“As important as I think (saving) is, national savings has always been relegated to the B list of economic measures.” – Edward M. Gramlich, Board of Governors of the Federal Reserve from 1997-2005
Believe it or not, there was a time not long ago when Americans tracked their savings rather than their credit card debt! Now saving money appears to be like a long lost memory. To be sure, lots of Americans set aside money, however it goes directly into mutual funds, frequently by method of 401(k)s and other qualified retirement accounts, where it is not liquid, guaranteed, or under their control.
Nowadays, we are so eager to run that we forget to walk first! We neglect saving in order to “invest,” when both are essential. Saving money offers the vital foundation that allows us to then invest effectively.
In his book Pound Foolish, Steve Utkus mentions that prior to the rise of the financial planning industry industry in the 1970s, the foundations of personal finance were “savings accounts, whole life insurance, and the home mortgage.” The majority of people’s number one fear was speaking in public, not running out of money.
However, individual savings came to a peak in 1975, when the average family socked away 14 % of their earnings. That’s a stark contrast to the typical post-2000 household, who set aside as little as 1 % of their annual income, as the following chart from TradingEconomics.com reveals:
Credit may have driven the economy for a few decades, but it came at a high price. Customers got used to having credit lines and abandoned the concept of savings. According to Jonas Emmerraji, contributor to Investopedia.com and Entrepreneur Magazine:
“As the credit market seized, and consumer credit lines began to shrivel, people started to realize that the credit limits on their accounts weren’t the same as cash in the bank.”
By 2008, the trap door of credit captured the entire country off-guard as the economy crashed, foreclosures rose, and many found themselves unemployed and/or insolvent.
Personal Savings: A Foundation of Prosperity
An active and consistent savings strategy is KEY to our economic health. It offers a number of short- and long-term advantages, such as:
1. Having a robust emergency fund readily available. If we enter the practice of counting on credit to get us through an unexpected monetary jam, that option is a dead end. Even if you think you can draw on a 401k account, you will still sustain huge penalties and taxes – when you can afford it the least. Usually employees are only able to access funds under certain conditions or for specific factors, and even then, they have to be paid pack on strict schedules (or all at once should they leave their employment).
The bottom line: it is important to have a liquid source of funds. Ample cash reserves allows us to weather emergency situations. The alternative is to sink into debt. Even if the credit is available, interest rates can be double-digit and a cycle of credit dependency can be created.
2. Having liquidity for opportunities. We typically think about saving money as something we do “in case of emergency,” however in fact, we ought to be saving “in case of opportunities”! Typical financial advice instructs people to put most of their money in the stock market, but there are many types of investment opportunities, from real estate to business to lending money at interest. The key to taking advantage of such opportunities is having the liquidity to do so.
3. Weathering economic downturns. Cash reserves can be counted on if (or when) the bottom falls out of the financial markets. Economic cycles can still present challenges, but those with money can weather the storms a lot more easily.
4. Saving triggers an upward spiral to financial security. Here is how that upward spiral works. According to a 2013 article in Forbes, there are four leading factors in upward mobility: education, dual incomes, continuous income generation and savings. A household that practices setting aside cash will have more to invest in education and training. Better training leads to better career or business opportunities. A higher income is achieved, with more to save or invest wisely. This is a pattern that builds on itself in the best possible way!
5. Save more money, save the economy. When people save rather than depend on credit, the economy has greater stability due to the fact it is not fueled by spending that ebbs and flows with interest rates, or spending that will halt suddenly if credit standards tighten up. An economy fueled by credit is susceptible to instability and economic “bubbles” that can pop later on.
Ultimately, by saving cash we are likewise saving and protecting ourselves in the long run. As Jeanette Bajalia, founder of Women’s Worth urges, “Let go of the mentality of spending money for immediate gratification to protect yourself in the long term.”
Time to Start Saving!
It is a natural human propensity to spend more as we make more. Nevertheless, this approach doesn’t move us ahead as much as put us in a continuous holding pattern, running even faster to keep from backsliding into poverty.
Saving, on the other hand, is a progressive action rather than a defensive action. It is essential to assert self-control in order to move from subsistence (just above poverty) living to comfort. We suggest a discipline of setting aside as much as 20 % of your earnings for long-term saving. By growing that reserve (especially at the 20 % level), you will progress to comfort then onto prosperity, while developing a cushion that will help break any financial fall.
As Kim Butler has stated, “Saving money is something we can control. It may not be easy…but saving money is possible.”
There is an excellent reason why living within your means is a time-honored concept– in the long run, it pays off.
5 Tips to Jump Start Your Saving.
1. Track what you’re spending now. When you understand where your money is going, you can figure out where you can afford to adjust your spending.
2. Align your spending with your priorities. Are you spending more at Starbucks or Dunkin than on your future financial freedom? Does your bank account expose what’s really important to you? Look to see where your values are – or aren’t – represented by your bank statements.
3. Focus on changing habits, not deprivation. By adding home-cooked meals with friends (rather than eating out) or adding to your Netflix movie queue instead of dropping $40 on a film and snacks for two.
4. Make saving automatic. Set up automatic withdrawals so that money doesn’t sit in your checking account.
5. Out of sight, out of mind. Consider opening a savings account at a separate bank or credit union, or starting a cash value insurance policy so that you have liquidity without making access to your cash too easy.
Where to Save?
Savings accounts at a bank or credit union are a decent place to start. As your liquidity grows, we do not recommend keeping 6 or 12 months of living expenses in a bank because of low interest rates as well as privacy concerns, taxation and other issues. And in a future article, we’ll talk about why banks may not be as safe as we believe!
If you hate to have your savings accounts earning a meager 1 % or less, there is a better option! Learn why the wealthy frequently use high cash value whole life or indexed universal life insurance, and how it can help you:
- increase long-term savings and financial stability.
- protect your privacy (the IRS won’t know exactly what you have stashed away).
- safeguard your family permanently (why get only term insurance coverage that ends up being cost-prohibitive when you need it most?).
- beat bank rates (internal rates of return are currently around 4-5 %, depending upon age and health), and
- build liquidity that can be utilized or borrowed against for any reason.
For more information, contact us to get an illustration on how a dividend paying whole life insurance or indexed universal life policy might perform for you, and whether it would make good sense in your situation.
Typically you’ll want the ability to be able to save for more than 10 years to achieve returns that “beat the banks.” However, the ability to put permanent life insurance benefits in place can also be a strong deciding factor! Life insurance is more than simply a savings vehicle.