Double Journey

How sad is it that when I saw this article on determining social security benefits I instantly thought to myself, “I know exactly how much I will make in Social Security, $0″

According to the Social Security administration, we will start running Social Security deficits in a little over 6 years.  It will go bankrupt in a little over 25.  Since I won’t be eligible for Social Security for over 30 more years, I’m pretty sure there is not going to be anything left for me at that point.

What is the most sad is that I will have been earning the maximum amount for the maximum allowed time.  In other words, Out of all the people in the United States, I’m the biggest payer into Social Security.  Ironically, I’m pretty sure I’m never going to get a penny out of it.  What a scam.  If you ever wonder why I rant against government, this is just one other perfect example.

Like many companies, my company recently announced a scaling back of certain employee benefits.  Some of them were quite significant, like the suspension of our 401K matching.  Some of them were important but not as significant; we scaled back the variety of drinks we offer for free like Red Bull and bottled water.   In these tough times it is to be expected so none of these changes actually caught me by surprise.   Funny enough, I see the financial statements of my division, and we are cash flow positive with no debt, a relatively strong position to be in as the economy worsens.

But it is always wise to be conservative going into problems rather than be caught off guard when things eventually get worse.  And I am sure they will get worse from here.  The thing is, and maybe it is just me becasue I was expecting it, most of the other employees seem to be taking this quite well.  Perhaps I have a skewed view of things now because I am in management.  I might also be bias because I do  not expect much from the company I work for other than a place to work, growth opportunities, and of course my paycheck.  However, almost every employee I talked to seem to be taking the cuts in stride.

This is in stark contrast to my experience at Microsoft where there was an uproar over losing towel service, something probably used by less than 5% of employees.  Perhaps people are just more understanding in a down economy.  It is universally understood that these cuts were made in lieu of losing headcount.  How many people would argue about keeping an energy drink over losing their job or having to see one of their fellow employee’s pack up their stuff?  Perhaps the difference this time is that people at Microsoft rarely worry about losing their job as opposed to most of the rest of the world which realize layoffs are a real possibility.

So I was pleasently surprised how well the staff was taking the announcement.  In fact, many people offered more suggestions about where there should be even more cutbacks.  Most of them really appreciate how honest and upfront management has been about the situation.  Most of them enjoy being part of the process.  It is ironic to me because I have been in other places which want to hide the truth from people until it is too late thinking their employees will not be able to handle it.  This case clearly shows how people can be if you are just upfront with the situation.

So how do you think you would handle getting your perks reduced?  Is there any perk you get that you think your company should do away with?  Is there any perk you would get upset if they took away?

A quick financial lesson. While this post may not seem relevant to me telling my back story, almost everything I talk about will be based on this concept, so pay attention. If you want to be rich, one of the most important things you will ever learn is the power of compound interest. This concept is best learned through example.

Let’s say you decide to invest in a Roth IRA, my favorite investment vehicle. You decide to start one today and invest the maximum $4,000 every year. You invest it wisely in an index fund that follows the total stock market which has historically returned 10% a year. In 40 years, your $4,000 a year, ($160,000 in principal payments) turns into $1,947,407.24, All of it tax free.

Now imagine if you were a good little saver and have saved the last 4 years. With a modest gain over the last few years you have $17,000 in your account. With the same investment strategy above you now have at the end of 40 years 2,716,814.59, All of it tax free. That is almost $800,000 difference for saving a little bit earlier. That $17,000 turned into $800,000!

Still not convinced? How about this? You do the above strategy from the ages of 25-35 and then stop. So for 10 years you invest $4,000 and then nothing after that. By the age of 65 you will have an account worth $1,223,633,58. Your $40K turned into $1.2 Million.

Or instead, you do nothing from the age of 25-35 and instead save from the age of 35-65 with the same strategy. Your final balance will be $723,773,70. Your $120K turned into $720K. Not bad until you consider that that’s a half-million dollar difference from the previous example of $1.2 Million! And you put in 1/3 the amount in principal and saved 3x as long!

The lesson? Save early, save often. I can’t stress this enough to my young friends. I know it is hard to save money now, but in the long run, it makes a BIG difference. This concept applies outside of finance as well. Doing the right things today, can pay big rewards tomorrow. You should always have an eye on the future and understand that small differences today, can have big repercussions in the future. This applies to you choosing what school to go to, what job to take, whether or not you should buy that new TV, pretty much everything you can think of. The younger you are, the more important this concept is. Understanding this at a very young age, helped me to get where I am today as I will explain shortly.