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Savings:  Rainy Day, College Education, Retirement

Savings: Rainy Day, College Education, Retirement

The discipline to sufficiently provide for our futures

We have touched on many aspects of our lives and the economy in this column, but none more important than planning for our financial future. Specifically, how to save and prepare for our financial needs from now until retirement, and what steps we should take to achieve those goals. I have recommended on several occasions that individuals seek the assistance of a financial planner in structuring their personal financial plans, and I reiterate that recommendation as it may be more important now than at anytime in recent history. The BCU Investment Advisors are available to assist you in this effort, simply contact them through any BCU branch or directly at their Vernon Hills offices.

I have approached my personal financial planning over the years from several different perspectives: “rainy day” savings, college savings, and retirement savings. Each perspective has unique characteristics and differing levels of importance at different times in our lives, yet they are all intertwined with regard to successful financial planning and to living comfortably without fear of financial shortfalls.

“Rainy day” savings are a fundamental necessity to any sound financial plan. No matter who you are or where you live or what you do for a living, there will be unexpected financial burdens which will hit at the worst possible of times. Therefore, the foundation of any financial plan is to build an emergency reserve of savings which will be available any time one of these financial disasters strikes. Car breaks down and you can’t get to work; a storm drops a tree through the living room ceiling and you have a $1,000 deductible on your homeowner’s policy; furnace goes off and the bathroom pipes freeze and break; a trip to the emergency room with inadequate health insurance; etc., etc. There will always be a financial emergency; the best financial planning anticipates these events and establishes rainy day savings which are used for nothing other than emergencies. For this reason every payday we need to set aside a fixed amount of savings in this category.

Early on as we began a family my wife and I paid particular attention to establishing “college savings accounts.” We did not have a formal plan such as the 529 College Savings Plans available today, but we did have the right perspective. We knew that we wanted the opportunity of a college education for our children, and we knew that we had to start saving from the date of their birth in order to have a chance at accumulating enough to meet the challenge. Two points became abundantly clear: we had to regularly contribute to these accounts if we had any hope of meeting the projected costs, and we could not access these savings for any purpose other than their educational expenses. In a word we needed the discipline to stay the course in order to achieve our goals.

College savings efforts usually get a boost from well meaning aunts and uncles, grandmas and grandpas, godfathers and godmothers, and good friends. The trick is to make sure that all of the cash, checks, and savings bonds make it directly into the children’s accounts. It should also be a taboo to touch any of these funds for any reason other than their intended purpose. We did take advantage of the 529 College savings plans at one point in time. We transferred all of the children’s college savings into managed 529 accounts which invested in stock mutual funds. The funds remained there for several years. Once the stock market returns flattened out we moved the funds back to traditional long term (5 year) CD’s at the BCU. By virtue of advice from a financial advisor we were able to capture an upswing in the stock market for several years then preserve those gains using insured CD’s with a 5% annual return. Again, the most important aspect of college savings plans is to start immediately and stick to it!

While all this was going on, we also had to consider our future needs in retirement. I was fortunate enough to have a 401K plan through my employer, as many do today. However, it is one thing to have the 401K plan offered, and another to actually take advantage of the plan. I have always recommended that anyone with access to this type of plan set aside the maximum amount allowed by your company’s plan. In many cases employers match a portion of the employees’ contribution and it is just plain foolish not to contribute at least the maximum amount matched by your employer; his match is free money. The major question today is how to allocate my 401K plan investments.

Once investors experience a severe setback as we have in the recent financial crisis, it is not unusual that they loose confidence and become extremely conservative in their investments. Unfortunately, we need to have that perspective before a major crash or market decline. 401K money should be diversified among stocks, bonds, and money market instruments. The percentage of your funds allocated to each class will depend on the then current market conditions, and that is where a financial advisor becomes important. If you have many years until retirement, the advisor will recommend investment allocations with a higher degree of risk which provide a potentially greater reward. As you near retirement age, the strategies change to a more conservative approach which have smaller yields but much less risk.

With any savings plan, whether rainy day, college, or retirement, the watchword is discipline. I have always adopted the approach of “pay myself first,” meaning that after meeting my necessary expenses of mortgage/rent, food, current bills, etc., I make my savings deposits before I consider any other use of my funds. Some months it is difficult and we do without our favorite restaurant and Movie Theater or we forego a new suit or a new dress, but we don’t do without our savings deposits as they represent a great source of comfort and sense of independence in good times as well as bad.

©Patrick J. Catania 2010
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.

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