Take your medicine. Make some sacrifices. Prepare for a rainy day. Tighten your belt.
Does this describe how you feel about saving and investing? Is it some sort of cruel punishment? Do you begrudgingly invest just enough dollars to get the company match and say that you “have a 401k”? You’re not alone. A lot of Americans feel the same. We are a nation of spenders, not savers.
The US household savings rate was 5.057% for 2015, according to the latest data from the Organization for Economic Development and Co-operation. Compare this to other developed countries: 8.563% in Australia, 9.668% for Germany, or 20.130% for Switzerland. The savings rate is estimated to be over 25% in China.
While the “average” household savings rate is 5.057% in the US, that average consists of a small number of people who save a significant amount of their income, and the majority of Americans who are living from paycheck to paycheck and save exactly zero. According to one study, 62% of Americans don’t have the ability to cover an unexpected $500 bill today.
I wish I could change people’s attitudes about savings. For some, saving money means buying an $80 sweater when it’s on sale for $40. But that is still spending money, not saving! Saving is setting money aside and having it grow. When you view saving as a negative – a chore that keeps you from having fun – your attitude may be the biggest roadblock to your own prosperity.
Saving and investing is the path to financial independence. Even if you don’t want to retire, we should still aim for financial independence, so you can work because you want to and not because you have to. Saving isn’t just for retirement planning, it’s developing a plan for financial security to free you from worry.
How can we make saving easier? What steps make you more likely to succeed?
1) Put your saving on autopilot through automatic monthly contributions. Whether it is establishing an emergency fund, contributing to a 401(k) or IRA, or creating a 529 college savings plan, making it automatic is the way to go.
2) Set goals. If you don’t have a finish line – a target amount for your nest egg – it’s hard to feel any sense of urgency to saving. When I was 30, I knew where I wanted to be at 50, which also meant I could determine where I needed to be at 35, 40, and 45. Those specific goals have helped me stay on track through the years. Without long-term goals, short-term actions often lack direction and a clear purpose.
3) Think big, not small. How many times have you read that you can fund your IRA by giving up your daily coffee fix. Forget that! If you get the big decisions right, the small stuff takes care of itself. Instead, be very smart, calculating, and objective on just two things: housing and cars. Those are the biggest expenses for almost everyone, and we have tremendous discretion in choosing how much we spend on these two categories.
If you want to jump start your saving, take a close look at all your recurring monthly costs: insurance, utilities, cell phone, cable TV, and memberships. Comparison shop, look for savings, and drop items you don’t use or won’t miss.
4) Focus on maximum saving. There is an oft-repeated rule of thumb that you should save 10% of your income. I am guilty of saying this one, too, especially as a “realistic” goal for new savers. However, there is nothing magical about the number 10%, and there is no guarantee that if you start saving 10% today that you will have enough money to accomplish all your financial goals. Instead, try to contribute the maximum to your 401(k): $18,000 or $24,000 if over age 50. And if you are also eligible for an IRA, fund a Traditional, Roth, or Backdoor Roth IRA. If you have self-employment or 1099 income, you may also be eligible for a SEP-IRA.
If it helps you to increase your saving, then let’s calculate each need separately and contribute to:
– Employer retirement accounts
– Health Savings Accounts
– 529 College Savings Plans
– Term life insurance policy
– Taxable brokerage account
– Savings for a first or second home down payment
Regardless of whether the market is up or down in 2016, I will have done my part by funding my accounts and accumulating more shares of my funds and ETFs. Over time, the returns will average out, but I accept that I have absolutely zero control over what the market does this year. What I do have control over is how much I save, and that’s more important.
I know a lot of millionaires who were great savers and invested in generic, plain mutual funds. But I have yet to meet anyone who has turned $5,000 into a million through their brilliant investing. Investing decisions matter, but you are likely to reach your goals faster if you can figure out how to save 50% more rather than spending your time trying to increase your returns by 50%, because it is not possible over any meaningful measure of time.
I feel great about saving and you should, too. It is empowering to see planning pay off when you have been diligent and consistent about saving. There is a lot of uncertainty and fear right now, and even as the market makes new highs, investors are very wary. If you want to become wealthy, divorce your feelings about today’s market from your feelings about saving. If you’re serious about getting to your goals sooner than planned, save more today!