ADA: You Can Still Have Fun

Well, Alternate Dimension Andy (ADA), I imagine you found the previous post sobering. I know it's unnerving to realize that in an average month you make less than $800. Or that your rent is 60% of your take-home pay (FUN SIDE NOTE: For most people, rent should be at most 28% of your total income, which by my estimates is 40% of your take-home pay; since you're flat broke, though, we have to bend the rules).

I have some other news which you probably will not like: you do not get to spend the remainder on whateverthefuckyouwant. You have two other things to worry about:

1. What happens when you get fired from your shitty-ass busboy job.
2. What happens when you retire.

In case it's not self-explanatory why you'd need to plan for something like losing your job: if you don't have a job, if you get hurt and can't work, or if you suffer some other kind of economic hardship, your landlord's not going to stop asking you to pay rent. Groceries will not become free. You will still need running water and electricity. Saving for such circumstances, I think, makes sense even to those who don't lend much credence to the art of personal finance.

Saving for retirement is probably a tougher case for me to make, but I promise it's just as important. I'm sure you've heard all this math bullshit before, but here it is again:

Suppose Ernie and Bert are both 25 years old. For ten years, Bert puts $1000 into a retirement account every year, and Ernie puts none into a retirement account. When they turn 35, they reverse roles; Ernie puts away $1000 a year until he retires, and Bert never contributes another penny to his retirement account. When they turn 65, which of the two will have more money?

If the answer were Ernie, it wouldn't be worth asking the question. And indeed, the correct answer is Bert, assuming that they were pulling in 7% in interest every year (which is a pretty trivial requirement).

Not that tables are particularly fun or interesting, but you need to look at this one:

Age	Ernie Adds	Ernie's Total	Bert Adds	Bert's Total
25	0	0	1000	1000
26	0	0	1000	2070
27	0	0	1000	3214.90
28	0	0	1000	4439.94
29	0	0	1000	5750.73
30	0	0	1000	7153.29
31	0	0	1000	8654.02
32	0	0	1000	10259.80
33	0	0	1000	11977.98
34	0	0	1000	13816.44
35	1000	1000	0	14783.59
36	1000	2070	0	15818.45
37	1000	3214.90	0	16925.74
38	1000	4439.94	0	18110.54
39	1000	5750.73	0	19378.28
40	1000	7153.29	0	20734.76
41	1000	8654.02	0	22186.19
42	1000	10259.80	0	23739.23
43	1000	11977.98	0	25400.97
44	1000	13816.44	0	27179.04
45	1000	15783.60	0	29081.57
46	1000	17888.45	0	31117.28
47	1000	20140.64	0	33295.50
48	1000	22550.49	0	35626.18
49	1000	25129.02	0	38120.01
50	1000	27888.05	0	40788.41
51	1000	30840.21	0	43643.60
52	1000	33999.03	0	46698.65
53	1000	37378.96	0	49967.56
54	1000	40995.49	0	53465.29
55	1000	44865.17	0	57207.86
56	1000	49005.73	0	61212.41
57	1000	53436.14	0	65497.28
58	1000	58176.67	0	70082.09
59	1000	63249.03	0	74987.84
60	1000	68676.47	0	80236.99
61	1000	74483.82	0	85853.57
62	1000	80697.69	0	91863.32
63	1000	87346.53	0	98293.76
64	1000	94460.78	0	105174.32
65	1000	102073.04	0	112536.52

In the end, Bert has more money, even though he only ever put in $10,000. Ernie, on the other hand, put in a total of $30,000 and in the end has $10,000 less than Bert. ADA, this is why you can't afford to wait on saving for retirement.

Just as important as saving for hardship and saving for retirement, though, is taking care of yourself. What good is saving if you hate being alive, right?

So here's what you're going to do, ADA. You're going to take that disposable income, and you're going to put it into three separate accounts:

1. 1/3 of your money will go into a savings account for hard times.
2. 1/3 of your money will go towards your retirement plan. I'll talk more about choosing a plan in a later post.
3. 1/3 of your money will go into an "allowance" checking account. Spend this on whatever the hell you want. Go out with your friends, buy a new TV, purchase Smurf memorabilia on eBay. Do what you can to keep your sanity by spending this money on fun things.

If you can, make putting money into 1. and 2. automatic. Your employer might have a direct deposit system that lets you split up where your money goes; you can automatically put some money into your savings and not have to rely on yourself to remember. Your employer probably also has some kind of retirement plan, which automatically deducts money from your paycheck and puts it someplace where you can't touch it 'til you're 65. Use tools like these to make sure you're honest with yourself!

ADA: In some upcoming posts, I'll tell you how you and your totally hot wife have worked out finances in this dimension; and I'll tell you how to pick a retirement plan.

Enjoy your allowance. Don't spend it all in one place.