Reallocating, or, Changing Your Spending Plan Categories

When you first start reading about personal finance, there are several big pieces of advice that you’re given to follow: pay off high-interest consumer debt, create an emergency fund, and invest in your 401k (especially if it comes with an employer match–free money, baby!). 

But what do we do when our financial reality changes, and it seems that we’ve possibly met some of our goals already? How do we choose how to change our spending plans?

Much like this chimp, I have some thinking to do. Image from pexels.com.

I recently took a look at my spending plan to tweak my in-case-of-emergency expense totals. In the event that I am laid off, how much money would I need to support myself, and what expenses would be sacrificed first?

There are some obvious ones–goodbye, climbing gym membership and Netflix–but there are some other expenses that aren’t as straightforward. For example, my housing is tied to my job. The organization I work for owns the building in which I live, which means I get to live in a studio in a HCOL area that costs about 2/3 of what rent would be if I paid market rental rates. This works for me as long as I keep this job. However, if I get laid off or choose to leave this job, I have 30 days to move. 

My current emergency account is calculated based off of keeping this apartment. However, if I were laid off from my current job, I know I wouldn’t want to look for another one in this area. No offense to all of you who absolutely love the south bay, but I haven’t exactly fallen in love with the area–I miss the Rocky Mountains, and snow, and not having to take more than one flight to see my family. None of my family lives in the area, and I have no “deep connections” to anyone or anything here–as such, if I lose this job, I would just move somewhere cheaper. 

At my current rent, I have 4.93 months of expenses covered. But is my monthly rate even accurate, if I would move anyway? Do I need to calculate at my current rental rate, or could I calculate at a lower one? 

More importantly, what would I do if I lost my job right now?

That’s pretty easy. I already have a ticket to Germany for December; I’d probably max the 30 days in my apartment here while putting in as many job applications as possible, throw all our furniture into monthly storage, and then fly out to the east coast to hang out with my family* for a month before heading to Germany to see my partner. And if I didn’t have a job by then–either back to mom’s to help her prepare her house to sell, or maybe spend some time job hunting while traveling in some low-cost locations.

Long story short, I had several numbers in my head. The first was six months of living expenses at my current rate. The second, which was higher, was $15,000. Why 15k? It covers a little over six months of my expenses, is enough to buy a new-to-me car if my 2007 Yaris decides to finally call it quits, and, frankly, it just seems like a nice big round number. But is that excessive, and is there a better way in which I could be using my paychecks? I’m currently throwing all this into a high-yield savings account, but at 1.8%, it’s not exactly the ideal place to make my money work for me. Additionally, I’m already on track to max out my IRA contributions for the year. So where should it go?

The way I see it, I have three main choices: put this money toward student loans, retirement, or invest. 

Student loans seems like it should be the obvious choice. I have over $40k of student loan debt at an average interest rate of 6.3%. As many financial advice books say, paying off student loans early is a guaranteed return–I won’t be losing any money, and I’ll have to pay these off eventually. At the current interest rate, though, it’s hard to decide–is my rate low enough to make me comfortable paying through the full 10 years, because the gains I would make in my other accounts would be more? Or would the money I lose to interest eat up anything I would make elsewhere? 

But there’s the psychological effect too–this $42k is hanging over my head, dragging me down and making me feel like I am in a financial panic, even though I know, logically, that I am not. As I’ve mentioned before, I’m pretty high strung, so maybe the sense of relief that would come with removing this debt faster would be worth the potential losses in other accounts. 

Another place my money could go is into retirement. I currently have a 401(a) retirement account with my employer. I do not receive any matching; they just give me 10% of each paycheck into that account. As long as I stay for two years, all that money is mine. I do, however, have the option of also starting a 403(b) account. This would use pretax money, so not only would I save for retirement, I would also lower my taxable income (which would be great, because, as I’m discovering, CA has a shit-ton of taxes–the highest income tax in the nation, to be exact). I just have to be comfortable knowing I can’t touch this money for about 27 years–although retirement savings is a long game, is it not?

