Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest blog will appear here every Monday.
Savings 101 – Starting from Scratch
The secret to a lifetime of financial security is really very simple — so simple that American kids once learned it before they even started school. The Secret: Save your money.
Americans cast aside that wisdom in recent years as we took advantage of easy credit, racking up record household debt and allowing our national savings rate to fall to an embarrassing 1%. But saving appears to be back in style. That’s great news because building a healthy nest egg remains the key to financial well being and the cornerstone of any retirement program.
I have created hundreds of successful financial plans for people ranging from modest wage earners to millionaires, and the key to achieving savings goals is always the same – a consistent household savings rate of 15%. That’s an ambitious level of savings, but the pay-off is fantastic. For example, a family with an income of $50,000 needs to save $7,500 a year to hit the 15% target. If they keep it up for 30 years, while earning even 5% return on their investments, they will have $500,000 in savings. Along with Social Security, that’s more than enough to live comfortably in retirement!
Of course, the journey to that kind of security begins with a single dollar saved. Here’s how to get started:
1. Create an Emergency Fund – Before you save a single dollar for retirement or any other long-term goal, you need to amass enough cash to pay for any crisis that might come along – a major car repair, a leaky roof, or a lost job. Ideally, this fund should be equal to six to 12 months of living expenses.
Being in debt is like being held underwater; it’s scary, and it limits your options. Once you have established your emergency fund, focus on cleaning up those credit card balances before you resume saving.
2. Prioritize Saving – If you don’t think you can afford to save money, you need to change your thinking. Try this: Decide how much you need to save each month and deduct that amount from your net pay – just like taxes and Social Security are deducted. Consider having your savings contribution automatically transferred from your checking account into a savings account with an on-line bank or credit union, where interest rates tend to be a bit higher.
The money that’s left over after you have “paid” your savings account is available to meet your other needs and wants. This process might force you to make some hard choices about your spending or consider ways to boost your income. That’s one of the great side benefits of committing to a savings plan – it makes you pay attention to your money and your future.
3. Use Savings Supplements – Put the retirement portion of your savings in a 401k plan or similar program that boosts your return with employer contributions and tax benefits. If your employer doesn’t offer such a plan, put your money in an IRA where it will grow tax-free.
Whatever your plan for saving, it’s important to start now. Time is a powerful ally. Open a savings account, start an IRA, or stick $20 in an envelope under the mattress – just get started and stay consistent. As the timeless proverb says, “Money grows on the tree of patience.”
Wes Moss is a certified financial planner and is the Chief Investment Strategist at Capital Investment Advisors in Atlanta. Moss is also the host of “Money Matters” on AM 750 and now 95.5 FM News Talk WSB on Sundays from 9 a.m.-11 a.m. An author, “Apprentice” alumni, husband and father, Moss is committed to helping Atlanta’s citizens with financial health.