Jim Correll, director Fab Lab ICC at Independence Community College, Independence Kansas 

I’ve not been a particularly good saver or “financial” person most of my life. I’ve learned a few things (some the hard way) and I’m better, although not particularly a good model of study for someone else. Even though, especially before COVID, my wife and I spent too much money in restaurants and we don’t track our personal spending closely, we are not extravagant and seem to have developed a knack for keeping our personal spending in line with our income. There are three things I’ve learned over the years that may help others improve their financial outlook and lessen the stress when paying those big bills that come throughout the year. First, is to consider converting all or part of your Individual Retirement Account (IRA) money away from traditional to Roth. Second is to always save some of what you earn and the third is to create your own sinking fund. 

I’m not a financial advisor so when it comes to IRA and whether or not Roth or traditional is right for you, you’ll need your financial advisor’s help. I’ll just tell my story and let you know that I wish I would have converted most of my IRA money to Roth starting in 1997 when Roth became available. No financial advisor would advise against the other two, always save and create your own sinking fund. 

Roth or Traditional IRA 

Since I’ve not had employment anywhere as an adult much longer than five to eight years, I’ve only had a couple of opportunities to participate in 401k plans. Typically, an employee can elect to contribute some salary into a 401k account tax deferred. This means income taxes are deferred to a later time in retirement when you draw the money out to use. The theory is that you’ll have less income in retirement, therefore a lower tax rate and pay less taxes. Many times, after a certain amount of time employed with a company, the employer contributes a percentage of your contribution as a match. When this is the case, the employee would normally withhold the maximum amount for the 401k account to maximize the employer’s contribution. 

When leaving the company, the 401k generally is transferred into an IRA. In a traditional IRA the tax deferment is preserved. That’s what I did in the two or three cases where I left a company that had had a 401k plan, transferred it to a traditional IRA. In retrospect that was a mistake and I wish someone would have suggested Roth. In a Roth IRA, you pay the income taxes at the time, but any interest or dividends earned after that point are tax free so when you withdraw at retirement, you have no tax liability. On a personal level, one of us is retired now yet we are blessed to still have a good income. We’ve been using some of our IRA funds to remodel our house the last few years. Our tax rate is still about the same so each year, we have a hefty tax bill on the withdrawals. I wish I would have converted to Roth instead of traditional. 

Save No Matter What 

Part of the story in a classic book of 1926 “Richest Man in Babylon” is about a man from a poor background who managed to become rich while all his friends, from similar backgrounds, remained poor. They asked him how he did it. His answer “No matter how much I made over the years, I always saved ten-percent and lived on the remaining ninety-percent. Over time, the ten percent really adds up. The moral of this story is the same. No matter how much or how little we make from our employer or from our business, put ten (or fifteen) percent in savings. In “Who Owns the Ice House?” the book we use in my Entrepreneurial Mindset class (registration open now for the next class starting January 28) Uncle Cleve took money from his Ice House business to the bank every week. When he saw an opportunity to fix peoples cars—late 1950’s in very small Glen Allan, MS—he had enough in savings to pay for building his auto garage. (No one would have loaned a black man in Mississippi money to start a business in 1958.) We don’t know what opportunities, or unexpected needs, will arise and having money in savings will help no matter what. 

Create Your Own Sinking Fund 

An accounting professor friend of mine once told me that publicly traded companies create a sinking fund—sinking as in a sink that holds something, like water, not sinking as in a sinking ship. They knew they would have to pay dividends, so the sinking fund gave them a place to store money throughout the year so that when dividend time came, they had the money to pay. 

He suggested the same concept for personal or even small business finance. We all have big bills that come due; car and house insurance, property taxes, medical deductibles, and even an occasional vacation. Let’s say the expected total for these items is $8,400 per year. Creating a savings account as sinking fund and transferring $700 each month to it would provide the money to pay each big bill as it comes due instead of stressing over where the money will come from. 

While a solid personal financial plan involves much more than just these three things, had I been doing them consistently my entire adult life, I’d probably be retired and living on a sailboat somewhere by now. 

Jim Correll is the director of Fab Lab ICC at the Center for Innovation and Entrepreneurship on the campus of Independence Community College. He can be reached at (620) 252-5349, by email at jcorrell@indycc.edu or Twitter @jimcorrellks. Archive columns and podcasts at www.fablabicc.org.