Get A Fix On Your Financial Future

Surveys show that a major portion of Americans is not saving enough money for retirement. And while many people in their 30s, 40s and 50s recognize this problem, they simply can't find a way to put away more money.

So over the next three days, The Early Show, with the help of financial expert David Bach, will be discussing ways to spend less, save more and make up for lost time.

On Wednesday, Bach who is the author of "Start Late, Finish Rich" shares how to Spend Less. On Thursday, he will discuss how to Save More and on Friday he will conclude this series with ideas on how to Earn More.

First things first: how do you know if you're behind in saving for retirement? How do you know if you're starting late?

"If you think you are starting late, you probably are," Bach says. "Most people have a pretty good sense of this."

So what is the "right" amount to have stashed away? How do you know if you are on track, saving the correct amount? Should you have more saved for retirement by this point in your life?

According to Bach, there is not one magic number that everybody should have saved. Instead, the amount that is right for you depends on your income. The basic rule of thumb here is something that Bach calls the 1-5-10 plan.

At age 30, you should have one year's worth of income saved. This amount does not include any home equity that you might have. So, if you are 30 and making $40,000 a year right now, you should have $40,000 in savings.

At age 40, you should have five years worth of annual income saved (or, five times your annual income saved).

At age 50, you should have 10 years worth of income saved.

Feel depressed after hearing this rule of thumb? You're not alone. Bach says that most people do not have this kind of money saved. Unfortunately, people become so depressed about the situation that they become paralyzed and do nothing to improve matters.

Feeling helpless and hopeless keeps people from making the financial changes they need, Bach says. You cannot allow this desperation to stand between you and a bright financial future. Saving will require some sacrifice. However, the steps you need to take are not complicated. As Bach likes to say, "It's simple; it's just not easy."

Spend Less: Be Debt Smart
Credit-card debt is the single biggest thing holding most people back financially, so it's a great place to start our discussion on how to SPEND LESS. To put it bluntly, you'll never be rich if you carry credit-card debt. (The average household has $9,000 in credit-card debt)

You should put half of your resources toward paying off the debt, and half in savings. If you think about it, this is exactly how corporate America handles debt. All big companies have debt, but they don't concentrate all of their resources on paying it off. Instead, they put some money toward debt and some money toward improving and growing their businesses.

So why, exactly, should you not concentrate all of your efforts on paying off debt? First, it takes the average person roughly 10 years to pay off credit-card debt. That's 10 years of not saving any money. Every year you wait to start saving can cost you $25,000 to $50,000 by retirement time. In other words, money you put into retirement savings this year may easily be worth $25,000 to $50,000 by the time you retire - and if you don't save anything, you've lost the opportunity to earn this compound interest.

"There is also an important emotional/psychological reason to save for the future at the same time as you're paying off your debt," Bach writes in "Start Late, Finish Rich." "By doing both of these things at the same time, you will feel your progress. You'll see money being saved and debt being reduced. ... In addition to the phenomenal economic cost of (waiting until debt is gone to begin saving), from an emotional point of view this is way too negative. So negative, in fact, that many people who follow this path get discouraged, give up early, and never get to the saving part. For someone who is starting late, this can be catastrophic."

That said, it's almost impossible to get ahead financially if you only make minimum payments on your debt each month. If you have $10,000 in debt, it will take you 37 YEARS to pay it off. So, Bach suggests paying the minimum balance, plus putting an additional $10 a day toward monthly payments. In other words, put an extra $300 ($10 x 30 days = $300) toward your payments each month.
$10,000 debt, 20 percent interest rate

  • pay minimum balance only = pay off in 37 years
  • pay minimum balance + $300 = pay off in 22 months

The secret to making this plan work for you is paying off your debt wisely. If you have $10,000 in debt, an average interest rate of 20 percent and you only pay the minimum balance each month, you wind up paying over $19,000 in interest by the time the debt is paid down. Not good. So, Bach offers the following three tips.
  1. Know what debt costs you: Sit down with all of your credit-card bills and identify your interest rates on each card. Know what fees, etc., are associated with the cards. This will help you see how much you are spending on interest and other fees.
  2. Negotiate your rates: It's essential to call your credit-card company and get them to lower your interest rate. When you call Customer Service, do not try to negotiate with the person who answers the phone. Ask for a supervisor. You may have to talk to a trail of supervisors before getting your rate decrease, but it's worth your time. Believe it or not, many cards will probably be willing to give you a 0 percent deal for six to nine months. The companies are willing to do this because most 0 percent deals also state that if you're late paying, the rate can immediately jump to as high as 29 percent. Statistically, a majority of people will make a late payment and then be hit with a huge rate increase as well as a late fee.
  3. Make payments automatic: To assure that you're not one of those people hit with a 29 percent rate increase (AND the accompanying late fee), arrange to have your credit-card bill paid automatically from your checking account each month.

Spend Less: Find Your Double Latte Factor
All of this sounds like a great plan, but where the heck do you find $10 more a day to put toward debt? Plus, Bach also says that we should be dividing our resources evenly between paying off debt and saving. That means you actually need an extra $20 each day - $10 for credit-card debt and $10 for retirement savings. Where in the world will all of that money come from? Enter the DOUBLE Latte Factor.

"Let's face it," Bach writes, "If you are really starting late, you're not going to be able to catch up just by cutting out regular lattes. You're going to need to double up on your savings - and that means digging deeper into your spending. You're going to have to attack your Double Latte Factor.

"What's the Double Latte Factor? It's all of those fixed, recurring expenses we incur as a result of buying or signing up for all those modern conveniences and services now considered absolutely essential that everyone somehow survived perfectly well without until maybe five or 10 years ago - things like satellite TV, cell phones, DVD subscriptions, health club memberships, giant pickup trucks, bottled water deliveries, two cars when you only need one, that sort of thing."

Bach recommends making a list of all of your possible Double Latte factors and simply eliminating one. If you're playing catch-up, $20 really is the magic number. You truly do need to cut $20 out of your spending each day. Bach believes that most people in their 40s and 50s should be earning enough money to do this. Look how it will pay off:

  • $20 a day x 20 years = $455,621 (assuming a 10 percent rate of return)
  • $20 a day x 30 years = $1,356,293

What's next?
Now that Bach has given us ideas on spending less, he will move on to saving more. Thursday's segment will include advice on where to put the money you've saved. Bach will introduce us to the PERFECT INVESTMENT - one that is low risk and has out-performed the market for the past 25 years.