Finally, this money could go into a non-retirement investment account. I would love to FIRE or FIOR, and an account like this would let me withdraw money before 59.5 without any penalties. As such, I could invest and know that I could access this money at any time. However, with that freedom also comes responsibility–namely, things like tax-loss harvesting and capital gains tax and a bunch of other shit that I have no idea what it is. Even though I keep trying to read more books, I still have no idea what I’m doing. So the thought of investing in an account like this still seems very overwhelming. I’ll get to that point… one day. But right now, I have a lot of other things on my plate to deal with. 

Besides, I have my Roth IRA. And though I know I shouldn’t touch that money until 59.5, knowing that I can access the deposits I’ve put into it, in case of emergency, does make me feel a little better. 

So what should I do? Loans, retirement, or non-retirement investments? 

I’m going to open a 403(b) for half of my emergency fund money, and put the other half toward student loans. I guess I just want to have my cake and eat it, too.

Realistically, though–with my interest rate, it’s hard to make a confident call. And although paying off my student loans early would give me some sort of psychological comfort, I would also have to face the reality that I put my retirement savings on hold, so when my loans are paid off, I wouldn’t have anything left to show for it. 

I currently have $500 going toward my emergency fund–I still plan on funneling $100/month toward it, but $200 will now go to a 403(b) and the other $200 will go to my student loans. This $200, plus my 401(a) money, plus my IRA, puts me at retirement savings of about 29% of my take-home pay. And $200 added to my current student loan spending plan amount is about $750, or about 150% of my estimated required payment**. I’ll be able to make a payment and a half each month. 

The whole point of this post is realizing that your financial goals may change–and that’s ok! Checking all your accounts every day might not be the healthiest thing to do, but every once in a while, you should look at your accounts, look at your numbers, and ask yourself: What would I do if I got fired this instant? 

See how you answer that question, and adjust your financial goals accordingly. 

* I recognize that the ability to just say I would go hang out with my mom is definitely a privilege–a lot of people don’t have that as a viable option, either because they don’t have any living family, or they have a bad relationship with their family, or their family simply couldn’t help support them. However, not only would my mom be absolutely thrilled to have me back for a little bit, but she would also get a bunch of labor from me in regards to cleaning and fixing the garage, painting, helping put down new carpet, etc. etc. etc. 

** This payment is estimated because my loans are still in their grace period. I graduated in June but won’t be required to make payments until January. However, I’ve used some calculators to estimate what my payment will be and have already budgeted for it/started paying these loans back. Once January rolls around, I’ll know the actually payment amount, and maybe consider refinancing with a lower interest rate.

The Thing About Money, Part 4: Retirement, or, I don’t want to be old and poor

(This is the fourth post in a six-post series titled The Thing About Money. Click to read The Thing About Money, Part I.)

As mentioned in Part 3 of this series, one of the things that scares me about my current debt load/financial situation in general is not having enough money to retire on. 

This worry isn’t without warrant. According to this 2018 survey, 42% of Americans have “less than $10,000 saved” for retirement. 42%. So, pretty much half of us (assuming this excludes children–Why haven’t you opened an IRA yet, little Timmy?). This is especially true of millennials; 57% of us have less than $10,000 saved (GUESS WHO HAS TWO THUMBS AND IS IN THE CLUB? THIS GIRL!!!!). 14% don’t have any retirement savings at all.

Nothing. Zero. Nada. 

This is a problem.

As per the National Council on Aging, “over 25 million Americans aged 60+ are economically insecure—living at or below 250% of the federal poverty level.” A full third of senior households don’t have any money left over by the end of the month, and some have to go into debt just to meet their basic living expenses. And even if they get social security, on average, women get $4500 less a year because they paid less into the system (and this number is even worse for women of color). Many elderly people are working well into their seventies, but eventually, there comes a time when their bodies just can’t do it anymore. 

There’s a big joke about having to eat cat food into one’s retirement, but it seems like there are people who are actually out there doing it. Frankly, I don’t want to be one of those people. 

You bet your ass I will push Mittens right out of line to get to that Fancy Feast. Photo from pexels.com.

This is a multigenerational issue. In a previously-mentioned episode of Bad with Money with Gaby Dunn, Gaby talks to her parents about their retirement plans. Her mom laughs and says “You’re my retirement plan.” She includes something along the lines of how they’ve invested so much in Gaby and pretty much that they expect her to help support her parents in their retirement. This is an incredible amount of stress to place on one’s child. And some parents live longer than we expect, which means we could be taking care of them after our own retirement*. 

