When I started my first full-time job and was offered entry into the company’s 401K retirement savings program, I immediately diverted 10% of my salary. At that time, my annual salary was an amount that today’s 20-somethings would consider below the poverty line. I was coming from an upbringing where my parents had no savings, let alone retirement savings, and I was highly motivated to not repeat the mistakes I witnessed. It did not occur to me that others did not feel this way.
Now that I am in the middle (or hopefully later) years of my working life, I have tried to evangelize the importance of retirement planning to the younger workers in my company. I recently had a conversation with a 24-year old co-worker about this. I made a flippant comment acknowledging that they had obviously opened their 401K retirement savings account upon hiring. This person did all but laugh at me. They commented that they couldn’t afford to save. This person and I were close, so they had shared certain details of their income and expenses with me. I knew that this person’s salary was more than double what mine was when I began investing in my 401K. I understand that many years have passed between these two events but regardless, all numbers are relative.
When I continued to harp of the need to start a retirement savings plan, this co-worker asked me to help them better understand their finances and find a way that they could afford such a savings plan.
My first approach was to try to explain the tax advantages of such a savings plan. I asked them if they could afford $100 per month. They explained that they could not. I then tried to draw on the white-board to show that $100 per month diverted to a 401K was only approximately $65 out of their monthly pay. Since our company pays twice per month, this was less than $35 per pay check. They acknowledged that this was definitely more affordable but that they still didn’t think they could afford it.
They then went on to explain that their take home pay was approximately $2,600 per month. Of that amount, $700 went to rent, $700 went to student loan payments, $400 went to a car payment, $110 went to monthly subscriptions and the rest went to utilities, lunches, happy hours and other general spending.
We agreed to tackle this from the highest monthly responsibility. The first was $700 per month in rent. This person had a smaller apartment that was shared with a roommate. I asked if they could add a third person and therefore split the rent 3-ways instead of two. They didn’t not feel comfortable with even considering this option. I asked if they could move back in with parents for a year or two in order to get a financial foundation set. They were not even willing to consider this option either. They felt that they were an adult and should not have to live with parents. I did not push.
Next, we looked at student loan payments. While this person knew they paid approximately $700 per month on various loans, they were not aware of the overall balances or interest rates associated with those loans. They simply knew the monthly payment requirement and assumed that this payment would always be part of their monthly budget. I tried to encourage them to research these loans and talk to someone who is an expert in student loans to see if there were opportunities to refinance or consolidate those loans to ensure that this obligation was being repaid in the most efficient way possible. My co-worker agreed to do so but there was a slight roll of the eyes as they agreed to this.
We next discussed their car payment. This person was driving an economy car, not a luxury model and felt that by doing so, they were being fiscally responsible. However, they purchased car new and carried a sizable debt on the vehicle. Their monthly payment was $400 per month and they owed a total of almost $23,000 on the vehicle. By doing a quick search on Kelly Blue Book, we learned that the value of the vehicle was a little more than $15,000. My co-worker simply wrote this off as “unfair” instead of acknowledging that perhaps they had made a bad decision on purchasing a vehicle in such a fashion. Once again, they simply focused on the monthly payment, rather than the overall financials. I explored the option of selling the car, paying off the remaining loan and buying a lesser vehicle for all cash. I quickly learned that this was not something they would be willing to consider. Again, a comment about being an adult came out.
The last spending category that we explored was subscriptions. This person was spending $60 per month on a monthly subscription that sent new clothes each month. In addition to the $60 per month paid for the subscription, if you decide to keep any of the clothing sent, you can purchase it at a discount. They also spend $40 per month on a service that sends dog treats and toys. Lastly, there was $10 per month spent on Netflix. We finally found an area that I felt even the stubborn adult could not deny could be trimmed. Well, I was wrong. This person dug in their heels and refused to even consider that these subscriptions were expensive and unnecessary.
My first reaction at this point was to be exasperated. I simply could not understand someone who put a higher amount of value on shipped dog toys than their own future. I quickly realized that this person was having trouble putting value on retirement savings because it was just so far away for them. They felt that there would be so much time between today and retirement that they could wait to get started. They will make more money in the future and can start saving later. Once I realized this stark difference in mindset, I tried to approach this conversation in a different way. I took one item—the dog toy subscription—and asked them to cancel the subscription but still put that $40 per month aside in an envelope. I asked them to commit to this for 3-months. I told them to continue to spend that money on their pet. I explained that this would be even better than the subscription since they would handpick the treats and toys that their pet received. They were skeptical but agreed to this.
After three months, we spoke again and they acknowledged that while they did go shopping the first month and purchased treats and toys for their pet, they had not done so since. Even during the first month, they admitted that they did not spend the full $40 on these items. They were now ready to commit these funds to starting a 401K account. I then revisited the tax discussion and showed them that $40 in after-tax money was the rough equivalent of $60 per month in pre-tax money. They agreed to set up a 401K account and divert $60 per month into this account. The last thing I asked of my co-worker was to revisit this conversation after 6 months to see if they have suffered monthly and decide if the amount needed to be adjusted. While I phrased it as a safety net, hinting that we could adjust the amount downward, my real intent is to show how little they even noticed the money being diverted and at that point we could discuss increasing the amount.
My biggest takeaway from this whole encounter was that you cannot force others to think or feel a certain way. My firm belief in retirement savings comes from the whole of my life experiences and those are going to be different from everyone else’s. However, I do truly believe that such a thing is more important to your future than making sure you rush to “grow up” and fall directly into the lifestyle inflation traps that most of us have fallen into… getting into a housing situation that we cannot comfortably afford or buying more car than we need or can afford. In order to help others, you must meet them on their own terms and perhaps more importantly, you must realize that sometimes others will have to make their own mistakes before they understand that they are in fact mistakes. After all, I only know these things because I made (and continue to make) those mistakes.
You could also try changing their federal exemption, and then put that saved money directly into their 401K. It shouldn’t make a difference in the EOY taxes since the 401K goes in pre-tax.