generally prudent thing to do.

Prudent Savings Maneuver #3 - Save More Than The Match

This one isn't true for everyone, as some employer plans are really high cost and not attractive relative to other options. However, for a lot of people it's a good idea. Employer plans like 401(k)s or 403(b)s are nice in that the contribution limits are higher than other tax-efficient vehicles. I save 10% pre-tax and 4% Roth in my 401(k) and my wife only saves at the match. 

Quick note, mixing the type of savings (pre-tax vs. Roth) is not a one-size-fits-all approach. It's a nuanced topic so if you don't know how you should be approaching this then please seek assistance!

Prudent Savings Maneuver #4 - Save and Invest In A Taxable Account

In my opinion these are not used nearly enough, especially amongst younger savers. It's true that they aren't as tax-friendly as, for example, Roth IRAs when compared side-by-side but they a.) can be part of an excellent long-term tax-efficient plan and b.) allow for short-term liquidity/access that accounts like 401(k)s and, to an extent, Roth IRAs just simply don't have. So they allow for both long-term savings as well as covering for short or intermediate-term goals. Our level of savings in this type of account varies wildly, as we'll routinely put in what is extra, though the cadence is consistent. 

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Next are the nice-to-have's. These are things that can and should be looked at, though I would argue they lay on the periphery of targeted savings approaches. Put another way, they can be good ideas but probably shouldn't be made to be priorities.

Nice To Have #1 - Pre-Funding

This is using a savings account outside of emergency funds to pre-fund goals. We kind of do this, though on a small scale. Namely, we put in a certain amount every month of the year to cover for Christmas gifts. Additionally, we pre-fund auto maintenance; we know it'll happen, we just don't know when. There are other, bigger items we just can't squeeze, like pre-funding for a lake house or a boat. It'd be fun to have these things but quite frankly, they are very low on our priority list. 

Nice To Have #2 - Exotic Savings Vehicles

These are things like illiquid investments (real estate), Whole Life Insurance, annuities, or crowdsourced lending. 

It's not that these things are bad on their face, it's just that they each have significant drawbacks that make them far less of priorities than the items above. If one is otherwise tackling many, most, or all of the items above then perhaps these other vehicles can become a good idea but largely shouldn't be touched until then. I'm not alone in that thought, see here, or here.

I don't currently own or save in any of these. I had a Whole Life policy at one point but after further reflection it just wasn't right for me (Whole Life CAN be right for people, just so happens that the type of person/family is fairly narrow - i.e. typically either small business owners and/or those with extremely strong cash-flow are best served). I also had a variable life insurance policy once - I really regret that one. 

Perhaps my wife and I will address these others in time but for now there are only so many dollars to go around.

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So there we have it. This year in our household we save what I consider to be a very healthy amount between 401(k)s, HSA, Roth IRA, Taxable Accounts, and liquid savings, with the aim of being financially independent before "normal" retirement age. 

Again, I don't bring all of this up seeking a pat on the back but instead to perhaps give some insight into what a financial planner does ... and to proclaim that in this case, the cobbler's kids aren't going shoeless. ;)

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