Savings More

Show Notes

In this show, Mike and Amy discuss the number 2 most popular New Years’ Resolution – 2nd only to fitness resolutions – Saving more.  Mike and Amy cover: 

1. The difference between savings and investments (2:59)
2. Considerations for when to save vs when to invest (5:25)
3. Savings for near term goals/ military retirement/ ultimate retirement (7:43)
4. Emergency Fund Savings (12:09)
5. Savings in cash/ cash equivalents (14:02)
6. Types of accounts for savings (18:00)
7. Mike summarizes the key concepts (19:12)

Links:

TreasuryDirect: 

Operation Retirement Readiness 

Schedule a consultation with Mike

 

Transcript

00:00:34 Amy: Hey, Mike. How’s it going?

00:00:37 Mike: Good. How are you? How are things now that we’re a little ways into the new year? Are you busy?

00:00:44 Amy: Yeah, it’s busy, as expected, which is always a good thing. People wanting to get started with their New Year’s resolutions and preparing for plans for 2024 and beyond. How about you?

00:00:58 Mike: Yeah, it’s been a good first couple weeks of the New Year, a lot of people wanting to talk about money, which is always a good thing.

00:01:08 Amy: Yeah. Yeah. Well, we’ve been talking about money related New Year’s resolutions over the last couple shows and we’ve talked about some common and uncommon resolutions that people should think about. Or maybe they do think about it as they approach military retirement or ultimate retirement.  Today we’re gonna jump into savings. The New Year’s resolution of saving more, because that’s the number 2 resolution after getting healthier. So, Mike, when you think about savings, what are you thinking about?

00:01:43 Mike: So I’m gonna. I’m gonna date myself. But you know my kind of early memory of savings is the passbook that banks used to give out, that you’d have as a kid and our school program, where you bring in like 1/4 or a dollar each week. And with your passbook and they’d send it off to the bank and the bank would deposit it and you know stamp the passbook with the new number and any interest. And so this was back in the late 70s, early 80s. So you were actually receiving interest. And so, you know, that’s so business savings my mind goes, goes back to that.

00:02:26 Amy: That’s pretty cool. I went to a much smaller school so we didn’t have any program like that. It was A very small school.  In the country. And so when I think about savings, the two things that come to mind, obviously, I think every kid had a Piggy Bank. So I saved all my quarters and pennies and nickels in my Piggy Bank. But at Christmas and on my birthday, my grandparents always gave me a savings bond. So those are the two things that I think about when I think about saving money.

00:02:59 Mike: Very nice. Yeah. Yeah, those are great, great ways to save. So before we get any further, what you know, a lot of people say savings. I think they sometimes mean investing and vice versa. So when you think about saving, how can you define that?

00:03:23 Amy: Yeah, actually, so there is really kind of almost, I’ll say, an official definition, not so much of savings, but of investing. And so, you know, when you go into a bank, you see signs around.

Any bank that also has some sort of investment representative in there, or you see it on TV as different organizations or advertising if they’re advertising investments and you’ve heard, you know these products are not guaranteed by the federal government or the US government. They are not guaranteed by the bank, and they may lose value. So the not-not-may disclosure that happens with investments, because all of those things are true about investments. Investments mean that you’re putting money into some vehicle. It is not guaranteed in any way.  So you may not get all of your principal back, never mind any earnings, and it definitely can lose value. We’ve seen that over the years versus savings where savings are typically in a bank product. And when you think about banks, you also think about FDIC insurance, which is Basically, the way that the government provides reassurance to depositors, not investors, but depositors.  That their principal is going to be there when they ask for it back and for a lot of years we didn’t have a lot of interest, but you could be sure that you were going to. Get your principal.

These days the interest rate situation is a little bit different, so you’re gonna get your principal back as well as your interest from some sort of savings vehicle and that’s just one example of a savings vehicle.  So does that sort of cover it, Mike?

00:05:25 Mike: Yeah, yeah, that hits it well. And. And you know, the one thing I like to think about is the time frame and also is how long and and and when you’d wanna, you know, shift from savings to investing. And I typically think that that’s.  You know, investing is stuff. You need money. You need maybe three to five years or more later in time. If you’re putting something into something that could lose value and you need it in three weeks, you’re really making a coin flip of whether you know that investment is going to go up or down. You never know. So timing is essential when you’re looking at savings investment and where to put your money. So that’s really important. And then the other piece you mentioned, the interest rates and you know while you’re going to get you know the amount Of money you put in. If we’re in a higher inflation environment and you’re getting paid less than you know the interest rate or or inflation rate. You’re gonna, you know, event, you know, in a realized sense. Get back less than you actually put in. So we see that today, inflation is running, you know, 3-4 or 5%, whatever it is right now. But some of these banks are still paying, you know, well under a percent. Maybe even under like 1/4 percent interest for checking and savings accounts. So yeah, you, you. You’ll get your money back, but it may be worth less than when you actually put it in, so making sure you understand the rates and inflation and how that all works is important.

