Building Wealth One School Year at a Time

**Disclaimer: I am not a financial professional and this article does not constitute financial advice.  It is only meant for entertainment purposes and to share our experience dealing with the financial reality of being educators.  Before doing anything with your hard-earned money, always consult with a financial professional.

 “Oh, that’s wonderful. Just remember, teachers don’t make a lot of money.”

This, or some version of this, was the most common reaction I heard when I told family members that I was going into teaching.  Over the years, I discovered it was true.

When Amanda and I first started teaching, “building wealth” was unfathomable for us. Despite our best efforts to avoid wasteful spending, there were lots of tears at the dining room table as we totaled up the monthly bills. To add to our frustration, our friends — you know, the tech girl and the realtor guy — were bringing in double, triple, or more (…much, much more) the amount of money we made every month.

We knew we needed to take control of our financial situation instead of becoming victims of it.  

If you plan to make teaching your career, it makes a ton of sense to pay attention to your finances and to maximize those hard-earned dollars. In this article, I’m going to share a simple plan to save $500K minimum – and most of you will actually save more (…much, much more) than that.  

If this topic interests you, check out our post on Four Steps Teachers Can Take To Increase Their Salary.  

Step 1: Identify Your “Why”.  What are you saving for?

Every meeting we’ve ever had with a financial professional started the same way.  I was eager to dive into the numbers, but instead, we always began with a conversation about our “why”.

Being financially stable involves sacrifice. 

The cold, hard reality is that some things you want right now must be deferred.

In order to delay gratification on a consistent basis, it’s super important to first articulate why you are doing it.

Why do you want to save money? Some examples:

• • For a house in that neighborhood with award-winning schools for your kids?
  • For peace of mind when the car breaks down or the back fence needs to be replaced?
  • For that condo in Cabo or that trip to Bali?
  • For the flexibility to care for aging parents?
  • For an early retirement – you may love teaching at age 29, but will you at 54?

Besides that condo in Cabo, there are huge benefits to financial stability:

• • Less stress, better health
  • Stronger relationships
  • More options, more freedom
  • More control over your life
  • Financially savvy children

Please know, financial stability doesn’t happen overnight.  And there are going to be tough moments (tears, setbacks, and missed trips with your friends to Vegas) but it will be worth it in the end.

Step 2: Learn to Live (Happily) on 75% of Your Current Income

The Bottom Line: You need to free up some money each month.

You’ve already identified some important goals or dreams you think are worth sacrificing for.  In order to achieve those goals, the reality is that we’re going to have to do some sacrificing now.  Please check out the “blueprint” below for how to save while also living a great life.

Let’s look at the numbers, using three typical teacher incomes.  The graphic below shows how much each teacher can save when they set aside about 25% of their income.

Here is a simple two-part philosophy on how to live within our means.

Nobody wants a life of total deprivation.  The goal of saving is to live a great life now while also enjoying the benefits of being financially stable in the future.

First, think about what improves your life.

Reflect on the values that directly improve the quality of your life.  This list is going to be different for everyone, and it will probably change over the course of your life.  We recently came up with the following:

• Exercise and good health
• Friends and family
• Healthy, good food
• Cultural stimulation and travel
• Time in nature
• Personal independence
• Helping others

Second, think about ways to incorporate those elements into your life without spending a ton of money.

If you can do that, you’ll not only save money, but you won’t really miss spending it.  For us, that means:

• Cook at home 
• Walk or ride a bike whenever possible
• Check out the museum the day it’s free
• Get a library card
• Go camping instead of that trip to Vegas
• Travel to Europe during our winter break and Hawaii during the summer (off-peak for both)

Our Consumer Culture is Not A Financial Ally

I think one reason spending less money is perceived to be difficult or bad is that society is largely based on consumerism.  Thousands of really smart advertising and marketing people sit around all day and think of ways to convince you that you need, even deserve, their product.  

You can do everything you want, but (given the realities of a teacher paycheck) it’s probably best to splurge in moderation. We celebrate that special event with a fancy dinner out, but dropping $200 on a meal is definitely not a regular thing.

