In a recent conversation, I was asked to address the following issue. As it was stated to me; “A study shows that nearly 75 percent of Americans don't have enough emergency savings. What would you, as a financial mentor, say about ways to save, why it matters or what is keeping people from having enough savings? This is a good question and seems to be one simply answered with common sense. However, these days common sense appears to be in short supply.
Developing the behavior of saving is not hard-wired into us, although being secure is. The simple answer is that people seek pleasure. Money has the ability to purchase pleasurable experiences. Thus, we spend more than we save. But is it really that simple? We have been conditioned to desire to purchase things we do not need, with funds we do not have, in order to achieve a certain standard of living we cannot really enjoy, in an attempt to acquire the feelings associated with possessing those things that we desire. Yes you can purchase a $40,000 automobile, on credit, to appear as one who has wealth, in the hopes that others will respect you. Doing so will give an illusion of wealth, yet will leave you with a negative net worth. The first cause that keeps people from having enough savings would be the people themselves.
Consider this, a basic bundled service package from Verizon (which includes land-line, internet, direct TV/FiOS, long distance, and a cell plan w/4 phones) costs on average $290 monthly. Are all of these services convenient? Sure, but they are not necessary to sustaining life? There are many examples of line items in a household budget that could be reduced or even eliminated for a period of time that would increase savable income. Reduce dining out, or skip a summer vacation for a couple of years, or even unsubscribe to your favorite subscriptions could build savable income. The point is to start by looking at your spending habits. One way to do this is to create a spending log. This is a book that tracks every expense and every source of income. My wife and I have maintained a spending log since we were married over twenty years ago. Your spending habits are a good place to start, but you cannot stop there. You need to develop a plan.
So let’s talk about some simple ideas to encourage behaviors that will promote savings. I want to look at a couple different types of savings. Let’s start with the emergency fund. First get rid of all of your consumer debt and debt instruments. That means stop using the credit cards, stop purchasing items that you do not have the financial capital to purchase, and stop confusing wants and desires with necessities. The first two are self-explanatory. The third one will take a bit of reprogramming. Many modern conveniences are believed to be necessities today. Do you really need a smart-phone today? Not really… it’s nice and convenient, but you do not need one. Keep this in mind, as with any technology, there is a residual effect for the consumer (a perceived or real benefit), but there is also a business reality. That reality is once you become dependent on a specific type of technology, you have in effect, invited business into life at a very personal level. They actually need you to have their product more than you need to have their product. This is why even after purchasing their product, they continue to market to you. They need you to buy more stuff from them to maintain profits. That’s what businesses do. There is nothing wrong or immoral about it, it is just business and you need to factor that into your purchases.
A car dealership isn’t concerned about whether you purchase a new car to meet your needs for transportation. That dealership is concerned about whether you buy a new car from its showroom. Why? When you purchase a car, the dealership offers to perform the maintenance on your vehicle. Since the service department is the second largest source of income for a dealership, it is not by accident that the dealership wants to sell you a car. A dealership wants you to purchase from its inventory so it can create the potential for a revenue stream through the service department. So the first part of this overall reprogramming of how we think is to understand businesses need you to have their products and services more than you need to have their products and services.
Reducing your expenditures on items that you might be able to do without for a period of time will help you build your emergency fund. The great thing about cable or Direct TV is you can always reactivate your services and, often times, at a reduced rate. The same can be said about a smart phone. For you to establish and build your emergency fund, you need to think “reactivation is always an option.” Your emergency fund should be constructed in three different layers. First, get a small buffer between you and life by setting aside $1,500 in a money market account. Before moving onto the second layer, you need to focus on eliminating any and all consumer debt (if you haven’t already done so). A mortgage is alright at this point, but no credit card debt, no student loans, no auto loans, and no other forms of debt. Once you have accomplished that, build your emergency fund to the value of three to six months of gross wages. A person making $50,000 annually should have between $12,500 and $25,000 in an emergency fund. If you were to experience a lay-off, your emergency fund would carry you for more than six months as you search for new employment.
The final layer of your emergency fund is more optional, but really creates some freedom in your life. Your emergency fund should be housed in a money market account. If possible, find a tax-free money market fund through a company such as T Rowe Price. The third layer to your emergency fund is a small fund of three months of expenses held in a tax-free bond fund. Again this can be provided by a company such as T Rowe Price. Having an auxiliary emergency fund with an investment element enhances the space you have created between you and life. As I said, this is an optional layer but, one that I think you will find appealing.
The next type of savings I would encourage is the basic investment type savings. This is savings that is designed to grow and is not money you plan on using for at least the next five years. This type of savings might include money that you are saving to purchase a car in five years or money you might use to add a deck to your house. The best way to ensure a consistent behavior of savings is to auto-draft the money directly from your paychecks to be deposited into this investment account. Then, once the money is deposited, establish an auto-investment plan to purchase solid mutual funds on a monthly investment plan. This creates a flow to your money from income earned to money saved to resources invested without manual interference. If you are without debt and you have your tri-layered emergency fund, then you should be able to commit a good percentage of your earned income to this account. In conjunction with this savings plan, you also need to think about retirement or long-term savings.
I advise taking full advantage of the technology available to encourage savings and investments. To create the discipline of savings, a person should establish an auto-draft from his or her paycheck, directly into a Roth IRA, with an automatic investment plan, purchasing solid growth stock mutual funds. Your retirement savings and your mid-range savings plan should work together to secure your future. The goal in retirement savings is to make the funds unavailable for spending. That means that you cannot take possession of the earned income before making the deposit into a retirement account. It takes a great deal of discipline to have the money in your hand and then move it to your retirement account without being tempted to spend it. Once you go on auto-pilot, your retirement savings will grow and you will find you don’t even miss the money.
Finally, I advise to start small and establish a strategic goal to increase that amount in coordination with specific employment events such as promotions, bonuses, and merit increases. In today’s economic environment, it is critical for individuals to take personal responsibility for their own futures. With the continued increase of dependency on federal programs, the strain of such resources will have to be spread out thinner for maximum coverage. This means fewer resources to a growing number of people. Thus, having your own resources will become more important. I believe that in general, people fail to save because there is an intellectual disconnect between wants and needs. Society tends to want what it wants regardless of the costs associated with the item. And a number of people are willing to use debt as a means of acquiring the item. When a person can learn to want only what he or she needs, that person, not only lives without regret, but he or she is able to save.
If you are interested in building a strategic plan for your money, then contact me and let’s get started on your personal success coaching plan now. You can reach me by email (email@example.com) or by visiting my website (http://kenrupert.com) and using the contact form. I am looking forward to working with you as you embark on the journey of a lifetime.