Simcha Savings: How to Grow Your Stash

July 23, 2020

Planning & Saving

It’s frightening to consider that many parents face massive unfunded financial obligations in the form of future simcha expenses. It’s easy to forget it sometimes, but in total, simcha expenses are greater than most mortgages!

Here’s the equation: # of sons × [bar mitzvah + engagement gifts + aufruf + FLOPC] + # of daughters × [vort + gifts + home setup + wedding + sheva brachos +support] = ?!?!?!?

Very few can write a check for many thousands from their regular income, so they need to begin setting aside savings years in advance. Anything short of that and they will face excessive borrowing or fundraising down the line.

Breaking It Down

Steadily stashing monthly amounts for future simchas will help alleviate the funding challenges. Say Mr. B. wants to gather $48,000 for his newborn daughter’s future wedding needs. While there’s no way he’ll come up with that amount in one shot, setting aside $200 a month for 20 years will accomplish the same thing. ($200 x 240 months = $48,000) While it takes persistence to save consistently for years, it’s what most people need to do to reach their financial goals.

The Power of Compound Interest

But even over time, adequate simcha funds are still hard to accumulate. If Mr. B. has five kids, locking away $1,000 a month for them ($200 x 5 kids), will bite into the budget. He can lighten the load by growing the pot significantly using the power of investing. Depending on achievable rates of returns, Mr. B. may dramatically reduce the payments he needs to place into wedding saving funds. Less needs to be removed from the present budget since the money will grow in the future.

But at What Percent?

Instead of putting his savings under a mattress, let’s say Mr. B. uses CDs, earning an average 2% rate. In that case, he can lower his monthly payment for his child from $200 to $165 and still attain his goal ($165 x 240 months invested @ 2% = $48,641). Better, but not by much. If Mr. B. takes a bit more risk and grows the savings at 6% annually, he can halve the $200 payment; $100 monthly for 240 months will hit his goal ($100 x 240 months invested @ 6.3% = $48,000). While investing takes effort and introduces various complexities, the profits bring financial goals within more realistic reach.

Consider Risk, Taxes, and Fees

So why stop at 6%? If Mr. B. is a highly skilled investor and can consistently earn 12% on his savings, he will need to save just $50 monthly ($50 x 240 months invested @12% = $49,462). Note that at that rate of growth, just one-quarter of the accumulated $48,000 is principal, and three quarters is profit ($12,000 principal and $36,000 profit). While this scenario is very tempting, few amateur investors can earn consistent double-digit returns. Factoring in fees, taxes, and basic risk protection (especially as withdrawal dates near,) getting even a 6% return is difficult for many investors.

Save. Save. And Save Some More.

For his older kids, Mr. B. may well need money before 20 years pass. This time frame means he needs to add more than $100 per month now to hit his goals. Over a condensed 10-year time period, payments of about $300 per month are required to hit $48,000 ($300 x 120 months invested @ 6% = $49,163). So while $100 monthly may work for his new daughter, he will have to pay extra for the others. Parents need to save big and save early if they want to avoid significant discomfort down the line.

What’s Your Plan?

Use the table above to estimate your own savings plan. It assumes monthly payments of $100 and charts the growth based on the number of months and various investment returns. For example, assuming a 10-year time period and 6% returns, the table shows that consistent $100 deposits would grow to about $16,000. You will, therefore, need to double your payments if your goal is $32,000, or you may cut the deposits to $50 if your goal is $8,000.

Consistent Saving Matter

The chart also illustrates the article’s main points: You need many monthly payments invested to grow a substantial pool of funds. Note that, despite double-digit returns, investors won’t accumulate much after a few years of stashing. At five years, even at 12%, the investor’s $6,000 grows to just over $8,000, so the bulk of the pot is still principal, not profit. Excellent investment returns don’t help if there’s minimal money invested.

But Good Investments Matter, Too

But over time, investment returns make a big difference to wealth creation. The table shows how over 25 years, payments totaling $30,000 barely grew at a 2% rate, expanding to just $38,882. Compare that with more than doubling at 6% (to $69,299) and quadrupling at 10% (to $132,683). Without the added boost from growth investing, accumulating wealth is almost impossible. Hopefully, Mashiach will set us free well beforehand, but until then, we’re in the hishtadlus grind. Yaakov Avinu worked for 14 years to secure his family’s future. Most of us will work longer than that to pay for ours!