16 Jun Kick-start the Savings Habit
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 is a time not long past when Americans tracked their savings instead of the credit card debt! Saving money may seem just like a memory of the past. Many Americans do set aside money, but it goes straight into mutual funds, often by way of 401(k)s and other qualified retirement accounts, where it is no longer liquid, guaranteed, or under their control.
We’re so excited to run that people forget to walk, first! We neglect saving in order to “invest,” when both are necessary. Saving and creating cash supplies is a critical function that enables us to subsequently invest successfully.
In his book Pound Foolish, Steve Utkus points out that before the rise of the financial planning industry in the 1970s, the cornerstones of personal finance were “savings accounts, whole life insurance, and the home mortgage.” Most people’s number one anxiety was public speaking, not running out of cash.
Nonetheless, private savings peaked in 1975, when the typical family put 14% of their gains away. That’s a stark contrast to the average post-2000 family, who set aside as little as 1% of their yearly income, as the following chart from TradingEconomics.com shows:
Credit may have driven the economy for the past few decades, but it came at a steep cost. Consumers left the idea of savings and got used to having lines of credit. 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 caught the whole country off guard as the market crashed, foreclosures soared, and many found themselves jobless or insolvent.
PERSONAL SAVINGS: A FOUNDATION OF PROSPERITY
A consistent and active savings strategy is KEY to our economic well-being. It offers several short- and long term gains, including:
Having a robust emergency fun available. If we get into the habit of counting on credit to get us through a financial crisis, that option is a dead end. Even in the event that you think that can draw on a 401k account, you may still incur substantial fees and taxes – when you are least able to afford them. Oftentimes workers are just in a position to gain access to funds under specific conditions or for specific motives, as well as then, they need to be paid back on rigorous programs (or all at once should they leave their employer.) The bottom line: it is essential to have a liquid source of funds. Cash reserves that are considerable allows us to weather emergencies. The alternative would be to sink into debt. Even in the event that credit can be obtained, rates of interest could be double-digit as well as a cycle of credit dependency can be started.
Having liquidity for opportunities. You can find lots of types of investment opportunities, from property to business to loaning money at interest, although typical financial guidance instructs individuals to place the majority of their cash in the stock exchange. The secret to taking advantage of such investment opportunities is having the liquidity to participate in them.
Weathering economic downturns. Cash reserves may be relied on if (or when) the bottom falls out of the financial markets. Although economical cycles can nevertheless present challenges, those with cash can weather the storms a whole lot easier.
Saving triggers an upward spiral towards financial security. Here is how that upward spiral works. Based on a 2013 post in Forbes, there are four top variables in upward mobility: constant income generation, dual incomes, education and savings. A home that’s in the practice of setting aside cash may have a lot more to spend money on training and schooling. Better training results in business opportunities or a better career. Ultimately, an increased income is realized, with more to save or invest wisely. It is a pattern that builds upon itself!
Save more money, save the economy. When individuals save rather than depend on credit, the market has greater stability as it’s not fueled by spending that flows and ebbs with interest rates, or spending that can stop abruptly if credit standards tighten up. A market fueled by credit is susceptible to uncertainty and economical “bubbles” that can pop. Ultimately, by saving money we are also 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 tendency to spend more as we earn more. This approach doesn’t move us ahead as much as put us in a perpetual holding pattern, running ever faster to keep from moving back into poverty.
Saving, on the flip side, is a progressive activity as opposed to a defensive activity. It’s important to maintain self discipline so that you can switch from subsistence living to comfort. In Busting the Retirement Lies, Kim Butler advocates a discipline of setting just as much as 20% of your gains aside for long term economy. By growing that reservation (particularly at the 20% amount), you’ll advance towards comfort, subsequently onto prosperity, while making a pillow that may help break any financial fall.
Butler says, “Saving money is something we can control. It may not be easy…but saving money is possible.”
There’s an excellent reason that living in your means is a time-honored concept – in the long run, it pays off… literally!
5 TIPS TO JUMP START YOUR SAVING
- Concentrate on shifting habits, not deprivation. By adding home-cooked meals with friends (instead of eating out) or adding to your Netflix movie queue instead of dropping $40 on theater tickets and snacks for two.
- Make saving automatic. Set up automatic withdrawals to ensure that cash does not sit in your checking account.
- Out of sight, out of mind. Consider starting a savings account in another bank or credit union, or consider starting a cash value insurance policy. Although the primary reason for purchasing a cash value, whole life insurance policy is for the death benefit, but you can also take advantage of its ability to act as a saving vehicle, so that you’ve got liquidity without making access to your own cash too easy.
- Monitor your spending. It is possible to discover where you are able to manage to fix your spending knowing wherever your cash goes.
- Align your spending with your priorities. Are you spending more at Starbucks than on your future financial freedom? Does your bank account show what is really important to you? Look to see where your values are – or are not – represented by your bank statements.
WHERE TO SAVE?
Savings accounts in a bank or credit union really are an excellent spot to start out. As your liquidity grows, we don’t recommend keeping more than 6 or 12 months of living expenses in a bank because of low interest rates and also privacy issues, taxation and other issues.
In the event you loathe making a measly 1% or less on your savings account, there’s a much better alternative! Although primarily utilized for its death benefit, learn why high cash value whole life insurance is generally utilized by wealthy individuals as well as the banks themselves! Here are some ways that high cash value whole life insurance can help you:
- increase long-term savings and financial stability
- protect your privacy (the IRS won’t know what you have stashed away)
- beat bank interest rates (internal rates of return are currently around 4%, depending on age and health), and
- build liquidity which can be utilized or borrowed against for just about any reason.
To find out more, contact the financial advisor who sent you this article to get an illustration on how a whole life policy might perform for you, and if it’d make sense in your particular situation.
Typically you’ll want the ability to be able to save for more than ten 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 just a savings vehicle.
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