The 9 Steps to Financial Freedom (22 page)

After you have written your answers, go back and think of occasions when your respect led to something great happening or when your disrespect brought with it some unhappy consequences. It’s very subtle, but the way we treat ourselves and our money touches upon every aspect of our lives.

Those people who are respectful of themselves, respectful of others who have money as well as those who do not, respectful of what money can and cannot do, are said to be people with a golden touch. I’m sure you’ve said it yourself about someone: Whatever she touches turns to gold. But a golden touch with money isn’t something you’re born with, like perfect pitch. It is something you can learn, something you
must
learn if you want to be blessed with financial freedom.

Please take out your wallet or whatever you keep your money in right now. How are your bills organized? Are the ones mixed in with the tens? Are they all facing different ways? Are they stuffed in there in such a way that you have to unravel them to see what they are? How you actually keep your money is where respect for it starts. Keeping your bills neat and in order, caring for them the way you care for other important things in your life, will serve as a constant reminder of the respect that you and your money deserve.

This is what Step 5 of the nine steps to financial freedom is about—being respectful of yourself and of your money and taking actions to give that respect meaning.

A few years ago I was asked to counsel the employees of a company that was offering early retirement to those employees fifty years old or over. I’ve given seminars to such employees before and also personally counseled more than one thousand people who have been offered early retirement, and I’ve seen how terrifying such an offer by an employer can be. If the employee is emotionally ready to retire, and financially ready to retire, it can be great. Seldom, though, do we have all our emotional and financial ducks in a row at such an early age. Many people are afraid to take offers of early retirement. Yet however afraid they are to say yes to the offer, they’re more afraid to say no. Why? Because if they say no, they’re at the mercy of their company, with no guarantees of employment for as long as they’ll need it. And once they turn down the offer the first time, they may not have a second chance.

This time I discovered something very interesting. Even though most of these people had worked for this company for twenty-five years, and most of them were earning the same salaries the whole time, there was an even split of the people who came for counseling, with only a few exceptions. The vast majority of people who came either had around $400,000 in their 401(k) retirement plans or else they had around $150,000—big difference.

What accounted for the difference? Were some simply better investors than the others? No. Nearly all these people had all
their money in the company’s stock, even though they had other investment options. Had some been in the company plan longer than others? It wasn’t that, either. Most of them had been in the plan for about the same time, give or take. Had some withdrawn large amounts of money from their retirement plans, even at a penalty? There were a few of these, but they were the people who only had anywhere from $10,000 to $50,000 left in their plans, and they were a small minority.

One single factor accounted for the difference. Those who had $400,000 or more had from the beginning put in the maximum amount they were allowed to put into their 401(k) account. Those who had $150,000 had simply put in 6 percent of their salaries because that was all the company matched. Their attitude was: Why put in more than the company will match? (Sound familiar?) One good reason for these people would have been $250,000 more in retirement security.

To look at it a different way, that extra $250,000 would give them an extra $850 or so a month without their ever having to touch the principal, or a hefty amount to invest for growth to cover inflation concerns, or to leave to their family when the time came. For most of the people I counseled, that $250,000 meant the difference between knowing that they would never have to find work again unless they wanted to and being afraid that one day there would be no choice.

Now, there is one scenario where I think it can make sense to
not
invest the maximum in your 401(k). If you are eligible for a Roth IRA (see
this page
) but you are too cash-strapped to contribute the maximum to your 401(k) and fund a Roth IRA, you are to scale back your 401(k) contribution. Make it your goal to contribute just enough to your 401(k) to qualify for the maximum employer matching contribution (but not a penny more), and then concentrate on investing in a Roth IRA, which in my opinion, is the best retirement investment available. But if
you can manage to invest the maximum in both the 401(k)
and
the Roth IRA, that’s an even better move.

There are only three honest ways in this life to get money. The first is to work for it. The amount of time most of us are able to work will be limited—by age, health, elimination of our jobs, whatever—and there will be many years, for most of us, when we’re spending money but not earning it. Do you know that many of us will spend more time in retirement than we ever did working?

The second way to make money is to inherit it. Are you among those who are hoping that an inheritance will be your saving grace? If you’re waiting around for the heavens to rain money down on you, I hope you paid close attention to Step 4. With life expectancy inching up to the eighties and beyond, you might well hit your own retirement years before you ever see a penny. What is more, for the majority of us, inheritance is rarely a sure bet. One nursing home stay, a few investments gone bad, a large probate or estate tax bill—anything can happen.

The third way to make money is the most powerful and respectful way there is. This is to invest the money you save during your working years wisely, so that when you no longer want to or are able to work, your money will work for you. The earning years of your retirement money can go on forever—money is a living entity, remember? If invested with respect, if invested in time to let it grow, these earnings will take care of you well and go on to take care of those you leave behind.