00:07:11 Amy: Yeah, that’s a really good point. So with that, I mean when we talk about savings, you know you made reference to shorter, shorter timelines. As we think about retirement, whether it’s a military retirement or an ultimate retirement. In either case, you’re talking about decades in retirement. You know, how do you balance savings and investing or how do you think about what should be in savings versus what should be invested in terms of retirement?

00:07:43 Mike: Yeah, for those long term goals. You know, if you’re still in the military and it’s ultimate retirement, yeah, you want to, you want to be invested. But if we’re talking about the trend. Position, you know liquidity and having access to money is key. When I was approaching military retirement, we had sold a rental property, made a little bit of money off that and you know, I knew I was just going to keep that in liquid savings because I was going to have expenses, you know, moving. Cross country buying a house needing money for a deposit and then when we got here we decided. That we were going to finish the basement in the House and put my office down there and. And so there was, you know, I knew I had some needs in the short time. And so that’s key what I tell folks as they’re approaching military retirement. You know, it may seem like blasphemy, but if you need to raise more money and maybe stop contributing to TSP for a little while so that you have money that can bridge that transition. If it takes you a little bit longer to find your next job or you decide to start a business, having that money is you know. Key to just being able to survive. So that’s one way. You know, I like to think about. I don’t know if you have any examples from, you know your transition. You know it definitely was. I was glad I had that money. Maybe not. Have to borrow anything or, you know, run the credit cards or or things like that. But it can be a challenge because. You know they’re Some of it’s unknown and so having their flexibility is really what I like to build in.

00:09:49 Amy: Yeah. Yeah. And I mean, I think you hit the nail on the head. With the uncertainty piece of it, I mean there’s so much uncertainty as you’re as you’re making any transition and the military transition, I feel like might accentuate a lot of that because you’re coming from, you know most most people have spent their entire adult lives. In the military have not been over, you know, overly exposed to the civilian sector of things, whether it’s, you know, moving into a federal government job or a private sector job. In either case, it’s all very new stuff, so the last thing you need to be worried about is whether or not you have the Cash that you Need to get through the transition because there’s no guarantee you’re going to come out and make A paycheck right away. And there is a little bit of a lag. I mean they’ve done a pretty good job getting. The lag between your last active duty paycheck or reserve paycheck in your first military retirement paycheck is the lag isn’t quite there. Like it used to be, but it’s still a few weeks difference, and if you’re not going to be working, it’s huge to have things to have money on hand just for Peace of Mind. It takes some of the stress off and gives you more options than you might have. You might not. You might not be so willing to accept a job that you weren’t interested in. Or, you know, something less than you wanted to take because you’re afraid they may not accept a higher

Offer and and in terms of heading into Ultimate retirement, it’s that much more important to have a savings cushion as you prepare for final retirement cause ideally you don’t go back to work unless you really want to, you know, pick up a part time job or something like that. But you don’t want to be in a situation where you retire and then the next year Market tank That’s, you know, basically if your investments decrease in the first two years after retirement, that’s that’s one of the biggest stressors on a retirement plan, potentially even bigger than things like maybe Social Security, not paying out all of you know, the benefits you expected. So having the cash cushion to get through market downturns in the very beginning of your retirement is a really big deal.

00:12:09 Mike: Yeah. I mean, a lot of people talk about, you know, when you’re working, having that three to six months, you know, somewhere in there of savings. But like you said, ultimate retirement, if you’re not getting that paycheck, it can be. You know, I like to advise, you know, at least two years. Maybe you know even three or four, depending on risk tolerances and things like that To just make sure You don’t need to withdraw money from, you know, investments that have gone down because you know we don’t know what’s happening with the stock market and even the bond market recently, people that that you know thought was safe, they can go down and it it, like you said it can it can jeopardize Your plan. And significantly, if you have to take out money when things are down, you know most of the time, you know, in all previous times we’ve, we’ve had recoveries of stock and bond markets, but it’s not guaranteed and it’s not guaranteed on any kind of time frame that we may be. Trying to get to having that, you know, really kind of oversized if you will cash cushion is really huge in retirement. So you know, yeah, that’s something I definitely advise folks as they’re getting. You know three or, you know, between three years out from Ultimate retirement, we start building up cash just slowly and You know. Diverting more from maybe you know more investments from their paychecks as they’re as they’re getting ready to wrap up. But yeah, that’s critically important.

