When I present financial literacy to employee groups, I’m always surprised by the number of people who are doing no saving whatsoever. The phrase ‘living paycheck to paycheck’ is more common than we realize—some are even living day to day or hour to hour. I’ve even recently heard of people that get angry that they got paid a few hours later in the day than normal; there are some major underlying issues there. Of course we should be saving for emergencies, but if you want to retire someday, you have to start saving—even if its small amounts at first. A report I read recently said the average American gets 1/3 of their retirement income from social security. So the question is: what is the source for the other 2/3 of your retirement income? For 99% of people who have something beyond social security, the other 2/3 will come from the savings you’ve built over your working life.
Let’s talk about where to start. As Americans, we tend to indulge ourselves, often a little too much. The best place to start is our bank statements. Look over your transactions and see what you can go without to put those dollars to better use. If you are someone who uses credit cards like they are debit cards, you have to start to understand the long-term damage that you might do if you’re not completely paying it off every month. Don’t get stuck in a cycle of using credit cards. But, if you do, then start to create a path to get you out. Even with a debit card, it can be so easy to use and not think about the actual dollars it represents. One helpful tool is a simple envelope system. You can take an envelope for each expense category you have and break it out over a week or a month. Let’s say you choose a week for your tracking and you have $20 to spend eating out. This might help you decide to make a coffee at home rather than stopping into Starbucks and drain almost half of your weekly dining allowance. Being more aware of where each dollar is going always helps you spend less.
Another way to save money is to look at your income compared to tax brackets. Many people tell me that they can’t afford to contribute to their company 401k plan. There are times when an employee is just over the threshold of a higher tax bracket. Now keep in mind that a 401k plan contribution is a deduction of your taxable income so it could lower you into the next tax bracket down. In a situation like that, and knowing you have to save for the future, it’s truly a time when you can’t afford NOT to save.
It can be very easy to spend money on things we want and then when it comes time for things we need, we just don’t have the money available so it’s not an option. Some of the smartest financial minds will tell you to pay yourself first. What this means is that you decide a specific amount, usually a percentage, to pay yourself every paycheck. After you’ve paid yourself, you will pay your major bills like housing, food, insurance, car, etc. At the point you’d usually be out of money because you ate out or bought that new outfit; you won’t have that money because it went to your future. Tony Robbins calls it the freedom fund. Your savings overtime can create financial independence, freedom, or vitality. Simply calling your savings your freedom fund can help motivate you as well. When you value yourself enough to pay YOU first, it will show in other areas of your life. I’ve seen people who have started the process of paying themselves first begin to have an abundance mindset. When you think abundance, you will get abundance, maybe slow at first but always more over time if you continue the habits.
Speaking of taxes, many Americans get tax returns every year. This has also increased with the historically low tax environment we are in now. Did you know that you could spread that tax return into each month of the prior year? It can be nice to get a lump sum of tax return in the spring but for many of us that money could be better used. Typically all you have to do is go to your HR department and tell them you want to adjust your withholdings. To get more money in each paycheck, tell them you want to lower your withholdings. If you need help deciding how much you should lower your withholdings by without having to owe money to the IRS, it may be beneficial to consult a tax professional like a CPA.
Growing up, I think most of us had some kind of piggy bank. As a child it often took the form of an actual pig. As we grow older it typically changes into a large glass, a plastic bucket, a mug, or some other odd piece of us that we started throwing spare change into and never stopped. Of course it’s good to keep that money and use it for a rainy day (or maybe a sunny day if you use yours for vacation time like my wife and I usually do), but the problem is that it’s not growing. Sure it’s growing by the amount you drop in periodically, but it’s not earning interest. One great tool to make things easier is an app called Acorns. Let me preface by saying that I in no way represent Acorns, but have found it to be a simple helpful savings tool. What you do is simply download the app, create an account, and then link up a debit or credit card to use. When you make a purchase, each transaction is rounded up to the next dollar and that difference is then invested. You don’t have to know about investing to pick one of the investment strategies. Overtime they will all make money so you will win if you let the account grow without looking at it much. The investment choices are: conservative, moderately conservative, moderate, moderately aggressive, and aggressive. I would suggest just picking the one that represents how you feel about taking risks with your money. From this point you can add in additional features like automatic contributions each week or each month that could be as low as a few dollars a month to thousands. If you need to access the money you can request a withdrawal and you will receive that money in your bank account within a week. I would also note that it is very valuable to have an account or two that you allow to grow without looking at so you’re not tempted to use. Another helpful option for saving money while earning interest is to open multiple bank accounts. It helps to not see all of what you have in one place. Also, some banks like mine allow you to create nicknames for accounts to you can title it what you plan to use it for.
If you are in a really bad spot and there is absolutely no way that you can save money today, you can still commit yourself to a plan like “save more tomorrow". What you do here is set a percentage of income that you will commit to when you get a raise. Let’s say that you commit to putting half of your next raise into savings each month. When you get a raise of let’s say 6%, you can then put 3% in savings and still have an increase in take home each month.
Food is a large purchase every month for most families. There are no special tricks here although using coupons and setting budgets are helpful. One of the things we have done is to simply research the best prices on things we buy the most. When we find out that information then we know we are saving money every time we buy that item and that can be put to savings. We buy items from Amazon, Kroger, Aldi, and Costco. For the most part we know what we will buy where. It makes for a little more time commitment, but it also saves more money. If we can commit some more time now and save more money, then down the road we get to spend a little more money and spend less of what we can never replace, time!
If you get yourself on a good path and want to learn more about where to save, you’ll want to meet with a professional. We, like others, have our areas of expertise. Seek out some options and maybe find out a little about the approaches taken by different professionals. It can be overwhelming when looking at all your options alone. You may have a 401k, maybe a Roth 401k option, you can use Roth IRA, certificates of deposit, mutual funds, 529 plans, real estate investment trusts, bank savings account, life insurance, thrift savings plan, 403b, pension, bonds, ETFs, annuities, and much more. You can very quickly get a headache thinking about all the options. Take steps forward, do research to help you do better over time, and learn from your mistakes.
You have to save for yourself, your family, and your future. Start somewhere, no matter how small. If you just want a little help getting started, contact us, or someone you know that you see has good savings habits. Savings can keep you on track when times get rocky like they do for all of us at some point in our lives. Until you start saving, you are also unable to take advantage of the incredible power of compound interest. If you don’t understand what compound interest is and how it works, then keep an eye out for my article on that subject. There’s a reason why Albert Einstein called it the 8th wonder of the world!