Step 3: Dedicate the Bulk of Your Savings to Three Places:

          1. Emergency Fund

          2. Roth IRA

          3. 403b

Early on in our 20s, Amanda and I understood that a life in teaching meant we needed to control our spending.  This would allow us to save for larger goals.  But it took us a while to figure out what to do with our extra money each month.  The three-basket approach made things simple.  The idea to call them “baskets” comes from financial author David Bach.

The graphic below show how much each of these three teachers can dedicate to their three savings destinations each month.

We learned that we needed to start an emergency fund.  Ideally, this is separate from regular checking accounts in order to earn interest.

1. Emergency Fund – gets about 1/3 of your savings each month.

Benefits of an Emergency Fund:

This money earns interest and is there when things (car repairs, a leaky roof, medical bills…) pop up.  And they’re going to pop up.  An emergency fund is absolutely critical to fight against the anxiety and stress of living paycheck to paycheck.   

Emergency Fund Details:

• • 33% of our extra cash each month
  • Put into a high-yield savings account
  • This should equal about 3-6 months of expenses

2. A Roth IRA – gets about 1/3 of your savings each month.

What is a Roth IRA? 

This is an Individual Retirement Account in which you take after-tax dollars (in your paycheck) and invest each month. Note that enrollment in a Roth IRA has nothing to do with your employer.  Getting started is easy. Most banks allow you to open up a Roth with an online application.  Another option is to open an account at a brokerage.  We personally use Fidelity and love the customer service. The entire process takes a few minutes.

CNBC recently posted an article stating that new investors should start investing by opening a Roth IRA.

Benefits of a Roth IRA:

Although you pay taxes now on the money you put into a Roth IRA, that money will grow over the years, and – here’s the great part –  all of that growth is tax-free.  When you take the money out (you can begin to do this without penalty at age 59 ½ ) the entire amount is tax-free.  We also recommend setting up automated withdrawals from your checking account to make contributing to your Roth IRA effortless each month.  

The yearly contribution limit in 2023 for a Roth IRA is $6,500.  Averaged out per month, you are maximizing your Roth IRA contribution at $541.66.  If you make more than $129,000 as a single tax filer, your eligibility to contribute to a Roth IRA begins to phase out.

The graphic below shows how much you would have saved in your Roth IRA after 30 years.

Roth IRA Details:

• • 33% of our extra cash each month 
  • Max contribution per year in 2023 is $6500, no taxes are due on the growth of the money over time
  • At age 59 ½, withdrawals are tax free

3. A 403b – gets abouts 1/3 of your savings each month.

What is a 403b?

A 403b is a retirement plan offered by public schools and many private schools.  Also called a tax-sheltered annuity or a TSA plan.  You sign up through your employer and authorize your school or district to set aside money from your paycheck on a pre-tax basis.  This means that you don’t pay taxes on those dollars right now, but instead invest them and pay taxes only when you withdraw the money.

Benefits of a 403b:

The major benefit is that you can invest pre-tax dollars from your salary each month.  For every dollar you invest, you shelter that money from the IRS until you withdraw at age 59 ½. It also means you pay less in taxes this year. 

The numbers above can get a little confusing, but the biggest thing about a 403b is that you’re shelting your money from the government tax collector.

For example: if your salary is $100,000, you pay $21,898 in taxes (assuming 4.5% state income rate).

But if you contribute, say $10,000 to a tax-sheltered annuity (aka 403b), your income is now $90,000.  You invested the $10,000 to grow over the years and you only would owe Uncle Sam $19,156.  A tax savings of $2742 – you sheltered the money from the government.

Your pre-tax dollars are invested and grow over the years.  Once you reach age 59 ½, you are eligible to begin withdrawals without penalty.  At that time, you will pay taxes according to your local tax rates.

The graphic below shows what you could have in your 403b after 30 years.

Let’s take a look at the total savings. After 30 years of nearly automatic saving, you now have the money to fulfill all of your dreams.

Summary of Your Plan:

1. Identify your life goals – the reason you want to save money. These goals should be big and important enough to motivate you over the long haul.

2. Learn to live (happily) on 75% of your income.

3. Split your savings each month into three parts: Emergency Fund, Roth IRA and 403b.