It is not respectful to yourself, to others, or to your money not to plan for your future. It is not respectful to yourself, to others, or to your money not to take full advantage of the 401(k)s or IRAs or the other retirement plans that are available to you. It is not respectful to yourself, to others, or to your money not to face your debt, to learn the basics of investing, and to stand guard over your money, making sure that every penny you’re spending is a penny that must be spent. What day you pay your bills, when you send in your taxes, and what hidden costs you pay for your checking account all can make a difference in how much money you have and how much money gets attracted your way. We all think that a bigger paycheck would be the answer to our financial woes, but that is rarely the case. Respect starts with the money you are earning right now and what you do with it.

Remember your first paycheck from your first job, how it seemed like so much money and how everything seemed possible? Remember your first raise, how your expenses expanded to spend it, and you wondered how you ever managed to get by on that first paycheck? With every subsequent raise, you’ve probably increased your spending to use up every penny of it—even though you got by perfectly well before your most recent raise, the one before that, and the one before that.

No, no, no—this does not mean you should make less money; I hope you make as much money as you can! But there is a simple and remarkably effective way to make yourself spend less. You invest more. By putting more money into your retirement accounts, your take-home check will be less and you will quickly train yourself to spend at a lower level, just as you used to do when you were making less money. (If you still don’t see how you can spend less, reread Step 3, which will show you how to do so.)

If you do this now, if and when that day comes when you’re asked to attend an early retirement seminar, or when those rumors in your office about downsizing become reality, you’ll be ready. You’ll be the one with the $400,000 or more with which to face the future.

You may say, “But Suze, I can barely afford to pay my bills as it is. How do you expect me to live today and still put money away for my retirement?”

If you think you cannot make it today, while you’re working and have a paycheck coming in, how in the world do you think you’re going to make it in the future, when you will have essentially the same bills to pay but no paycheck coming in? The answer is that you won’t. But if you set it up now, even on a modest salary, you can put aside an impressive amount of money.

Some years ago a couple came to my office—early forties, nicely dressed, two children, annual salary of $35,000 (which would be closer to $70,000 in today’s dollars). The wife didn’t work outside her home, because the children were too small, although she planned to go back to work in a few years. They
owned their own house and had fourteen years left on their mortgage. They paid their credit card bills in full every month. They already had a sizable nest egg, because the husband had been aggressively investing the maximum in his 401(k) plan at work. They had a few other investments that were doing nicely, earmarked to fund their children’s education. I remember asking them, “How is it possible that you can do all this on just $35,000 a year?” He answered: “We only spend what we see. The company takes out the maximum for my 401(k), and I also have them send money directly to our credit union. The credit union sends money directly to a mutual fund to invest it. Our take-home money isn’t much, but at least we know we can spend it all and not have to worry. So it works.” I asked them why they had come to see me, and they said they wanted to make sure they were covering all their financial bases. With immense respect for the job they were doing, I sent them home and told them not to change a thing.

Your mind is the most powerful tool you have, and in the same way my clients just mentioned did, you must make it believe that you make less than you do so that you will naturally spend less.

Your mind believes that if you bring home a monthly paycheck of $3,000, then you have $3,000 to spend. And you’ll spend it, all of it. If you get a raise and start bringing home $4,000 a month, you’ll spend all of that, too, and wonder how on earth you managed on less. But if you start bringing home $3,500 a month, your mind will adjust to it, and you’ll naturally spend less. The way to do it is exactly the way my clients do: just put it away before you ever see it.

You won’t be depriving yourself. You’ll be paying yourself. You’ll be on your own payroll and soon be able to enjoy two of
life’s great pleasures: counting your money as it grows and dreaming of how you’ll spend it when the time comes.

“I would happily save more for retirement,” Judy said, “but I can’t afford it.”

Judy had it backward. In fact, she couldn’t afford not to put more money away for retirement. Having worked at the same corporation for twenty-seven years, she had missed out on thousands upon thousands of dollars she could have saved
painlessly, effortlessly, and tax-deferred. By receiving a little less in each paycheck, she would have earned herself far, far more in the long term for her retirement, which would be upon her not too many years down the road.

With Judy, as with the rest of us, it is not the amount of money earned that is important. It is how much of that she does not have to give to the IRS, how much she really does get to keep.

Money that goes into a retirement fund is money you do not have to pay taxes on until you take it out. Or if you use a Roth IRA or Roth 401(k) to save for retirement, you invest dollars that have already been taxed and then in retirement all withdrawals will be tax-free. Depending on your income tax bracket, you might be able to keep up to 35 percent more of your money (the highest federal tax bracket through 2012). Because of the tax savings, contributing the maximum to your retirement account right now will not deprive you of as much current income as you might fear. And where it will make a vast difference is in what you’ll have to spend later.

Let’s say that I convinced Judy to raise her 401(k) contribution to $500 a month or $6,000 a year, and let’s say that she is in the 35 percent federal tax bracket. By investing in the 401(k), she will have cut her monthly federal tax bill by $175. If she had not invested in the 401(k), that $500 would be taxed before she got the money, leaving her with just $325 to spend.