The advantages of automatic savings/investing and budgeting

[MickinMD ★]

I never owned my own home until age 40 - 1991 - and after stocking it with furniture, tools, plants, etc. I only had about $1000 left in savings and realized I was going to be in trouble in another 20 years if I didn't greatly increase my saving rate.

I am terrible at making consistent, manual, regular savings over and over - I'll forget, get lazy, etc.

What saved me - and lots of others - was discovering Automatic Monthly Investments, mostly in mutual funds and stock DRIP's, some in a Roth IRA.  They can also be done today with online savings accounts or accounts where you can set up "Buckets" for various things.  My 5% plus my employer's contribution of 9.35% of my salary into the pension fund also saved me but I would have some financial stress now without the extra savings.

I thought of the "it seems like a bill I'm paying" today when, tracking what's coming out of my checking account by the 15th, when I pay 100% of all my credit card statements, I also have $50, $75, and $100 being automatically invested in two stocks and a mutual fund.  As far my keeping my "spending" under control, that $225 is processed in my mind as part of that spending.

My savings, including stocks, began to grow when I began to automatically save and I would ratchet up the monthly amount from time to time, gradually raising my savings rate from 5% to 15% of my clear pay.

BUT, I'd have never reached 15% if I hadn't done something else: I began to track my spending, all of it. Simply writing it down helps me spend less. Today, I use a free spreadsheet workbook to do it that lets me simply set up Variable Expenses, Fixed Expenses, and Income on one sheet, display a summary on another sheet, and then there are 12 spreadsheets to cover each month of the year.  On the month sheets, a dropdown box automatically appears to assign one of the categories you set up on the Budget page to spending.  It's the 12th free budget sheet, "Personal Budgeting Spreadsheet" here - where the site title is "10 Free Household Budget Spreadsheets" but there are really 13.

[Kirby ★]

You are absolutely right about the benefits of automated savings whether through a 401(k) or some other automated withdrawal.   The "pay yourself first" approach helps because it's always easy to get distracted if you need to make specific investment decisions each month.

[Dirtyhip]

Agreed.  We set our pre-tax savings at a lofty goal.  The after tax savings isn't auto.  I don't mind doing the transfer and I am very disciplined about making those manual moves.  I actually find it enjoyable to move cash to certain goal accounts. 

I feel so lucky that our finances are in order.  So many people are not financially healthy right now. 

[shootingstar]

May need to have some automated transfers from 1 acct. to another when retiring.

So far, I make manual transfers which to me is preferred for now:  it's conscious effort that I'm saving for xxx or xxx, etc.

However planning how things are done retirement will be quite different than while I'm working full-time.  And each year won't be the same for awhile, so that one can control tax.

[Dottleshead]

Whether it’s manual or automatic, it can be raided quite easily

[shootingstar]

The more I think about it..no. Sometimes one is transferring a security in kind, to another account (which triggers a disposition + some form of tax, depending on the security).

[Dottleshead]

Well you’re going to pay tax one way or another. It’s a before or after. You make the choice 

[Dirtyhip]

1 minute ago, Dottles said:

Well you’re going to pay tax one way or another. It’s a before or after. You make the choice 

I guess one would hope that your taxes in retirement would be lower.  Income lower/lower taxes.  

Personally, I like a mix of Roth, pre-tax savings and taxable brokerage accounts.  Most of the taxes have already been paid on brokerage, except for capital gains, dividends, etc.  Roth is a beautiful gift, if you put enough in and are not over that income limit.  Roth is all tax free.  Yay!

[Dottleshead]

15 minutes ago, Dirtyhip said:

Roth is a beautiful gift, if you put enough in and are not over that income limit.  Roth is all tax free.  Yay!

That’s because I’ve already paid taxes on it by the time I pay into it. My company does that as I pay post tax dollars into my Roth. Pre-tax into my 401k

[Dirtyhip]

9 minutes ago, Dottles said:

That’s because I’ve already paid taxes on it by the time I pay into it. My company does that as I pay post tax dollars into my Roth. Pre-tax into my 401k

Yes, but we are not taxed on the gains.  Those can be sustantial.  Roth gains are tax free, unlike our fun taxable brokerage. 

This is why the limit is so low, unless you are talking about roth conversion from a 401K.  The limit is much higher there.  $7500 towards catch up roth this year and 29000 catch up 401 for those of us over 50.  I don't know the limits on conversion, or backdoor roth.

[Dottleshead]

1 minute ago, Dirtyhip said:

Yes, but we are not taxed on the gains.  Those can be sustantial.  Roth gains are tax free, unlike our fun taxable brokerage. 

This is why the limit is so low, unless you are talking about roth conversion from a 401K.  The limit is much higher there.  $7500 towards catch up roth this year and 29000 catch up 401 for those of us over 50.  I don't know the limits on conversion, or backdoor roth.

None of it matters if the market remains flat. 😉

[Dirtyhip]

4 minutes ago, Dottles said:

None of it matters if the market remains flat. 😉

Investing is long term.  Look at your tickers over the long term, and not by the last year or so. 

Trust me.  I not only stay at Holiday Inn Express, but we own some IHG too.