Luckily, I don’t have to worry about my mom. She’s about to retire from the military, so she has a guaranteed paycheck and affordable medical care for the rest of her life. The knowledge that she’ll be taken care of takes a great weight off of me; she’s too proud to ever ask for help, but I would have given it to her, had she needed it. But she doesn’t. And I’m super grateful, because now I have the freedom to only worry about myself.

Unfortunately, the reverse of this situation is the reality for people as well. Many parents of adult children are having to delay or are not adequately saving for retirement because their children still need support, either with general expenses or, often, student loans. It’s completely understandable why someone would want to help their children, especially if they’re struggling; however, this seems like a good time to remind everyone of what they tell you on planes–put your own oxygen mask on before helping others. 

I don’t want this to be my future, for myself or my mother. 

Like my mother, I am also too proud to ask for help if I need it, unless I’m in an incredibly desperate situation. There was one–exactly one–situation when I had to call my step-dad for emergency support, and it still ranks as one of the most shameful moments of my life. After I graduated college, I was trying to support myself on the only job I could get at the time–minimum wage at a local bagel shop. Parking was notoriously hard in my neighborhood, so I often played roulette with spaces in random apartment buildings. One morning I walked to my car to find it booted. The cost to remove the boot? $200. 

I did not have $200.

So I cried. I called the number on the boot and cried on the phone with the company, cried when some random man showed up to take the boot off, cried when he ran my almost-maxed-out credit card, and cried on my way to work, wondering how I was going to pay rent the next week. After work, I did the unthinkable–

I called my step-dad and asked for help. 

And cried some more. And he, sweet man–full of remorse from years of alcoholism and still feeling like he needed to buy my love to make up for it–he transferred some money into my high school savings account so I could write a rent check without it bouncing and get a few groceries for the week. I felt like shit. I felt like the smallest, most pathetic, most useless human on the face of the earth. I felt manipulative for calling him, because I knew he would help me, because I was too embarrassed to talk to my own mother. 

I am still embarrassed when I think of this story. 

However, I tell this story to remind myself of why saving is so important. I don’t ever want to rely on anyone else again for my support. Additionally, I have no children to care for me and currently no intention to have any, nor, if I do, would I expect them to care for me. That’s not their job. As such, I need to make efforts now to ensure that my finances are ok later. 

I currently have a tiny bit of money stashed away for retirement. As in, like, less than $5000. Additionally, I worked overseas for a full three and a half years, so that’s three and a half years I didn’t pay into social security. I’m in my thirties, and even though retirement seems like it’s a long way away, I don’t think I’m going to make it into old age gracefully if I don’t drastically change things now. 

However, there is a part of me that wonders if it’s even worth the effort. Should I worry about “the market” when climate change is going to cause “Human Civilization to crumble” by the time 2050 rolls around (aka when I’m 63)? Should I instead be stockpiling clean water, bullets, and sunscreen? (I talked about this a bit in my first post, so I’m stopping my existential ramble… now.)

Assuming we are still alive in 2050 and not slaves to our computers or in a war against an army of machines, I will need some retirement savings. 

It’s not easy. Since starting my new job, I’ve budgeted a pretty good chunk–about $500/month–to go into an IRA. Even with the rest of my expenses and my student loan payments, I should be able to keep this up at least through June. But then I might get kicked out of my employer-owned housing, and that $500/month might have to be added to my rent just so I can find a place to live (three cheers for the south bay). 

I recently cancelled my cell phone insurance and photoshop monthly plan, in an effort to save some more money. I tell myself that if I keep playing with my spreadsheets and adjusting my numbers by five dollars here, ten dollars there, I will somehow feel like I am not going to end up old and destitute, only to have my body tossed in a pauper’s field with the gravel barely covering my bones, where on windy days the dirt blows away and you can see my skull (Oh Milat—why did you stare at the mayor?)

But this is why I need to start now. As the oft-quoted Einstein supposedly said, compound interest is the most powerful force in the universe. I have about thirty years to get this powerful force to work for, and not against, me. So, next week, let’s take a good hard look at my budget. 

* This may be behind a paywall. I’ll work on posting more sources that are open access, but your local library may have a subscription through which you can access this article.