Basic economics states that you may do one of four things with money: save it, spend it, invest it, and give it away. Americans have no trouble spending money — we’re very good at that. In fact, we spend money we don’t even have yet. Some Americans invest their money and some give it away (to friends, family members or charity), but we are not known for saving it. We don’t even do it as a nation; our national debt is a frequent topic of political debate. Other countries, most notably Germany, engender a different value system and their citizens behave differently as a result. They value thrift and the ability to defer gratification. But, for the first time in many years, Americans are saving money again.
It seems The Great Recession has enabled Americans to think beyond wants, beyond desires, beyond the immediate to the long-term survival and financial health of their family and community. People are forced to decline purchases because they perhaps cannot get enough credit to make such purchases, as they had before. As a result, Americans are saving money! This action represents a huge swing in our financial pendulum that we, as professional advisers, hope continues.
The rule of thumb for emergency savings is three to six month’s worth of living expenses, but because of the recession, and the number of people who have been out of work for an extended period of time, most advisers have increased this recommendation to six to 12 month’s worth. That number may seem daunting, so let’s discuss ways for you to accomplish this goal.
The easiest and most efficient way to save is by setting up an automatic program either through your paycheck (payroll deduction) or through your bank or credit union (for example, by transferring a specific amount from your checking account to your savings account). Once established, you can change it but it’s unlikely you will. Why? Because we’re all too busy; it’s easier to keep the status quo. Also, once you’ve learned to plan your finances around the remainder, you won’t miss the money that’s being saved. You can even establish an automatic increase if you receive a cost-of-living adjustment, raise or other increase to your earnings.
This behavior is also helpful when saving towards any goal, such as retirement. Using a 401(k) or similar program will enable you to automatically save money, sometimes with an employer matching contribution, without feeling the monthly “pinch” and the indecisiveness you may encounter as you face your monthly bills. You simply must pay yourself first. That’s how our government ensures it gets its money; it withholds it (automatically) from your paycheck.
If saving money is one of your New Year’s resolutions, write down how much you want to save (per month, total amount) and tell someone about your goal. These two steps (writing your goals down and having an accountability partner) have been shown to greatly increase the likelihood that you will achieve your goal. When you have a goal in mind, it helps you stay focused and thus you are less likely to spend money on things that will detract from your goal. You may ask yourself “Is this purchase going to help me or hurt me?” Stay committed to your goals — you’re important and your goals are, too.
Good luck with your savings plan!
FPA member Amy Jo Lauber, CFP®, is the President of Lauber Financial Planning in Buffalo, NY.