00:14:02 Amy: And you know we’ve talked a lot. About cash, you know you might read In the news About cash equivalents, those are things like money markets Where they’re they’re not, they’re not savings accounts, so they’re not guaranteed, but they’re like savings accounts in that they’re relatively safe. You know, they’re very short term. Government treasury bills, which are widely considered to be risk free. But it all comes down to risk tolerance and making sure you understand what you have. So if you run across something that’s a cash equivalent and you’re not familiar with it before you decide that it is a cash equivalent. For you, you should do your homework and or reach out to a financial planner who can give you good advice and tell you exactly what that is and whether or not it fits into your savings plan, not your investing plan, but your savings plan. And if it does, how it might fit in.

00:15:06 Mike: Yeah, that’s a good point. So what any other? Places besides bank accounts or like you said, the the money market funds that that people could put money that they might need in the next, you know, three to five years that you know does provide some some interest.

00:15:30 Amy: Yeah. Yeah, so. One of the one of the very common things that’s gotten more popular over the years. You know I bonds are are considered longer term investments. You know they’re they’re debt backed by the US government, but they’re they’re meant to be longer term investments. But the government also issues short term debt and those are called. Treasury bills they have gotten to be quite a lot more popular. Some people buy them through their broker, through a brokerage account, wherever you happen to have your brokerage account set up. But you could also buy them through TreasuryDirect again. How you incorporate A Treasury bill strategy really depends upon your understanding and making sure you know exactly what it means to own a Treasury bill, how they work, when they mature and still you know because they’re not 100% liquid. You know, if you’re going to buy a four week T bill, it’s meant to be. Locked up for four weeks. So you certainly wouldn’t put grocery money into a four week T bill unless it was for groceries in four weeks. But again, it’s all about understanding how these cash equivalents work and how they might fit into your overall saving strategy based on your specific situation. So you can’t work on just generalizations in this podcast or in any other financial publication.

00:16:57 Mike: Yeah. And I guess the the other one, I’ll throw out is CD’s or certificates of deposit that you can get, you know at a bank they typically offer A little bit higher interest rates, but you know again like the T-bills and and locking your money up, you you know are typically giving the bank the money for six months a year or two years, something like that. So it’s a fixed interest rate when you buy it. They take the money, they will credit you the interest and then at the end of that time period, you get it back. Typically you can get them back earlier, but you probably lose some of the money that you know some of the interest that you would have gotten if you have to, you know, take the money out early. But that’s another. That’s another place that’s safe, that’s FDIC insured that you can, you know, put your savings in if you’ve got a For a little bit longer time horizon.

00:18:00 Amy: Yeah, yeah. And something we didn’t talk about specifically is, you know, the difference between keeping your savings in any kind of retirement account versus just a plain old regular what we would call a taxable account. So your savings accounts are always, always considered taxable, but you can also have other kinds of accounts and then most people have retirement accounts. It is OK to keep some of your cash in retirement accounts, but just understand the rules that are associated with pulling cash out of those accounts. So if you’re less than 59 1/2, you know the retirement account is not the best place to keep your cash. But if you’re over 59 1/2, it might be a great place to keep your cash.

00:18:48 Mike: Yeah, definitely. Some of the tax advantages there Can Make that a smart move so.

00:18:56 Amy: So, Mike, what do you think? I mean, we’ve talked about a lot of different things here. What do you think the key takeaways are when they’re when somebody’s thinking about saving specifically for a military era or an ultimate retirement?

00:19:12 Mike: So I think there’s a couple key things with savings. And the first is that savings should be safe and accessible. You know, based on the timeline that you are, you know you need the money. The second thing is It should be, you know, shorter term things. Then if you need the money within three to five years.  That’s where you use a savings vehicle versus an investment that can go up or down with you know based on value. And you know, during transitions, I’d say the third thing is that more savings and liquidity is better, just gives you options, helps you reduce your stress. If you just have that bigger cushion for that transition.

00:20:07 Amy: And the other thing and we haven’t used this word yet because we’ve been focused on the cushion for transition. But the reality is that your emergency fund that already exists, that should already exist should that you know, all of the preparation for retirement is sort of stacked On top of that. So you’ve got your emergency fund and then you stack additional money on top of in order to make your transition a lot less stressful and without, you know, having to restart your emergency fund for potentially zero once you are settled and through your transition.

00:20:46 Mike: That’s a great point.

00:20:48 Amy: So Mike is there, is there anything else we should cover on savings before we head out for today?

00:20:56 Mike:

No, I think we’ve hit.  The major things and just. To help folks to understand that transition that they may be approaching and how savings can play a big big part in that.

00:21:12 Amy: Awesome. Well, Mike, this has been great. I’m looking forward to our next several shows where we’re going to continue talking about, you know, each of the common resolutions that people have, you know, with budgets and paying down debt and investing more and education savings, we’ll be covering all of those in the coming shows. And I’m looking forward to it.

00:21:33 Mike: Yeah, there’s, there’s some great topics. So yeah, looking forward to getting back together and and chatting about this in another couple of weeks.

00:21:44 Amy: Awesome. Sounds good, Mike. Take care.