While my finances are staying mostly the same from last year in terms of income (the only change being a small step increase), I decided I needed to change my strategy for investing and saving in the coming school year. The pandemic has shown me the value of securing my savings over my investments, and so I’m switching up my investing and savings plan accordingly.
What I did last year
In order to explain the need for a change, I’m going to explain my previous investment strategy that I used last year. My base salary was $51,268, and I earned $6,840 in stipends. Every dollar I invested went towards maxing out my Roth IRA, meaning I manually sent a portion of my take-home pay to my Roth IRA account each month, usually $500-600, as a line in my budget. I wasn’t actively contributing to my 457(b) at all.
I also set the goal for myself to save the money I needed for summer in order to be able to take the time off. Knowing I needed about $5,000 to live on (factoring in that I wanted to keep saving and investing during the summer months), I decided to put my 2 stipends (which ended up totaling $4,140 after taxes) and a portion of my tax refund towards my summer savings.
I liked this plan because I didn’t need to save each month for summer– I could simply put aside the large amounts of money from my stipends and my taxes when they came in and not have to think about it. And notably, it worked. I didn’t have to work and was able to reap all the rewards of taking the summer off for the first time since I was 16.
But here’s why it probably wasn’t the best idea:
1. I didn’t know the what the exact amounts of my stipends or tax refunds would be– this meant I left my savings much more up in the air than I should have been comfortable with. Now, I have a clearer idea of the amounts, but I would still advise anyone with unknown income to prioritize securing savings rather than investments, as you investments have longer to grow (if you aren’t retiring in the near future), while your savings will be necessary in the short-term.
2. The unexpected and unprecedented pandemic taught me yet another reason why I should secure my savings before I secure my investments. When COVID hit and my school system didn’t decide whether or not I’d still receive my stipends for months, it was clear that I shouldn’t have counted my chickens before they hatched. I fortunately still received the stipends I expected, but it taught me that I need to prioritize the security of my savings for more immediate needs than my investments, which have a lot more time for me to contribute to and grow.
So, I decided to make a small adjustment. Let’s take a look at this year’s numbers:
- Expected base salary: $52,775 (+$1,500 from last year)
- Expected stipends: $3,465-$6,840 (same as last year, but it’s unclear whether or not we’ll have sports again in the Spring, so my coaching stipend is not guaranteed)
- I decided to invest 15% of my income in my 457b, which is my employer-sponsored plan. To learn about the differences between a 457b and a 403b (or even an IRA), watch my video on how to invest as a teacher.
Since I’ll be doing this, I know that at least 15% (about $566/month) of my income will always be invested. I’m also interested to see how having an automated amount of money, versus one that I’ll manually invest, will change my money mindset and habits.
I’ll manually save a certain amount for summer– right now, it looks like that number will be $350-400/month, since I ran the calculations of what I would need to live on without expecting to invest, save for travel, etc.). This means that I’m going to aim to complete the majority of my sinking fund accounts during the 10 months that I’m working.
Instead of using my stipends and tax refund to pay for my summer, I’ll use that money to invest in my Roth IRA. This is safer, considering I can afford not to invest this money where the amount is more questionable, given COVID and the variability of tax refunds. I’m also planning to invest my 3rd paycheck. Many people get a 3rd paycheck twice per year, in the months where we have three paydays, but as a teacher, I’m only getting one once this year in December.
Essentially, I’m using my stipends, tax refund, third paycheck, and any other extra money as investments rather than as my summer savings plan. Between all of these different income sources, I should be able to max out my Roth IRA. However, if I lose a stipend due to COVID or don’t get much on my tax return, not maxing out my Roth IRA isn’t the biggest deal in the world, whereas not having enough money to pay myself over summer would mean I’d have to start working over the summer once again, which I’m not sure I want to do.
I’m glad that I learn this lesson without suffering the consequences, and my hope is that you guys can, too.
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