Roommate or Razor’s Edge

A while back a colleague of mine, Ted (name changed to protect the innocent), came into my office. He asked me how I invested my money, because his investments didn’t seem to be growing enough to provide him any hope of retiring with a comfortable lifestyle. I asked him the same question that I ask everyone who asks the “what do I invest in” question. “How much are you saving?”

Ted answered “I’m saving enough in my 401k to get the company match”. At our company that meant that Ted was saving about 6.0% of his income, and the company was matching 4.5% of his income. He was right.  At the pace he was saving he’d wind up with about half of what he was taking home today in monthly income in retirement. I asked did he have any savings outside the plan. No. Did he have an emergency fund? No.

I told him his retirement plan savings were certainly a good start, but if he wanted his retirement savings to grow, not to mention be a bit more financially secure today, he needed to save more. Ted is a divorced dad helping to pay for his step daughter’s college education and support his elementary school age son. Ted’s response was that he just didn’t see how he could save any more than he already was, given his house and tuition payments.

Yes, your choice of investments will have an impact on how quickly your savings will grow, but if you have an investment strategy that is right for your age (or, in investment speak, time horizon), the only way to get your savings to grow faster is to save more.  Ted was using a recommended investment mix, provided by the company plan, that was designed for people in Ted’s age range. Since I was responsible for developing the recommended mixes, I was in full support of his investment choices.

So what is a guy like Ted to do? There are two ways to improve your ability to save; earn more or spend less. It turns out that Ted owned a three bedroom house in a Portland suburb.  With his step daughter away at college, it appeared that the house was bigger than he needed. One way for Ted to earn more would be to rent out a room in his house, either to a well screened roommate or intermittently through a service such as Airbnb. The current rental market would allow Ted to make enough to pay most of his share of his daughter’s tuition payment.

Most people don’t want to take on a roommate.  If they are not falling behind on bill payments, they believe they are living within their means.  However, people like Ted are living on a razor’s edge with no emergency fund, and little in retirement savings. What if Ted were to lose his job or become disabled? His situation would very quickly become dire. Therefore, Ted was living beyond his means, and to be financially viable, he needed to compromise. Taking on a roommate was one possible compromise.

What ideas do you have that will allow you to increase your savings rate? Share them here.

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