This week, The Simple Dollar takes a look at David Bach’s Smart Couples Finish Rich, a personal finance book that proposes to address the difficulties of a couple getting on the same personal finance page and aiming their financial ship in the right direction. Does it work? Let’s take a look.
Step Four: The Couples’ Latte Factor
This chapter focuses on something that is a theme here at The Simple Dollar: everyday small purchases are what is keeping us from being rich. Bach uses another case study here to demonstrate the frivolous (but also somehow completely socially acceptable) daily spending of a family: lattes and bagels in the morning, takeout for lunch and dinner, video rentals and late fees, and so on. It really added up, and Bach argued that if one could just strip $10 a day out of this, one could really prepare for retirement (I discussed how much $10 a day can make for you before…).
The exercise for this chapter is to use a notebook and for a single week record everything that you spend. At the end of the week, sit down with your spouse and review the notebook. It’s often shocking how much fat one can trim if you’ve never done this before (and sometimes even if you think you’re doing really well at it). The simple fact is that all of us can start saving money; if you buy frivolous things, just cut some of them out and suddenly you have money to start saving.
Step Five: Build Your Retirement Basket
Now that you’ve realized that you can save money, Bach introduces the idea of three “baskets” that you should put your money in. The first of these is the retirement basket. Bach argues vehemently that we should be putting (at a minimum) 10% of our gross salary into a tax-deferred retirement account. He discusses various mechanisms for doing this, including the usual 401(k), 403(b), and Roth IRA options, but mostly the focus is on the fact that you should be saving a healthy amount for retirement in some fashion. Even if the investment options are relatively poor, they’re still the best deal around because they’re tax deferred (meaning you can put money in without paying income tax, which effectively means you’re beating any money you might invest post-tax by about 30%) and many employees offer a match (meaning for every dollar you put in, your employer may contribute some, too).
The action plan here is obvious: see what retirement accounts are available to you and make sure that you’re seeing at least a 10% contribution into the account. I agree wholeheartedly with this idea; putting 10% of my income away for retirement, even during my most foolish days, is something I’m amazed to look at now: I have almost $40K in various retirement plans and I have more than thirty years until retirement.
Step Six: Build Your Security Basket
The second investment “basket” is the security basket, which is basically a safety net against the unforeseen. Bach recommends a healthy emergency fund for starters, in an account that earns at least a 4% APY, and following that up with a will/living trust, good health insurance, a life insurance policy, disability insurance, and eventually a long-term care policy. The action plans here are obvious: get started with the emergency fund (if you can spare a latte a day and two take-out meals a week, I can get you an emergency fund with almost $4,000 in it by the end of the year), then investigate other insurances and make sure you’re well covered so that if an emergency strikes, your family has no worries.
Tomorrow, we’ll look at the final three steps in the book.
Smart Couples Finish Rich is the ninth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.