By Seth Busetti
In 2014 Alexis and I learned a frustrating lesson about saving while we were upgrading to a bigger house. We had faithfully saved and invested, and we were on track with all of our goals, but then life happened. Our single-story three bedroom house that once seemed so permanent started to get small really fast. The first realization was when our twin girls, who were sharing a room, upgraded to “big girl” beds. After a trip to IKEA and several hours of hieroglyphic decryption and Allen key wizardry, we successfully jammed two loft beds in that little room. If you held your breath and turned sideways you could even walk around! Next, after a few years’ hiatus, Alexis started playing bass guitar for our worship team. So we set her instrument and a little bass amp next to my guitar and guitar amp to facilitate evening practice sessions. Beautiful music was coming from that sardine can of a studio we used to call a master bedroom! Then, by God’s grace, we started our adoption process and soon enough a fourth child was on the way. We were ready to upgrade our house.
We assumed we would be in that house for at least 10 years. Based on the progress we had made on our emergency fund and 401K goals, we started aggressively paying down our mortgage and in a short time had built up quite a bit of equity. It was more than enough for the down payment on our new house. The problem was that it wasn’t easy for us to get that money back out. We made a classic mistake, parking significant excess savings in a location that made it hard to quickly liquidate. Sure, there were options to get that equity back, but they were all either very time consuming, or had high fees or penalties, and overall were a pain in the neck. In the end, it all worked out. But getting that liquid savings out of our home equity was such a headache that at the same time we secured the new house, we opened another savings account at the bank, which we call “Busetti Savings and Loan,” a tool for us to avoid the financial paperwork gymnastics we had just gone through.
You may have experienced setbacks similar to our home equity lesson. Or perhaps questions about how to juggle all the possible savings options are making it frustrating for you to get started. Wherever you are in your savings progress, we want to help you avoid some of the savings mishaps we’ve gone through. Here are three very common mistakes that just about everybody makes while they are learning to save.
- Saving Instead of Paying Down Debt. So many families we talk to tell us about wanting to increase allocations to their 401K, or about the extra they want to throw into a favorite tech stock, or they are thinking about getting into some gold. All the while, they’ve got big car debts, outstanding student loans, personal loans, or other kinds of consumer debt. The only thing worse than having inaccessible money (as in our house story), is having your money pre-committed to creditors. If you owe $35,000 on cars or credit cards, don’t even think about real estate investments or trading commodities. Build your starter $1,000 emergency fund, and then start attacking the debts. Your savings goals come after all debts are paid off. You don’t want to lock money away in non-liquid accounts (i.e., retirement) at the same time that someone else (creditors) has a right to every dollar you make. That is a recipe for confusion and frustration. Pay your debt off first, then work on savings.
- Mistaking Valuables for Savings. I can’t tell you how many times I’ve heard people say, “I don’t really have much confidence in the market, that’s why I keep my investment in X,” where X is an old collectible car, family heirlooms like a china set or porcelain dolls, or a guitar collection. Savings really should fall into two general categories: liquid savings or investments. Liquid savings means you can easily access the money. The most common form of liquid savings is an emergency fund held in a bank account. The second form of saving is investments, which by definition are intended to grow in value. That’s why heirlooms or hobby collectibles are generally poor investments. They typically hold more sentimental value than actual value, and they tend to only “hold value” if not depreciate. Sure, from time to time there are stories of a baseball card or stamp collection that gets a huge valuation, but for most people that isn’t the case. Once your money becomes locked up in a location that is difficult to access (e.g., home equity) or in a flat or depreciating commodity (e.g., guitars or Beanie Babies), that money no longer fulfills the purpose of savings.
- Savings Plan is Too Short-Sighted. We ran into difficulties getting our home equity back, not because paying down a mortgage is a bad plan, but because once we took that path we should have stayed for the long haul. Or, we should have had a separate source of liquid savings. We weren’t in the business of flipping real estate, so we didn’t have Rich Dad, Poor Dad banking mechanisms in place. We just hadn’t planned for outgrowing our house. Similarly, many people decide on the spur of the moment to remodel their kitchen, and in the absence of a large liquid savings, they tap into their 401K, or do a HELOC or reverse mortgage (if they are older). That’s just short sighted thinking. When you start saving, try and think a few years down the road. What might come up in 3-5 years that I need to be ready to address with savings? Maybe it is replacing a vehicle, or adding an in-home office, or getting braces for the kids. That last one is really common, moms and dads!
So while we really encourage aggressive saving and investing, we also want you to be aware of some of the obstacles that can come up. To review, first pay off all your debt (except for your mortgage) before you start to aggressively save. Next, make sure you have liquid savings accessible for upcoming big spend items and ensure that your investments actually appreciate in value over time. Finally, think forward a few years about how your savings and investments will be used and create room for contingency planning within your budget.
We are here if you want to talk through any of these savings decisions. Sometimes the first step is to sit with a trusted friend or advisor and talk through your priorities and the strategies available to you. Send us a quick note and we’ll get in touch with you!
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Photo by Clem Onojeghuo on Unsplash