I’m a huge fan of Dave Ramsey and his “Baby Steps” (pdf). I love the way that he sets out seven, basic steps for debt reduction, retirement, and financial security. Personally, I think that the most important Baby Steps are the first two: Have a $1000 mini-emergency fund and then use a debt snowball to payoff your debts. But, I also realize that Dave’s plan for retirement, savings, and investing may not fit every situation. For instance, Dave suggests putting 15% of income into retirement. In 2007, I plan to put 40% of my income into retirement accounts. So, with that in mind, I was thinking about ways that I ‘crawl’ or ‘run’ between the ‘steps’.
Crawling: Doing The Little Stuff
I fix my own lunch, I have a basic satellite television package, I pay per-text charges on my cell phone, not a flat fee, I look for bargains at the grocery store, keeping a grocery store price-book, and I use coupons and buy generic.
You get the picture… By looking at the small things and thinking about ‘small purchases’, I accelerated my debt reduction and savings accumulation. No matter how much money I have in savings, I ALWAYS think about ways to SAVE MORE. Ever penny really does count. I am amazed that so many people make fabulous salaries but are always BROKE. Want to know why? They refuse to focus on the ‘little stuff’. There are two types of people: Those who see a penny on the ground and keep on walking and those who see a penny on the ground and pick it up. Me? I’m going to pick it up, heads or tails!
Running: Doing The Big Stuff
I am fully-funding my 403b, two Roth IRAs, and two ESAs. While I enjoy the idea of saving $10 a month doing something “frugal”, I also enjoy “paying myself first” and putting away money in my retirement accounts. I like to create big goals, reach for them, and I’m not afraid to fail. While I think that it is important to manage every dollar, it’s extremely important, to me, to fully-fund these long-term investment accounts. Why? Preparation for the future, baby.
Every dollar that I put into my 403b is like a 25% BONUS to my salary. Why? I don’t have to pay taxes on that money until I withdraw it. Every dollar I put into my Roth IRA grows TAX FREE. So, I fully-fund BOTH accounts so that I can diversify my tax exposure AND prepare for the future.
I know plenty of people who live very modest, even frugal lives, who never focus on funding retirement accounts or thinking (much) about their futures. It is so important to look at TODAY, but we must occasionally think about TOMORROW! Conversely, there are those ‘dreamers’ among us who are waiting for ‘their ships to come in’ and they never worry about basic, fundamentals like “spend less” or “work more”. I used to be this type of ‘dreamer’. I was always looking for that magic paycheck that was just around the corner. The truth is, we must learn to crawl, take steps, and then run. Do the little things, focus on the basic plan, and then sprint ahead when you get the chance!