Let’s Face the Facts: You Probably Stink at Saving Money
This article by Sean Williams originally appeared on fool.com.
We’ve probably all been told at one point or another that we need to save for our futures (i.e., retirement), but does the American public really listen? According to a new Financial Security Index report from Bankrate, more Americans than ever are feeling better about how much money they’re saving.
Only there’s one problem: The savings habits of most Americans haven’t changed — if anything, they may have gotten worse!
Honestly, you probably stink at saving money
It’s not entirely a shock that Bankrate’s data found that respondents are feeling a bit more confident. We’re roughly eight years removed from the depths of the Great Recession, and both gross domestic product (GDP) growth and the inflation rate are returning to normal. Also, the unemployment rate is sitting healthfully below the 5% mark. These are tangible reasons for the consumer to feel more comfortable about his or her finances.
However, this comfort hasn’t translated into a smarter consumer. Bankrate’s data shows pretty clearly that quite a few consumers stink at saving money. When respondents were asked what percentage of their annual income they were saving, here were the responses:
- None: 19%
- 1%-5%: 25%
- 6%-10%: 23%
- 11%-15%: 11%
- More than 15%: 14%
- No current income/not saving: 2%
According to the report, the 21% of Americans who aren’t putting a dime away in savings each year is unchanged from the previous year, and 46% of respondents are saving 5% or less of their annual income.
What’s more, the percentage of respondents saving 11% or more of their income annually actually dropped to 25% from 28% on a year-over-year basis. Most financial advisors recommend people save between 10% and 15% of their annual income. In other words, people may be more confident about saving, but they actually appear to be saving less!
Why, you ask? Here are the biggest reasons why respondents don’t save more of their money, based on Bankrate’s report:
- Expenses: 38%
- Haven’t gotten around to it: 16%
- Job isn’t good enough: 13%
- Debt: 13%
- Don’t need to save more: 5%
- Other: 4%
In other words, two-thirds of the reasoning — expenses, plus “debt” and “haven’t gotten around to it” — for why people aren’t saving more can more or less be tied to an insufficient financial discipline. This is likely a result of not maintaining a detailed household budget.
In fact, the correlation between a 2013 Gallup poll is almost uncanny. Gallup found that just 32% of respondents in its survey were keeping a detailed monthly budget, with failing grades across the board regardless of whether someone had high, middle, or low income.
It all starts with a proper budget
In order to lay a foundation for good saving habits, consumers must first put in some legwork to create a workable budget. In simpler terms, creating a budget will help people better understand their cash flow. Without an understanding of where your income goes after it’s deposited into your checking account, you’ll have little to no chance to optimally adjust your saving and spending habits.
Here are a few helpful and simple budgeting tips that should keep you on track:
- Use budgeting software: The good news is that the old days of writing out your budget by hand are long gone. Most budgeting software can be found online for free, and in some cases, it’ll help you formulate a savings plan based solely on your target savings number.
- Get everyone involved: Beyond simply formulating your budget, the next toughest challenge is sticking to it. One of the wisest moves you can make is getting everyone in your household involved. This means children, grandparents, and friends, all sticking to a budget. If you live alone, consider meeting up with like-minded people with a goal of saving money once or twice a month.
- Set up automatic withdrawals: The “haven’t gotten around to it” excuse will disappear if you set up automatic withdrawals from your paycheck into a savings or investment account once weekly, bi-weekly, or monthly. If the withdrawal is automatic, it provides even more incentive to stick to your spending game plan.
- Consider using cash for purchases: Speaking of spending, consider using cash to make your purchases instead of credit. Even though credit cards give you a detailed statement of your spending at the end of the month, credit isn’t tangible. Money, on the other hand, can be felt. If you spend it, you feel a sense of loss since you need to physically pull it out of your wallet and hand it over in order to buy goods or services. Using cash can help dissuade impulse purchases.
- Be S.M.A.R.T.: Finally, you need to be “SMART” about your budgeting. This acronym stands for Specific, Measurable, Achievable, Realistic, Time-based. In other words, you want to create goals that you’ll strive for, but that are also specific and measurable so you’ll know what adjustments you’ll need to make to stay on track.
Allow retirement accounts to do the work for you
In addition to simply saving money, consumers have to put their money to work in smart ways.
One of the best ways to build wealth is to take advantage of an employer-sponsored 401(k) should one be offered at your place of employment. A 401(k) takes a percentage of your income — determined by you — on a pre-tax basis, and often invests it into a mutual fund of your choosing. The particular funds you can choose from are determined by the investment firm your company works with. What’s particularly intriguing about a 401(k) is that more and more employers are matching a percentage of an employee’s annual wages in an effort to retain talent, and to encourage people to save for their retirements.
Individual retirement accounts, or IRAs, are another keen way of setting yourself up for future success. A Traditional IRA, like a 401(k), allows you to invest pre-tax income and defer the ordinary income tax you’ll pay until your golden years, when you begin making withdrawals. Its sister plan, the Roth IRA, is funded with after-tax dollars. While this doesn’t reduce your upfront tax liability, it does allow your investments to grow on a tax-free basis for life, assuming no unqualified distributions.
The whole point of a 401(k), IRA, or practically any other retirement vehicle is that they penalize account holders for making a withdrawal before hitting retirement age. This incentivizes the account holder to buy quality assets and hold them for very long periods of time. When combined with a detailed monthly budget and automatic withdrawals, it’s a pretty foolproof plan to saving money and building wealth.
Originally published at www.fool.com on March 27, 2017.