Buy a house, and other forced savings
WASHINGTON (Reuters) - This is America Saves Week, one of those artificial holidays designed to convey a message. And the message is: Save more money.
Oh, sure - we are all supposed to be saving more. But raise your hand if you have any cash left at the end of the month to plunk into that savings account. That's what I thought. Keep your hand up if you are underwhelmed by the 0.4 percent interest your bank is offering you on that account.
Maybe that's why the personal savings rate seems sort of stuck at around 4 percent of disposable income in the U.S. according to Commerce Department. There's got to be a better way, as the commercials say.
Here are a few better ways to save. They work because they take the savings out of your hot little hands before you get any chance to spend them. The theory behind these automatic savings is this: You won't miss what you won't see. And your savings will build up despite your best efforts at self sabotage.
- Buy a house. That may sound like crazy advice at a time when many advisers have newly come to embrace renting, but look at the math: If you buy a home on a 30-year fixed mortgage and make your payments every month, at the end of 30 years you own a house you can sell. If you rent instead, at the end of 30 years all you'll have is another rental contract.
The numbers are somewhat persuasive. The median home price today is $231,300, according to the National Association of Realtors. Borrow $212,000 at a 4.18 percent average interest rate (according to HSH Associates; you can probably do better), and your monthly payment will be $1034. In 10 years you'll have paid it down to $168,142; in 20 years, $101,361 and in 30 years you are done.
You can turbo charge that by getting a 15-year loan at 3.47 percent and paying $1,513 a month. In 5 years you'll owe $153,265; in 10 years, you'll owe $83,255 and in 15 years, finis.
Meanwhile, your payment will stay the same. It's hard to imagine rent staying stable for all those years. It's hard to imagine interest rates staying stable for all those years.
Critics will point to the meltdown in housing that's occurred in the last five years and say it's a bad investment. But in actuality, the housing meltdown followed an unusual ramp up. On average, people who bought houses before 2004 are even or above, according to the Case Shiller index. Furthermore, the likelihood of a post-meltdown meltdown isn't zero, but it's not that high either. Home ownership is a long term proposition.
Critics will also say that homeowners have to pay for property taxes and home insurance, but don't you think that landlords are charging you for that, too?
- Use high deductible health insurance and a health care savings account. The high deductible insurance plan lowers the monthly premium. You can link the plan with a specially designated health care savings account and make tax-deductible contributions of up to $3,100 per person ($6,250 for family coverage) a year. There's also a catch up contribution of $1,000 for people over 55.
Here's the beauty of this plan. Withdraw the savings to pay for health care costs and you never have to pay taxes on them. But there's no requirement that you withdraw them in the year you make those expenses. So, make the full contribution and let it sit in your health savings account until you retire. Use other funds for your health care costs until then.
You'll probably have plenty of health care costs after you retire, and can use this account. Even if you don't, you can withdraw money in retirement to repay yourself health care costs you laid out during the earlier years when you were participating in the plan and stashing the money. It's even better than a tax-deferred retirement account, because there's never any tax on that money, if used for healthcare.(Learn more at HSA Bank, one bank that offers these accounts and allows you to invest them long term; www.hsabank.com).
- Use a credit card that saves for you. The uPromise credit card will put your cash rebates directly into your college savings account or another savings vehicle; www.upromise.com.
Fidelity Investments offers three different American Express cards that will put 2 percent cash back into your retirement account, brokerage account or college savings fund. (www.fidelity.com.)
- Go autopilot. Choose a no-load inexpensive index mutual fund at a company like Vanguard or Fidelity. Open an account and authorize the fund company to automatically pull a set amount out of your checking account every month and invest it in the fund. Make it whatever you can afford; $50 or $100 or more. You won't miss the money when you're used to it being deducted automatically. Month after month, you'll buy more shares when prices are low and fewer when prices are high. You'll accumulate enough money so that next year, you will really feel like celebrating America Saves Week, too. Maybe with a bumped up contribution.
(The Stern Advice column appears weekly, and at additional times as warranted. Linda Stern can be reached at firstname.lastname@example.org; She tweets at www.twitter.com/lindastern.;
Read more of her work at blogs.reuters.com/linda-stern;
Editing by Richard Chang)