In response to my recent post, Will your parents’ financial decisions leave you holding the bag?, Steve wrote,
I agree with the premise that a person’s retirement should be taken care of before saving for a child’s education, but saving enough for one’s own future seems to be a moving target.
When does a person ‘have enough for retirement’? I am 27, with a 6 month old baby. Besides $15,000 in student loans (@ 2.6% interest rate), and a mortgage, my wife and I are debt free. We contribute to our 401k’s up to the match, and we contribute $100 a month to a Roth IRA. Since we are so young, we feel secure in our ability to save enough for retirement, so we also contribute to a 529 plan for our child.
Even though we feel secure, anything could happen at any time. Maybe one of us gets injured, and we can not work anymore. Maybe this happens to both of us. We never know, therefore I am inclined to save more. But when is it enough? If I max out my 401k, is that enough? I am 27…I may have 60 years of life left…$15,000 will not be enough if something happens next year.
I struggle with the concept of taking care of myself first, then take care of others, when there exists so many potentially negative unknowns. If I am not saving for my daughter’s education…should I not be giving money to charity? Take care myself first, right???
What is the sweet spot for annual saving for yourself, vs saving/giving to others?
Yes, the future holds many unknowns, making it difficult to be completely accurate with long-term financial planning. This deep recession, for instance, has all but destroyed many well-laid plans. The key, however, is to plan for the best while preparing for the worst. In other words, create Plan A and Plan B.
Plan A is what you hope to have happen. You hope that you’ll remain healthy and able-bodied, fully employed, happily married, able to donate money to charity, and able to save for your child’s future as well as your own.
Are you saving enough? It all depends on how much you spend now and what you anticipate spending in the future. Plug your financial considerations and planned life events into a Lifetime Financial Planner software or an Excel spreadsheet and tweak it until the numbers work.
Plan B considers what could happen; the what-ifs. You, your wife, or your child might become ill or disabled. Your marriage might not last and your assets and income could be divided in half. You might join the growing ranks of the unemployed. You might hurt someone in a car accident, get sued and lose all of your savings and everything you own.
How can you protect your finances from catastrophic incident? Buy high-deductible insurance policies, namely disability insurance, term life insurance, personal liability insurance, health insurance. Maintain and improve your job skills. Run a sideline business from your home. Consult with an attorney for additional “what-if” planning.
Additionally, save as much as you can today while you are young. Use your youth to exploit the power of compounding growth. And stay far, far, far away from consumer debt so that if something bad were to happen, you and your family could afford to live on little income.
Where does charity come into play? This is a very personal choice. Until I knew that our financial future was firmly on solid ground, I chose to donate my time rather than my money. I’ve always served as a volunteer in one way or another and not only does this help others, but it improves my set of skills, introduces me to a network of new people, and makes me feel great. This crazy busy world needs more of the gift of time from volunteers.
Should you contribute to your child’s 529 Plan? Most of us have heard a flight attendant recite these words as part of their safety spiel prior to departure: “Please secure your own oxygen mask prior to assisting children or others”…