Engineer Your Future

I know I am not saving enough, but how do I start? “Saving” is one of those financial fundamentals that is SIMPLE, but not EASY.

Before beating ourselves up too much, know that we are in good company.  An article last year at Bankrate.com claims that 1 in 4 Americans have little or nothing in savings.  Only 29 percent have the recommended six months’ expenses in savings.  That means that around 70 percent of people could benefit from saving more than they do now.

Reasons why people do not save:

  • I don’t make enough money to pay all my expenses.
  • I have debts from school or credit cards.
  • I keep having setbacks and emergencies.
  • I don’t keep up with inflation in a bank account
  • I don’t know how to save

Why save?

  • To have an emergency reserve
  • To save for a near-term goal, such as buying a car or other item

How much should I save?

  • A good goal for lifetime saving is to plan to save 10% of your gross earnings, with the idea of never spending the principal.
  • Saving rate is the key to the whole FIRE (Financial Independence Retire Early) movement. We should all save as much as we are able!

How do I get started?

  • Most people cannot spare 10% of their paycheck if they are not already saving something.
  • The trick is to start small: if you are saving nothing, start by saving 1-2% of your pay each paycheck.
  • When you receive a raise or a bonus, save all of it that you can. Eventually, you will be saving 10% of your gross pay.
  • Automate the process so you never touch the money.

What if I don’t make enough money to pay all of my expenses?

  • Consider starting at 1%. Here is an example, assuming you are just getting started saving: if you are paid $2000 every two weeks, start by making an automatic savings deposit of $20 per paycheck. This doesn’t seem like enough to accomplish anything, and by itself, it isn’t.  What it does accomplish is to start a good habit.
  • Promise you will do everything you can to never draw out of this money, even for emergencies.
  • Ask yourself: are my income and spending fundamentally out of balance? Sometimes, for example when we are in school, we are spending more than we earn.  It’s unreasonable to expect to be able to “pay as you go” in every stage of life.
  • If we have good access to credit, through student loans or a home equity line, borrowing modestly in order to start a good habit may not cause long-term harm. But be careful: When we see credit card balances that keep going up, or if savings balances steadily creep down, this is a danger sign, and change is needed.
  • It may be necessary to make some strategic decisions. If you discover that your housing, food, and transportation costs you more than is coming in, it may be time to make some tough choices.  It can be easy to kid yourself and think that success is just around the corner.  Financial advisers are fond of suggesting we stop spending money on coffee and other small things.  And these expenses do add up, but this requires a lot of denial.  By targeting bigger expenses, we can improve our cash flow dramatically with perhaps one single change. Remember, building any new habit is not easy!

How do I trade off between paying down school or credit card debt?

  • Credit card debt is very expensive. (Yes, who knew?)
  • Consider a strategy such as the Debt Snowball to attack this problem.
  • School loans often charge lower interest. These can be paid as scheduled, in parallel with building up the savings habit.  High-interest student loans can be treated like credit cards.  Avoid paying less than enough to amortize the loan.  Sometimes, the minimum payment only pays the accruing interest – or not even all of it – and the balance stays flat or can even increase.

Setbacks and emergencies happen to everyone.

  • Small setbacks such as car repairs are unpredictable but happen to everyone. These can be included in regular monthly expenses.
  • Big setbacks, such as out-of-network medical expenses, can be life changing. There is no getting around this type of setback.  The Simple Dollar blog offers some guidance.  Don’t assume there is nothing you can do.

I don’t keep up with inflation in a bank account

It’s true: there was a war on savers that began in earnest with the financial collapse of 2008. It has largely subsided since 2017. Today, inflation is between 1.5% and 2%.  Savings accounts at most big banks do not pay this much.  But there are ways to eke out just a bit more than inflation:

  • High-interest savings accounts. Online banks are typically offering 1.9% to 2.2%.  Popular choices include Synchrony.com, Ally.com and Purepoint.com.  com is a good place to search for the best savings account rates.
  • US Savings Series EE and Series I Savings Bonds. To get started, visit treasurydirect.com. Savings bonds are so good that you can only buy $10,000 per year, per social security number. There are plenty of details that we’ll save for a future article. I-bonds are currently paying 1.9% (not subject to state income tax) and EE bonds can earn as much as 3.53% guaranteed yield if held long enough.

Saving doesn’t happen by accident.  Even when we make a lot of money, it can be too easy to let it slip through our fingers.