The comments in my last post about helping children, Bar Mitzvahs, and weddings reminded me of a number of discussions I have had with friends, of the Yeshiva world, who have found themselves in a good enough position that they can start to save a little bit of money each month. Nearly every one of these young wives, if not every single one of them, has stated that now that they can save money, their goal is to save for their children's weddings. Let's just say that for me keeping quiet isn't an easy thing to do when these types of conversations take place. But, that is why I have a blog (smiley).
I commend all those who are saving, but in many ways I think it is a sad commentary that saving for a wedding is at the top of the list as a saving priority. Just like all areas of life, saving should have a rhyme and a reason, and a seder as to how to go about it and how to make it work. And, in my opinion, saving for a wedding as a first priority just doesn't make sense, much less a Bar Mitzvah.
I don't assume any of these young couples are planning to make lavish weddings, and I imagine that they are really thinking about helping to "set up" their children. Yet these families are not currently "set up" themselves. They have not bought a home, nor have they put together a savings plan for retirement (this I know from other conversations, and this is a subject of its own-so give me some time).
The following is just my opinion of how young people (singles as well as couples-it is never too early to start saving, or paying down student debt if necessary!) should start to prioritize their savings. The theme might be "make sure to take care #1" (and for crying out loud, don't trick yourself into believing your kids will take care of you just because you plan to take care of them). :
1. Emergency Fund: I have yet to discuss an emergency fund, but stuff happens and if you don't want to fall into credit card debt, it is imperative that you have a cushion set aside to weather these times. Recently I bought a new pair of glasses to use up the excess money in our Flexible Spending Account. When I returned home, I found that my husband had placed an itemized receipt from his dentist appointment totalling $300 on my desk. Good thing the money was available, because we had just exceeded the available funds in our FSA.
2. Retirement: Many employers offer matching funds if you fund your own employer sponsored retirement plan. If you don't put in the amount that entitles you to maximum matching, you are passing up your money! Unfortunately, I know many people out there who have done just that. My mantra is that almost always a place to cut back, you should do everything you can to find that place before saying no to this money.
The great news about saving for retirement (401(k) or traditional IRA) is that it reduces your tax burden in the here and now. The amount you save is tax deferred, and if you are lucky enough (we have been!) you can bring yourself into a lower tax bracket and benefit in an even greater way. If your employer doesn't offer a plan, or even if your employer does, you can still place money into a traditional IRA and take a tax deduction for that amount.
Lest you are afraid of locking up your money until you are of retirement age, fear not. You can also borrow against your retirement if need be (not always a recommended course) and I believe you can borrow for a 1st time home purchase without a penalty.
3. Down Payment Rent is forever, a home eventually becomes yours. Whether or not you should buy in an inflated market is depends on a number of factors, including how long you plan to live in the area, but I consider buying a home in a "smart" way to be a good idea on a number of levels (not all of which are financial).
When is a good time to buy? It is trite, but the sooner the better. Frum people run the risk of never being able to make that move into a home of their own if the tuition bills start coming before a mortgage is established. I've seen it. I doubt I'm alone.
Saving should not be haphazard and using vehicles like a 401(k) or a 529 (see below) works only to your benefit. Saving for #1 (yourself) doesn't preclude saving for your children. In fact it will make it easier. Saving for retirement and buying a home significantly lowers your taxes burden and puts money in your pocket (unless you get hit by the AMT. Sorry Charlie Hall).
If you want to use that money to pay for weddings or Bar Mitzvahs, at least you will have more of it. But in the Sephardi household, we are not saving for weddings or Bar Mitzvahs, at least not yet. We can't do it all, and like commentor "jdub," we would rather have a "lox and bagel" wedding than strap our children with massive amounts of student debt from college or vocational school if we can avoid it. Therefore, saving up for college (or vocational school) will come before saving for a wedding. The best wedding gift we can give our kids and future kids-in-law is the preparation to be self-supporting. (You'll thank us later!)
4. College Savings: Yet another benefit in saving through specific vehicles is the "tax shelters that they offer. A 529 plan allows savings to grow tax free and be withdrawn tax free so long as they are used to pay for qualified college (or vocational school) expenses. There are even some rewards credit cards that you can use to fund a 529, so long as you have the funds to open the plan (normally $1000, but Vanguard lets you open up a plan for only $250 during the "holiday season" through Upromise). So even if you are not as far as step 4, you still might be able to get one foot in the door. And if you haven't registered at UPromise, there is no time like the present. [Update: 8/19/08: There is a $20 annual fee on the UPromise accounts for those that live outside of Nevada. There are plans with no fee that can be bought through many states. I have this account, but might roll it over into a no fee account].
5. Saving for the kids: We put all of the little bits of money our children recieve as gifts here or there in their own young savers accounts. Here too there are some tax advantages, as children under 18 are not taxed on income below a certain amount. The disadvantage: the custodial parent(s) loose control over the money when the children turn 18. But, even with this disadvantage, there are great advantages. More discussion on this later.
There is so much to save for in life. But saving is much more effective when you use the tools at your disposal to increase savings. Saving for a wedding, probably won't help you reach that goal (assuming you still think want to do so after reading this post). Saving for retirement might actually help you near that goal. Illogical? Not to me.
Previous Budget Posts:
Budgeting Credit and Debt I
Budgeting Credit and Debt II
Budgeting Tool #1: Monthly Budget Tracking and Budget Summary
Budgets: Putting it on Paper, Defining Priorities, and Doing what it Takes