Automatic Pilot, Part I
by Richard
It’s high time we idiot-proofed the process of saving and investments.
I just finished reading “Automatic Millionaire” by David Bach, and I would recommend it especially to those you know who lack the discipline to save and invest on their own volition. Which is just about everybody I know…except for you and me, of course.
Bach’s premise is born out of his watchful experience as an investment adviser.
Clients complain there is always too much month at the end of the money, and how can we therefore draw blood from a stone?
Bach’s solution is the one the IRS came up with several decades ago:
Automatic Payroll Deductions
One of the last industrial states to elect payroll deduction for taxes was California. When Reagan was governor, he said that “taxes should hurt”. And hurt they did, when they accumulated without any sinking fund to offset the burden.
There are two core retirement accounts everybody should pursue. A 401k at work, with matching employer funds and a Roth IRA you fund on your own.
If you are on top of your game, and you qualify, there are two more to add to the list. Your Health Savings Account, and a Coverdell Educational IRA for each of your children.
First, Fund Your 401k
The easiest one of the bunch is the 401k, many of which have opted for automatic enrollment, requiring a negative option on the part of the employee.
In plain English, they sign you up at a rate to qualify for the matching funds, unless you instruct your employer otherwise.
It comes right out of your check before you ever see money hit your checking account, just like your payroll and income tax withholdings. And you can never spend what you never received.
The others require a bit more gumption, but are easy enough to set in place. To fund your Roth IRA, HSA, and Education IRA….first see if your HR department at work will divert your payroll funds and siphon off the required amount.
Then, Fund These Discretionary Accounts
- $5,000 for your Roth ($6,000 if over 50)
- $2,900 for your HSA ($3,800 if over 55)
- $2,000 per year, per child for the Educational IRA. Assume two children
Let’s also assume an employee under 50. The total to fund all three accounts would be $11,900 per year. Try to write a check like that without advance funding.
I double dog dare you.
But if you are paid twice a month as most employees are, that works out to just a shade under $500 deducted every pay period.
Of course you’ll miss it, but you’ll soon learn to budget around this constraint.
Don’t Let Logistics Stop You
And what if the HR department can’t be bothered? You set up your own automatic draw down. Have $500 transferred immediately upon each of your direct deposited paychecks into a money market account, then go online to arrange the individual transfers to these accounts.
It’s not as slick as never having the money, but it comes in at a close second.
And now you have two dedicated funds focused on your retirement, plus side pocket investments for your health care and your children’s educational needs.
In tomorrow’s post, we will do some projections based on the expected useful life of these four accounts.
And we will throw in home ownership for good measure.
